Leading construction experts and economists agree that the economy is emerging from its deepest and longest financial crisis since the Great Depression. Even with a modest boost from government stimulus dollars, it will be a very slow crawl out of recession and into recovery.
“The recession has reached an end,” declared Robert Murray, vice president of economic affairs for McGraw-Hill Construction, during the McGraw-Hill-sponsored Outlook 2010 Executive Conference held Oct. 15–16, 2009, at the Capital Hilton in Washington, D.C.
“The economy is already correcting itself faster than it did in the last recession,” said Jim Haughey, chief economist for Reed Construction Data, during a Webcast on Oct. 22, 2009, titled “The Year Ahead for Construction: A Perfect ‘10.’” There are signs of hope and opportunity, but it will still be a long, painful climb out of a dark valley.
Even the flickers of hope are greeted with cautious optimism because one event or change in the markets can set things downhill again in a hurry. Oil price increases, a natural disaster or a terrorist attack could send construction markets tumbling again.
The residential market crash was bigger than anyone expected. To make matters worse, the nonresidential or commercial/industrial/institutional sector (CII)—once thought of as a refuge from the abysmal residential market—also took a major hit in 2009, leaving contractors few avenues for success. Expect modest growth in 2010, but at least the economic tourniquets have slowed the bleeding.
This construction outlook derives information from various sources, chief among them, the McGraw-Hill Construction Outlook 2010 Executive Conference and Reed Construction Data’s Webcast. Various other sources were used to help forge a more complete snapshot of the economy and its effect on the construction markets in the United States.
To determine exactly how the overall construction market is performing, we must first carefully examine the residential market, starting with single-family housing. As single-family homes go, so goes the overall economy.
Residential construction, the leading construction market indicator, is starting to show signs of life. However, there is a lot of single-family home inventory that needs to be sold off before construction will pick up again.
According to the latest data available, the National Association of Realtors (NAR) reported that (seasonally adjusted) existing home sales jumped by 10.1 percent in October 2009 from September 2009 to 6.10 million units, a 23 percent improvement upon the 4.94 million-unit level in October 2008. Sales activity also represents the highest pace of existing homes since February 2007 when it reached 6.55 million units. And while this measure includes condominiums and townhouses, it’s still a good barometer of housing inventory.
“Many buyers have been rushing to beat the deadline for first-time buyer tax credit,” said Lawrence Yun, NAR Chief Economist, in a Nov. 23, 2009, statement.
While sales of existing homes rose in October 2009, inventory decreased. Total housing inventory fell in October by 3.7 percent from the previous month, NAR reported. In addition, the decrease marks a 14.9 percent drop from a year ago.
“The supply of homes on the market is now at the lowest level in over two and a half years. We’re getting closer to a general balance between buyers and sellers,” Yun said.
Combined, existing home sales gains and inventory losses are part of a necessary correction for the economy to turn around. The industry needed to stop building houses and allow the inventory to flatten out.
“Prices needed to come down, and they have come down,” said David Wyss, Standard & Poor’s chief economist, speaking at the McGraw-Hill conference. He cautioned, however, that there is a glut of property yet to hit the foreclosure market, which could slow recovery in the housing sector. He said the housing bubble forced home prices up by 72 percent during 1997 to 2005. Therefore, there is nowhere to go but down. In 2010, houses are going to be “really cheap,” he said.
There were 937,000 single-family houses built in 2007, which was down 30 percent from the previous year. In 2008, new single-family homes took a 41 percent hit to 549,000 units and another 22 percent hit in 2009 to 430,000 units.
Nationwide, home sales are up 24 percent from their January 2009 low, but they are still down 23 percent from four years ago. Yes, activity is picking up, but there is a long way to go to recovery.
There’s a lot of hope in the housing sector, said Kermit Baker, chief economist at the American Institute of Architects, who spoke at the McGraw-Hill conference and on the Reed Construction Data Webcast. Normally, he said, home building and remodeling account for 5 percent of overall economic growth. During this recovery, it has accounted for 20 percent of the growth.
“The economy cannot recover without housing helping it,” he said.
