Forecasters Lean Conservatively to Slight Slippage for 2000

A few months ago, in the September issue, I was reporting on the booming growth in the electrical contracting industry during 1992-1997. Guess what: It ain't over yet! We're on a roll. Now it's time to gaze into the crystal ball and see what the year 2000 holds for us. I have plenty of help. I will draw from information presented at three major forecasting conferences, hosted by the National Association of Home Builders, the Construction Markets Data Group, and McGraw-Hill's Construction Information Group. All were held in Washington, D.C., in late fall. At these meetings, the forecasters and numbers crunchers and soothsayers predicted that unemployment across all industries may be up a tad but the 2000 outlook was rosy for the electrical contracting industry. I don't know if you've noticed but it seems to me that the one thing that never changes at these meetings is that they all use the same crystal ball. That is good, not bad. It tells us at least that they're looking at the same numbers. (Or over one another's shoulder?) Then, they all have their own formula, which skews the numbers a little this way or that, but overall they all are saying the same thing. That is: There will be only the tiniest slippage in the industry in 2000, this due to fewer single-family housing starts (which causes ripples felt in other markets), to be followed by another rise in 2001. This is important. If things declined in 2000 and 2001, we would be looking at a potential recession. We are not. In fact, the story I'm getting from electrical contractors, and many have a pretty good handle on projections for their own businesses for 2000, is that next year will be yet another banner year. "I have more (business) prebooked going into 2000 than into 1999," said Jon Woodworth of Sasco Electric's Newport Beach, Calif., office. That is what I am hearing from virtually every contractor that I've talked to. (See sidebar below.) According to contractors, the only constraint to additional growth in 2000 is the lack of trained electricians. "We get two to three faxes a day asking us to bid work," says Joseph Catomaccio, a Philadelphia contractor. "But we have to look real hard at everything because of the labor shortage. We don't want to bid and win work that we can't handle." The wider picture: If you focus tightly on certain markets, you might see a decline in 2000. However, when you back off for the broader picture, you'll find that most markets are predicted to rise mildly or even dramatically in the new millennium. The hotel industry provides a good example, where limited-service hotels are predicted to decline while demand for large full-service hotels will pick up some of the slack. McGraw-Hill is predicting a flat line forecast to 2000, with no growth whatever. This prediction, like any other, should be taken with a grain of salt and tempered with past performances - such as their prediction for 1999 in which they forecast a flat market when in fact the actual number will probably be in the area of a nine percent increase. I think you'll agree, that's a substantial variance. (See Table 3 for specific segment projections from forecasters who attempted to analyze more than one market segment.) It doesn't end there. McGraw-Hill forecast a five percent decrease in 1999 for single-family residential and you know that was way off the mark. The final number will come in at around a six percent increase. Other forecasters also exhibit the "couldn't hit the broad side of a barn door" symptom. For example, FMI Corporation projected a 0.4 percent decrease in construction put-in-place in 1999 and their own numbers show a seven percent increase. For 2000, FMI is projecting a 2.1 percent increase, with small decreases in residential construction being offset by gains in nonresidential and nonbuilding construction. I know, I know - right about now you're wagging your finger at me and saying, "Hindsight is always easier than foresight," and you're right. All I'm saying is hold the salt shaker in your hand while reading this and sprinkle liberally. Now, let's look at the good stuff first, that being nonresidential product types. Residential-Down a little but fahgeddaboudit! Residential forecasts for 2000 are provided in Table 1. Although there are differences of opinion to the tune of 200,000 housing units, a safe number would appear to be in the range of 1.5 million housing units, with 1.2 million+ single-family starts. Not a bad number! As can be seen in Table 2, the slight decline forecast for next year would still put 2000 on a level plane with 1998 - which was an excellent year for construction overall. "We see a 10 percent retrenchment in mobile home construction next year," David Seiders of the National Association of Home Builders (NAHB) noted. "We are expecting housing to be a drag on GNP