For every sweltering summer there is a bone-chilling winter. In construction, contractors enjoyed tremendous growth and profitability during the late 1990s and early part of this new century. While it lasted, the ride generated widespread prosperity. However, those levels of growth and profitability couldn't last forever. Even the residential sector, which continued to flourish with better-than-expected results in 2002, can no longer elude the cooling-off period now chilling construction markets.

The good news is that no one predicts disaster for construction as a whole, or any of its sectors, in 2003. The bad news comes from a personal perspective: If you didn’t really enjoy 2002, look for more of the same.

That’s the message from the majority of economists speaking at three October 2002 construction-outlook conferences sponsored by McGraw-Hill Construction, Reed Business Information and the National Association of Home Builders (NAHB).

Generally, most forecasters agreed on three points:

-The residential market outperformed 2002 expectations and, while it might fall off a bit in the near future, it’s going to remain at very high levels—perhaps through 2004.

-Nonresidential market declines were steeper than expected. Don’t expect a rebound until summer; until then, the decline might worsen a bit. Perhaps the rebound won’t be stupendous—when it comes.

-Institutional construction markets will suffer as a result of the state tax revenue drop. But increased educational and health care spending will offset some of this decline; an increase in federal construction dollars (mostly due to antiterrorism and defense gains) will help; and perhaps voters in late 2002 will have OK’d some bond issues.

Other niche markets covered in this report include: manufacturing construction (awful when compared to 1997’s performance) and utility (a huge drop from an unsustainable peak).

In perspective, the present situation can be deemed “good,” and the forecast can be seen as more than acceptable. Despite a recession and what seems to be a bout of economic stagnation in the overall economy, construction markets have kept generally high levels.

Specifically, September 2002 electrical construction field employment levels dropped 8 percent from the 2000 peak, and most of us remember activity then as being close to unsustainable as we would ever like to come.

Residential

Let’s lead with the good news first. David Seiders, NAHB’s chief economist, sees housing starts staying close to the 2002 level. See Table 1 for NAHB numbers, but keep in mind that 1996-2000 housing starts averaged 1,502,000. We’re way above that now, and Seiders said starts will remain lofty through 2004.

“We look for the economy overall to be more solid (than 2002),” Seiders said, “and for 2004 to be pretty good.” Just how good? Table 1 (page 115) shows NAHB’s projections, including an average national civilian unemployment rate of only 5.3 percent and 3.7 percent “real” growth in gross domestic product.

McGraw-Hill’s projections for 2003 housing starts total 1,625,000, just 5,000 shy of Seiders’ estimate. In Table 2, however, McGraw-Hill sees flat spending on new construction.

Nonresidential overview

Ken Simonson, chief economist for the Associated General Contractors of America (AGC), provided a rosy residential market forecast. He also noted that some nonresidential construction—including retail stores for new housing developments and sewer construction—were really part of the residential sector.

But in turning to the rest of construction, Simonson said his forecast for nonresidential and government sectors was “fairly appalling.” Those words are also apt for 2002 nonresidential markets—with 2003 projections not providing significant cheer.

What does “appalling” mean, in real numbers? Here’s a look at the September 2002 construction put-in-place or “construction spending” report from the Department of Commerce:

-Residential construction spending up 6.5 percent in the first nine months (compared with 2001);

-Nonresidential down 17.2 percent, with industrial down 45, office buildings and hotel/motel down 28, and “other” commercial (principally retail) down 7 percent.

-Educational and institutional construction both up 11 percent year-over-year.

Essentially, the consensus 2003 forecast is for nonresidential construction to be flat to down slightly from these numbers.

Offices and hotels

The office building sector has been one of the two hardest-hit. The national vacancy rate was above 16 percent, according to one recent reading. “We are at the bottom...I don’t think we’re going to go much lower,” said Glen Mueller, a Johns Hopkins University professor and director of real estate investment strategy at Legg Mason.

Ray Owens, a Federal Reserve Bank senior economist, said, “Overall absorption rates are climbing toward net zero, but Class ‘A’ is moving back into positive territory. This is a sign that there is some improvement in store for the sector and that the bottom, in terms of net absorption, may be close to an end.”

(“Absorption” here means the renting of available office space and Class “A” the most expensive type available.)

“Hard-hit” is a good term for the hotel and motel market, which has still not fully recovered from Sept. 11. The problem, said Mueller, is that business customers didn’t come back, resulting in this sector’s low ebb of construction. However, he sees this market bottoming out and picking up later in 2003.