With so much hinging on the housing market, experts and economists have focused their attention on the residential market, just as many electrical contractors have.
Housing triggers recovery, and as we move into recovery, home building is down 75 percent since 1996, its worst performance since World War II, Baker said. The first piece to recovery, he said, is affordability. Affordability is good right now, especially for first-time buyers taking advantage of the government’s $8,000 tax credit. There will be more declines in home prices as we move further into recovery, but he also warned that there is a danger that foreclosures and shadow inventory might add to the supply. Shadow inventory is defined as vacant, for-sale homes that were taken off the market; those houses might be put back on the market as the economy improves.
Vacant, for-sale homes are clearly in excess, according to the AIA’s Baker. What once stood at 1.5 million units grew to 3.8 million units. The country has worked off half of those, but it’s a “moving target” because of the foreclosures and shadow inventory. The good news is that homebuyers are getting back into the market.
“Prices have fallen enough in those markets that people are jumping back into the market,” Baker said.
The short-term outlook might be bleak, but the long-term view appears to be much brighter because of shifting demographics. Baker anticipates 800,000 single-family home starts in 2010 and another 2.1 million in 2011. McGraw-Hill’s Murray projects 560,000 single-family housing starts in 2010, a 30 percent increase. These projections, while slightly varied, provide glimpses of hope that a prosperous recovery is on the horizon.
While Murray and Baker’s projections differ, they agree that the next two years will show growth in the residential construction market.
Reed Construction Data’s Haughey is less optimistic, saying, “The residential housing market will be depressed for at least two more years and maybe another year beyond that.”
Baker projects there will be 15 million new households this decade. He sees two-thirds of that growth coming from the older-than-55 group, but the burgeoning Hispanic population will also drive it.
The remodeling market expanded rapidly through 2007 to $326 billion in terms of market spending, Baker said. As the economy shrank, people stopped spending on remodeling projects and fixing up second homes. Therefore, the remodeling sector experienced a steep decline, making up half of the 75 percent decline in the overall housing sector.
Baker expects an upturn in the first half of 2010 in the residential remodeling market, driven by some emerging trends: smaller house sizes, emphasis on exteriors and property improvements, and energy efficiency and accessibility.
He used the phrase “leaner and greener” to describe a trend in homebuilding that mixes a “healthy dose of both economics and the philosophy of being green.” What he means by that is more residential projects are seeking Leadership in Energy and Environmental Design (LEED) Green Building Rating System certification; they also are smaller and more efficient. People are trending away from building in excess of what they need in an effort to save on energy costs and maximize the use of smaller spaces.
Speaking of maximizing space, home offices are on the rise as telecommuting increases nationwide, Baker said. There are remodeling opportunities in the home office market. However, a trend toward telecommuting could ultimately hurt office space in the commercial side of the market.
In the United States, the 2009 multifamily housing market took a heavy loss, as the sector sustained a 55 percent decline. Because of diminished credit availability and concerns about over-building, multifamily housing became a much less attractive investment in 2009. However, there are some large projects that began in 2009 that will be under construction for quite some time, including the 39-story Lakeview High-Rise Condo Tower in Chicago; the Monaco Residential Towers in Jersey City, N.J.; and the Tower 111 project in New York City. Those three projects combine for 1,167 dwelling units and nearly $625 million. But that won’t stop the pain in this sector.
According to McGraw-Hill Construction, New York is down 71 percent in new multifamily dwelling units from 2008 to 2009, as is Dallas-Fort Worth. Seattle fell by 56 percent, Houston by 68 percent, Chicago by 51 percent and Washington, D.C., by 73 percent. Those losses came from the top five multifamily markets in the United States. Salt Lake City, the No. 7 city, is the only one in the Top 10 that increased (by 17 percent) from 2008 to 2009. Charlotte fell by 40 percent, Miami by 56 percent and Boston by 49 percent. These are tremendous hits, when you consider that the Top 10 cities on the 2007 to 2008 list took double-digit hits, except New York and Dallas-Fort Worth. New York was flat and Dallas-Fort Worth was down a mere 1 percent.