during the fourth quarter (of 1999) … The Fed dearly wants to see this!" Don't get the wrong impression: The Federal Reserve Board does not want to create a recession. However, it does want to slow down the economy, according to Seiders and other forecasters. Inflation is the real threat to residential construction. If it goes too high, you can count on some interest rate hikes from the Fed. David Jones, economist for the stockbroker firm Aubrey G. Lanston, thinks this will happen. According to Jones, inflation will jump from 2.5 percent in 1999 to 3.5 percent in 2000 and, yes, the Fed will drop some quarter-point rate hikes on us, maybe as many as four hikes. However, Jones still projects a small decline in housing starts from 1.65 million in 1999 to 1.55 million. "Are we going to have something more severe? No. Greenspan can handle it," Jones says flatly. The least optimistic housing forecaster was David Lereah of the Mortgage Bankers Association, who says in so many words that higher mortgage interest rates will put the quietus on the housing industry. He forecasts a sharp 13 percent drop as well as an employment reduction in the housing finances industry from 375,000 down to 300,000 in 2000. His perspective on housing finance was equally startling, to say the least. Consider this: In 1998, there were $1.5 trillion worth of mortgage originations, with fully half in refinancing. In 1999, the value of mortgages for new homes actually increased (from $750 billion to $838 billion), while refinancing dropped due to interest rate hikes. For 2000, Lereah predicts a refinancing reduction of 85 percent! Too, purchasing originations will drop due to the decreased housing starts (fewer housing starts = fewer originations). Performance depends on demographics: The decline in housing starts will have an adverse impact on almost all states, according to Stanley Duobinis, director of forecasting for the NAHB. The level of impact will range between negative 16 percent and positive two percent. "Some of the largest changes are in areas where job growth cannot expand because of labor constraints, such as Nebraska," he noted. Duobinis predicts California, Nevada, Arizona, and Utah will be the least affected, as well as Florida, Maine, Vermont, New Hampshire, and Massachusetts. These states will experience at most a four percent decline. A few will even register an increase. The most affected states, which will experience at least a 10 percent decline, include the Dakotas, Missouri, Indiana, Louisiana, Mississippi, and North Carolina. His rationale was that states that joined the economic recovery late were likely to still be in the "up" cycle in the recovery and would be least adversely affected in 2000. Sara Johnson of Standard & Poor's thinks along the same lines. Her projections depend on demographic outlooks for population and employment growth. "In September, there were 14 states with jobless rates under three percent … this is exceptional," Johnson noted. She thinks the Midwest would experience little population growth and thus has the least potential for economic growth. The strongest employment growth would be in the West. Johnson made the following projections for the leaders in housing starts: Arizona, Colorado, Florida, Idaho, Nevada, North and South Carolina, and Utah. Regional estimates are shown in Table 4. Note that local forecasters often produce different regional numbers. For example, California's total construction volume in 1999 is estimated at $52.76 billion, according to Lamberson, Koster & Co. (in work done for the Construction Industry Research Board) - a high for the 1990s. In the East, the New Jersey Alliance for Action said that nonresidential building projects for the 2000-2001 two-year cycle will be up by 18.4 percent over previous numbers, and were an all-time record for the 15 years their group has tracked such figures. Office and industrial projects alone in New Jersey will total $7 billion, according to a Prudential Securities real estate analyst. Nonresidential outlook is up in 2000: Notwithstanding the forecasts of higher interest rates and a mild dip to a sharp decline in housing, the soothsayers as a group have a positive view of the nonresidential market. Why is that? A decline is generally preceded by certain markets such as offices or hotels being overbuilt, such as in 1989 when everything hit the fan. Amplifying this thought, Bill Toal, chief economist for the Portland Cement Association, says, "Typically, at the end of an economic expansion, commercial construction becomes overbuilt (as in 1989), and the ensuing decline is severe. "There are very few imbalances (at the end of 1999). Office vacancy rates have fallen from over 20 percent to nine percent. In many areas, there are shortages of office space, and rents are on the rise. No major retrenchment in commercial construction is in store." Raymond