Perspective on the office and hotel markets can be found in Table 3, which provides selected national square-footage statistics, estimates and forecasts for various markets. Total forecast office square footage to be contracted in 2003 is a bit less than half that in 2000. For hotels and motels, the figure for this year is about 55 percent of what it was three years ago.

Buildings magazine, which annually projects spending on commercial construction and modernization, shows an overall spending dip of 2.5 percent for office buildings and 3 percent for hotels and motels. It forecasts a flat 2003 (down 0.3 percent) for the combined three categories of spending for all kinds of commercial buildings.

Education and health care

On the other hand, two niche markets within the nonresidential or institutional class are going great guns, something even noneconomists have noted, such as Thomas Leppert, chairman and CEO of Turner Corp., the nation’s leading general builder. During his McGraw-Hill presentation, Leppert said educational buildings have replaced commercial as his company’s No. 1 market.

Educational construction’s forecasted decline in Table 3 is based on a huge slump in state tax revenues. Further, skyrocketing university and college construction has been brought to earth by the plummeting stock market. Plus much of its funding comes from university endowments, many of which have lost value in the past three years.

Unlike the federal government, states have to balance their annual budgets. Bob Murray, McGraw-Hill’s chief economist, noted that Ohio recently took $300 million out of its planned school construction, and California may cut 15 percent of its $100 billion budget.

However, demographics are driving educational construction. The so-called “baby boom echo” is sending enrollments skyward. Further, the AGC’s Simonson noted that a lot turned on voter reaction to bond issues on Nov. 5, 2002. There were, he said, 420 bond issues that could fund state and local construction. If they all passed into law, they would generate $44 billion in funding over the next few years, with schools and highways being the most-likely projects.

Murray also noted the importance of voter reaction. California had its largest-ever bond issue on the ballot, at $13 billion; Los Angeles faced a separate $3.4 billion bond issue.

Other submarkets in brief

Industrial—As Table 3 shows, the continued high relative value of the U.S. dollar has put construction of new manufacturing plants in a deep hole. McGraw-Hill’s Murray notes that manufacturing construction peaked at 191 million square feet in 1997. The projected 2003 uptick would leave contracts at less than 40 percent of that.

“Every year we think it can’t get any worse,” Murray said. “This year, it did.”

Warehouses—While some might associate warehouses with the industrial sector, dot-com mania drove the late 1990s and 2000 boom and its collapse led to an 11.2 percent warehouse vacancy rate in second-quarter 2002, according to CB Richard Ellis, a commercial real estate services firm.

That low, double-digit rate for warehouse vacancies is unusual. Historically, this sector has been well-managed. In 2000, even with a record 306 million square feet of construction, the vacancy rate was only 7.7 percent. Warehouses are generally built only when needed; few are developed “on spec.”

Retail—This sector’s relatively mild decline is projected to remain constant because, despite the failure of some retailers (notably Kmart), large retail chains such as Wal-Mart (more than 200 planned openings in 2003), Home Depot (200 planned) and Lowe’s (130) keep building for competitive reasons.

Additionally, Murray noted that retail construction “has benefited from the relationship with housing markets.” As new housing developments are finished in previously undeveloped areas, retail construction ensues in the form of strip shopping centers and malls.

Utility—What happens when a big part of an industry becomes deregulated? Table 2 shows electric utility construction falling in 2003 to less than half of the 2001 dollar value. “Demand for electricity is not what had been projected,” said Murray.

He said that the 1999-2001 surge in utility construction occurred in specific places, notably Texas and California. “These states have seen a decline of 50 to 80 percent in 2002,” he added. Much of the 2002 construction took place in New York and Pennsylvania, he said.

Regional activity

McGraw-Hill’s 2003 projections include specific figures for five U.S. regions. The Northeast is having the worst year, down 4 percent overall, with its nonbuilding construction sector (highways, stadiums, sewers) down 11 percent.

Best of the lot is the South Atlantic (the East Coast from Delaware to Florida), with a 1 percent gain projected. As with all of the other regions, the multifamily housing market (plus 12 percent) is seen as the best here.

Other regional projections: North Central down 2 percent; South Central down 1 percent; and the West (including Alaska, Hawaii and California) flat. EC

SALIMANDO is a Vienna, Va.-based freelance writer and frequent contributor to ELECTRICAL CONTRACTOR. He can be reached at jsali@cris.com.