Again, just like single-family housing, multifamily housing is turning around and will show modest increases in 2010, all part of the recovery from the excesses of the past.
According to McGraw-Hill’s Murray, commercial building is down 43 percent in terms of dollars and down 55 percent in terms of square footage. This market was supposed to be a sanctuary for contractors suffering under the weight of a critically depressed residential market. Institutional work also took a hit in 2009 to the tune of 15 percent, after rising by 10 percent in 2008. Public works remained flat in 2009 and are projected to remain flat, despite the government stimulus money, which focuses on public projects. It’s not a good sign.
And, after being up 35 percent in 2009 and only up 4 percent in 2009, Haughey projects a 6 percent decrease on power spending in 2010, after quadrupling in the last few years. “Power is in trouble,” Haughey said.
Speaking at the McGraw-Hill conference, Ken Simonson, chief economist at the Associated General Contractors of America (AGC), said retail, office and lodging are in bad shape right now, but “retail will grow the most in 2010—better than the dismal rate of last year.”
CII opportunities, according to Reed Construction Data’s Haughey, include a 22 percent increase in retail starts, indicating it is coming back relatively fast; a 46 percent increase in amusement and recreational projects in 2008 (big projects still underway); and a 44 percent uptick in base realignment and upgrades on military installations.
“Education and healthcare didn’t get hurt by the recession,” Haughey said.
While Haughey holds that position, Robert Murray of McGraw-Hill Construction wrote in his Construction Outlook that “The 2009 performance by category has shown large declines for healthcare facilities, schools, and amusement-related buildings. The public building category has held up relatively well, reflecting strong levels of courthouse and military-related construction.”
In 2009, Murray said, stores and shopping centers were down 52 percent to 100 million square feet, the lowest level in 50 years. Retail was at an all-time high in 2007 and is now in fast retreat, he said. Cautious consumers are leading this trend, as spending is down and unemployment is up, which further limits spending.
The unemployment rate should exceed 10 percent in 2010 and won’t fall to 6 percent until 2013, according to a Wall Street Journal survey of 48 economists. Weaker employment is hurting construction because it is curtailing consumer spending. Consumers had hunkered down and become extremely cautious for four consecutive quarters of debt reduction leading into 2010, which means they aren’t spending money on construction projects. In addition, according to Standard & Poor’s Weis, consumers are saving only 1.7 percent of income, which doesn’t get much lower. Most of the money not being spent is going toward reducing debt in U.S. households.
The stock market turned around in March 2009 and is up 60 percent from its low. And while some are expecting a correction, perhaps it won’t come. There are also concerns about a double-dip recession if oil prices go back up or if financial markets freeze again.
Warehouses were down in 2009 by 61 percent and are expected to drop by another 4 percent in 2010. Vacancy rates increased from 9.5 percent in the third quarter of 2006 to 11.8 percent in the second quarter of 2009, McGraw-Hill’s Murray said.
Hotel construction fell by 56 percent in 2009 to 35 million square feet and is projected to fall another 14 percent in 2010. The economy is affecting business travel, recreational travel and casinos. Again, there are some large projects holding this hotel sector in check, namely the Thunder Valley Hotel in Lincoln, Calif.; the Disney Hawaii Resort at Ko Olina in Kapolei, Hawaii; and the Coeur d’Alene Casino Resort Expansion in Worely, Idaho. Those three projects account for 1.65 million square feet in hotel space and about $525 million.
Office construction was down 51 percent to 80 million square feet in 2009 after falling by 25 percent in 2008.
“There’s still a lot of empty office space out there,” Weis said.
McGraw-Hill’s Murray expects another drop in 2010 by another 9 percent. Combined, though, that’s an 85 percent dive in three years. Much of this can be linked to the overall economy, of course, but tighter credit conditions have contributed to the declines.
There’s plenty of pain distributed throughout the country, but New York City (70 percent), Houston (77 percent), and Dallas-Fort Worth (75 percent) took the biggest hits in the office building construction sector. Miami also lost 63 percent in this market.