Torto, of Torto Wheaton Research, affirms Toal's assertions, stating that overbuilding hasn't occurred in commercial markets during this long-term economic boom. He statistically compared 1999 per-square-foot rental and purchase prices with what was seen in 1988. In every case, the increase was small. Office construction will be flat: Torto sees the office markets as "plateauing" (see Table 5), while Bob Murray, chief economist for McGraw-Hill, predicts a three percent decline (see Table 4). Murray points out that the 1,555 million square feet of office space estimated for 1999 is, "two-and-a-half times the cyclical starting point back in 1992. The slow start in the early 1990s made it possible to show healthy improvement in the sixth through eighth years of the current expansion, since the more typical boom-and-bust pattern was averted. Retail and industry up for 2000: Hugh Kelly of Landauer Realty Group thinks, "…we'll see a period in which real estate as an asset class outperforms stocks and bonds." He sees the seven to nine percent dividends paid by Reties, along with the three percent to five percent annual capital appreciation in the real estate market, as factors driving investors of all sorts back to the real estate market. Kelly also sees a continued revival in the downtown areas of major cities between now and 2010. McGraw-Hill's estimate for 2000 shows 160 million square feet of manufacturing space contracts, the same as in 1998 (with a dip to 150 million estimated for 1999). That would make the manufacturing segment the leading gainer in dollars, at nine percent over 1999, among nonresidential sectors. Not time, money, or contractors to meet school construction demands: School construction will be a hot market from 2000 on out into the future, as the National Center for Education Statistics says the number of students in secondary schools will rise from 17.9 million in 1999 to 19.6 million in 2007. Thomas Loy of FMI Corporation predicts that education construction will increase by 11 percent. McGraw-Hill's figures show education construction up from $26.4 billion in 1998 to $32.3 billion in 2000 and, according to Murray, "34 states (are) reporting greater construction activity during the first nine months of 1999" in the educational sector. Another perspective is provided by of Norma Kacen, a government relations specialist at the National Education Association. In so many words, Kacen said there is not money enough, nor contractors enough, nor time enough to build enough schools in 2000 to fulfill the demand. That was the gist of her message. A review of her numbers will make you a believer in this market, too. Consider: * a third of the nation's schools (25,000) are in "a serious state of disrepair"; * two million children attend school in portable buildings; * the average school building in the United States is 42 years old, and * fifteen million children go to school in buildings "with substandard ventilation, heating, and air quality." To rectify these problems, 8,000 school construction contracts were awarded in 1998 and that is only scratching the surface of the problem, according to Kacen. If you totaled up repairs and new construction needs, you'd be looking at a $200 billion problem, Kacen says. This number was reached by combining the several-years-old General Accounting Office assessment that $112 billion in repairs are needed with recent estimates that at least $73 billion in new construction will be needed for the booming youth population. Summing it up: If you look close, you will see a few dips and sags in the coming year. Overall, the forecasters are giving us a clean bill of health. The nonresidential market growth offsets the performance drops in single-family starts. The decline predicted for residential housing is not substantial. We're not talking about serious overbuilding here. In addition, in some geographical regions, you're going to be looking at increases rather than declines in housing, depending on where your region is in the cycle of recovery. Moreover, regardless of where you are, the nonresidential markets-retail, industrial, and manufacturing-look good for the most part. Then there is the office market, predicted to be flat, yet vacancy rates are falling, and rents rising. It looks like 2000 will be a year in which you will not only survive but also continue to thrive! McKENZIE is publisher of Electrical Contractor. He can be reached at (301) 215-4514 or by e-mail at Message from electrical contractors: "We're on a roll!" Sitting pretty -- Motor City has one-third of 1999's sales already booked for 2000 Dick Martin of Motor City Electric in Detroit gave us some hard numbers for 2000. Martin said Motor City has $50-$60 million worth of business booked for the coming year. This represents a third of the company's total work ($184 million) in 1999. Half of its work is in wastewater