Manufacturing construction slid by 49 percent to 40 million square feet in 2009. In terms of dollar revenue, it slid 62 percent to $10.9 billion. These retreats come on the heels of a surge in ethanol plants in 2006–2007 and refinery additions in 2008. The manufacturing sector surged by 51 percent and 41 percent, respectively, in 2007 and 2008, leaving it nowhere to go but down. Expect a more modest decline of 14 percent in 2010, Murray said.
The economy also is affecting school construction, as the educational building sector experienced a 23 percent knock in 2009. McGraw-Hill projects an additional 8 percent hit in 2010. Many states, especially Texas and California, have passed school construction bond measures, which account for the projected 2010 improvement. While every other type of school project sustained double-digit losses in 2009, the only type to show a gain was laboratories, with a 9 percent increase.
From a geographical perspective the Top 10 states for educational building construction sustained losses in 2009, led by Georgia, which was down 45 percent, and California, which was down 42 percent. New York, however, increased by 20 percent, and Virginia rose by 8 percent. All in all, it was a bad year for educational construction.
After rising to 110 million square feet in 2008, which was an all-time high, healthcare facilities construction slumped by 36 percent in 2009 and is expected to rise by a modest 3 percent to 72 million square feet in 2010. Within that healthcare category, clinics/nursing homes spending was down 33 percent, and hospital spending was down 44 percent in 2009. Tight credit conditions and the debate over healthcare reform created uncertainty in this market.
Illinois, one of the biggest winners in 2008 with a 110 percent increase in healthcare building spending, took a 55 percent slap in 2009, the hardest hit state in the Top 10.
Amusement and recreation buildings declined by 29 percent in 2009 after declining by 9 percent in 2007 and 10 percent in 2008. McGraw-Hill anticipates another 4 percent decrease in amusement/recreational construction spending in 2010.
Religious building construction is down by 3 percent in 2009, due mostly to a pull-back in charitable giving because of a tight economy.
Airport terminal construction increased in 2009 by 103 percent to 4.1 million square feet and 77 percent in terms of dollars to $1.4 billion. Expect slight declines in 2010, but there’s still a good amount of steady work in airports.
Public projects and stimulus
Many of the large office building projects on the 2009 books include major military projects, many of which will benefit from stimulus dollars. Let’s take a closer look at the stimulus package to determine how the government helped boost the economy, even if it was in a modest way.
Stimulating or not?
The United States government on Feb. 17, 2009, enacted the $787 billion American Recovery and Reinvestment Act (ARRA), with its $308 billion in appropriations in 2010 and 2011. About $130 billion was aimed at construction. A large chunk of that will go to Government Services Agency (GSA) projects. GSA awarded new federal construction contracts for ports of entry and courthouses, including the $223 million consolidation of St. Elizabeth Campus in Washington, D.C.; the full and partial building modernization of the $226 million Commerce Department headquarters in Washington, D.C.; and $121 million for 50 United Nations Plaza in San Francisco, Calif.
GSA landed $5.6 billion for federal building construction and upgrades. About $750 million of that will go toward construction and renovation of federal buildings and courthouses. Another $300 billion has been earmarked for land ports of entry, and $4.5 billion will go toward energy-efficiency upgrades.
Transportation gets the lion’s share of the stimulus money: $27.5 billion for highways and bridges, $8.4 billion for transit, and $9.3 billion for railways ($1.3 billion of which is for Amtrak and $8 billion for a high-speed rail).
Mass transit work has been on an upward trajectory since 2006 and will continue in 2010. It increased by 66 percent in 2007, by a mere 3 percent in 2008, 29 percent in 2009 and is projected to rise by 18 percent in 2010. Federal funding will spark this sector.
Also part of the stimulus plan, the Department of Defense received $4.2 billion to restore and modernize facilities and another $1.3 billion toward the Veterans Administration to upgrade its hospitals.
The stimulus bill also benefits the energy sector, in which $11 billion is going toward improving the aging electrical grid and $4.5 billion is going toward investment in smart grid technologies. It’s the beginning of enabling electric customers to store and resell power back to the grid. In addition, the stimulus plan allows for tax credits for renewable-energy projects.
Keep in mind, though, that electric utilities spending peaked in 2008 when it increased by 70 percent. In 2009, it decreased by 45 percent and is projected to decline further by 3 percent in 2010. The stimulus bill should provide a boost, but it is expected to be modest.
Some contractors are directly benefiting from the stimulus money while others haven’t felt it nudge yet.
According to Gregory M. Druga, vice president and general manager a Grunley Construction Co. in Rockville, Md., the government stimulus plan has “created some opportunities,” particularly with a lot of GSA work. The company added 4 percent to its staff directly due to stimulus projects. There has been a lot of government retrofit work, which requires 1,000 workers on local Washington, D.C., projects, he said. Between the Hoover Building, the Mary Switzer Building and the Department of the Interior, Grunley Construction has been involved in quite a bit of phased modernization work, all of which has LEED certification included in the projects.
During a panel discussion at the McGraw-Hill Construction Outlook 2010 Executive Conference, Druga said that his company has been working very closely on joint ventures with local contractors around the country.
At the conference, William J. Calhoun Jr., executive vice president, Clark Construction Group LLC, said that 15 to 16 percent of Clark’s new work is coming directly from the stimulus package. Perhaps that is due to the large amount of work Clark does for the government in the Washington, D.C., metro area.
While some are benefiting from the ARRA, some haven’t felt it yet or won’t. Reed Construction Data’s Haughey said the stimulus effect likely peaked in October and November 2009 and will have less impact as time goes on. The stimulus program boosted the GDP by about 2 to 3 percent but Haughey equated that to a federal “pump priming.” There’s an initial boost, then a slower flow.
“There’s way more demand than supply and money,” said Manju Chandrasekhar, vice president of economics and business solutions, Halcrow Inc., during a credit market panel at the McGraw-Hill Executive Outlook Conference, speaking about the stimulus package. “It’s a short-term jab in the arm and not a long-term boost.” He suggested that the money is stuck in the pipelines because the people who administer it are overwhelmed.
“I suppose it’s working some,” said Rick Ciullo, chief operating officer of Chubb Surety, as a panelist at the McGraw-Hill Construction conference. “It’s not showing up in contracts or in paychecks. We’re not yet seeing the benefits. But I’m hopeful.”
Stimulus money is critical to companies being pinched by their financial institutions.
Credit and financing
“A tight credit market has made it harder to get financing,” said Chandrasekhar. According to a survey of bank lending officers, in 2009, just about 90 percent reported tighter lending standards, but that is expected to ease back to about 45 percent in 2010. Tighter credit, according to McGraw-Hill’s Murray, has affected large projects such as the Echelon Resort in Las Vegas; Atlantic Yards in Brooklyn, N.Y.; the Chicago Spire; and the World Trade Center Towers 2 and 3, also in New York.
Clark Construction’s Calhoun said lenders are taking a much closer look at loan-to-value ratios. More risk-based lending is making it more difficult to get financing. Contractors are also looking closely at the quality of the bank and the loan terms to protect against bank failure. On top of that, contractors’ profit margins are being squeezed further. With financing and credit being pinched in an already tight economy, many contractors are asking when the relief is coming.
What to expect in 2010
It might be best to just forget about 2009 altogether. Every major construction category took a major hit, except public works, which was flat. As we look ahead to 2010, most sectors will prosper, but the ones that will see the most growth include single-family housing (32 percent), multifamily housing (16 percent), and public works (14 percent). The safest bet is public works because it didn’t have as far to climb in terms of a market correction and because of an injection of government stimulus dollars.
“Government-related buildings are cushioning the extent of the decline,” McGraw-Hill’s Murray said.
For those betting everything on the residential market, Reed Construction Data’s Jim Haughey summed it up during a recent Webcast:
“We have moved from the worst you’ve ever seen to just horrible.”
Overall construction is expected to increase by 11 percent in 2010 to $466.2 billion, which is significant, but nowhere near the $690 billion level of 2006. The good news is, “We are turning the corner,” Murray said.
KELLY, former editor of ELECTRICAL CONTRACTOR, is a Baltimore-based freelance writer. Reach him at email@example.com.