treatment and water work: Installing new water systems, updating and computerizing them, and supplying more water to areas. Thirty percent of their work is industrial, with some automotive. Twenty percent is commercial. "We predict an increase in commercial buildings," says Martin. Some of the office work involves moves, adds, and changes. The increased demand for labor for their new and ongoing projects, Martin says, presents a challenge in the tight labor market. "There is no extra labor in this town...We [Our existing staff] will just work overtime to get it done." Commonwealth Electric sees strong performance in Midwest for next few years Gary Demmel at Commonwealth Electric Co. in Lincoln, Neb., said it has been a great year, as the past 4-5 years have been. He expects the economy to remain strong for the next year or two, with new business picking up in building small computer data centers and ensuring other customers have reliable power. Telecommunications/data work results from clients requesting increased speed or a greater number of tie-ins. Demmel reports "lots of activity in cell sites and switching stations" as well. When asked about labor shortages for these booming areas, Demmel said, "We've been fortunate. Although labor has been tight, we employ union electricians. We're happy with IBEW's training in datacom. The real [labor] shortage is with drywallers and masons." Ongoing work into the new millennium William Lindsay, of Duncan Electric in Chattanooga, said business in 1999 was good, and his firm has ongoing work to carry them into the new millennium, particularly in plants and mills. He anticipates a substantial increase in voice/data/video work, which will tighten the labor market, but not severely enough to be called a "shortage." According to Lindsay, "Duncan Electric specializes primarily in industrial work and manufacturing installations. Power quality and facility maintenance will be two major growth areas." He also predicts a large increase in renovating existing industrial facilities. One boost should come from the Environmental Protection Agency's "cluster" rules that force the pulp and paper industry to cut its dependency on chlorine to bleach paper. This electrical contractor explains, "We help pulp and paper mills come into compliance by wiring the facilities for new equipment to accommodate whatever new chemicals serve as alternatives to chlorine." The electrical work they perform includes cable and tray installations, wiring up motors, instrumentation controls, and new power wiring. In the same way, Duncan Electric's work also helps chemical plants come into EPA compliance for smog limits. Lindsay says, "The EPA has changed [tightened] its limits on smog. [Industrial plants] need new equipment to get on line." Large California contractor has more 2000 work prebooked than in 1999 Jon Woodworth of the Sasco Electric office in Newport Beach, Calif., says his office operated at over 90 percent capacity in 1999 and has more work prebooked for 2000 than was prebooked for 1999. "In fact," says Woodworth, "We've been steadily increasing our staff in 1999 to handle a work increase in 2000, so we definitely see 2000 as an even better year than 1999." He adds, "The labor shortage is forcing us to be real selective in the jobs we bid." Sasco's Newport Beach branch employs about 175 electricians and keeps 11 project managers busy. Sasco and other Orange County contractors have the good fortune to have a hand in the big, new Disney project, California Adventure. According to Woodworth, the development will spark new, surrounding retail centers and new hotels will be starting up as well. Combining this new growth with the current surge in the office market in his region, Woodworth predicts very good years immediately ahead. Labor shortage only constraint for Philadelphia contractor in 2000 Joseph Cotumaccio, Sr., founder of Joseph Cotumaccio & Sons, Inc., in Fernwood, Pa., reports a backlog of work that will easily carry his firm through March of 2000. Cotumaccio & Sons, a mid-sized contractor, specializes in sewage disposal plants, fiber optic work, voice/data/video networking, instrumentation, and automation. The only problem he sees for 2000 is the continuing labor shortage. "We're on a roll. We get two to three faxes a day from commercial builders asking us to bid work," says Catomaccio. "But we have to look real hard at everything because of the labor shortage because we don't want to bid and win work that we can't handle." Web Links: More Information on the Forecast and Specific Niche Markets Torto Wheaton Research Housing Starts: 1981-99 "School Planning and Management" magazine - construction data North American Construction Forecast site - CMD Group's conference highlights Landauer Forecast - Executive Summary FMI Corp. Forecast Updates

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