A look at 2010

Leading economists weigh in on prospects for the near future

BY CINDY GRAHL

The recession is now officially over, but of course, just as it began an entire year before anyone declared it, its effects will be seen in the market for some time to come. Here is a roundup of what some of the experts have been saying about prospects in the commercial design and construction industry for the near future:
A roundtable of experts in September presented a webcast of construction market insights for 2010. At that time, here were the thoughts of economists from Reed Construction Data, the Associated General Contractors of America, and the American Institute of Architects:

Jim Haughey, of Reed Construction Data
noted that most market drivers for nonresidential construction are negative, especially for developer-financed commercial, with many projects delayed, cancelled or suspended. Some cutbacks are initiated by developers who expect well below average operating income and asset values in 2010-11 than when they began planning. Other cutbacks are being forced by the inability to obtain financing. Most of the decline in rental and occupancy rates has occurred but continued declines are forecast into late 2010.
A modest cutback in institutional construction spending, always very late in a business cycle, began a few months ago. However, those institutional projects planned to be
financed by current tax receipts or investment fund earnings did experience a sharp cutback in starts and a small cutback in jobsite spending in late 2008 and early 2009 when both tax receipts and investment fund balances were plunging.
Investment fund balances began recovering last May and state and local government tax receipts are tentatively recovering now. However, the depressed state of both investment and general fund balances throughout 2010 will cause further small declines in this type of project over the next year. Building stimulus funds will substantially offset weakness in investment and general funds in 2010-11. Almost all of the building stimulus funds appropriated 15 months ago have yet to be spent. Congress will likely appropriate more building stimulus funds early next year which will be spent in 2011 and beyond.
Institutional construction activity is declining slowly with most of small expected decline still ahead. The usual cyclical pattern is distorted by the stimulus plan. So far it has propped up state budget balances and maintained some construction activity that otherwise would have been halted. Ahead the stimulus plan will fund as much as $100 billion in institutional building beginning soon and stretching beyond 2012. He added that normal recession recovery processes will be more significant than stimulus spending.
Overall, construction will begin to rise in 2010 and regain its peak in 2012. Retail is overbuilt, hospitality hit by a loss of credit and rising vacancies, and office building due to drop due to service sector layoffs.

Ken Simonson, of the Associated General Contractors of America, says that producer price index for the 2003-2009 timeframe was up 33%, while that of the consumer price index rose only 17%, according to the Bureau of Labor Statistics. One early effect of the recession was a fall off in the PPI, but that is starting to rebound now. In 2009, diesel, copper, steel and aluminum were lower than average, with increases seen in concrete and gypsum, and asphalt and lumber uncertain. In the next year, says Simonson, due to worldwide demand, erratic supply and hard to transport materials, the industry is subject to price spurts, transportation bottlenecks and fuel price swings, with 6% to 8% increases in product price index, with some spikiness.
Though construction employment fell from 2008 to 2009 by 15.3%, with an unemployment rate of a soaring 17.1% in the construction industry, wages as hourly earnings did go up 1.6%, compared to 2.5% in private industry. In Ohio, employment in the industry fell by 17%, vs. 15.1% in the U.S. in general.
Overall, says Simonson, he expects nonresidential spending to stay even or decrease slightly, with possible gains in retail, healthcare and higher education, while total materials costs hold steady or rise up to 8%, with labor costs rising by 3% or less.

Kermit Baker, of the American
Institute of Architects, addressed residential, saying it had improved considerably since the beginning of 2009, a good sign as it was first to fall and its rise presages other advances in the lagging indicators. House prices may have bottomed, he added, but the inventory of homes needs to be worked off, though entry level homes are moving toward recovery. The Architectural Billings Index is in a holding pattern, with many inquiries not resulting in work, and this holds true across all locations and market segments. Baker also said that architectural firms are beginning to benefit from the Federal stimulus plan.
Since the roundtable, the AIA has come out with a projection for nonresidential construction spending to decrease by 13.4% in 2010, with a marginal increase of 1.8% the following year, an indication that the freefall is over and this will be the year of bottoming out.
McGraw Hill Construction has released its Construction Outlook Report for 2010. After a year in which declines were broader, steeper and faster than anticipated, the U.S. construction market will be helped by growth for several sectors, mostly residential, said Robert A Murray, vice president of economic affairs. In short, the worst is over. Total construction starts should climb 11% to $466 billion, leading to greater stability.
Some highlights: Commercial buildings will drop 4% in dollar value, with weak employment contributing. Public works, as part of the stimulus, will also help the economy recover. Institutional buildings as a sector will begin to stabilize, with square footage down by only 2% and the dollar amount edging up by 1%, thanks to energy upgrades. Healthcare took a hit in 2009 due to the credit crunch, but Murray expects a 5% bounceback to $22 billion, while education continues to decline, but more slowly, by 3%, as taxes drop. Manufacturing will drop 14% in dollars and 3% in square feet, while public works rises by 14% and electric utilities slip 3% after a record year.
Overall, private non-residential building has yet to bottom out, due to tight credit and the vacancies in the market, with a 3% drop following the enormous 30% in 2009, with hospitality hit harder with a 9% decrease.
One bright spot was the stimulus package, says McGraw Hill, with $130 billion for construction already being seen in a pickup in infrastructure building, which is seen as leading to pickups in other construction sectors as well. “The stimulus funds are meant to be just that,” a stimulus, not the be-all, end-all answer to infrastructure financing,” said Frank Guinta, senior vice president of Hill International. One provision of the ARRA is the creation of Build America Bonds, issued in 2009-10.
Another plus is the stabilization of the financial sector, leading to markets for municipal bonds. The consensus is that GDP turned positive in 3Q2009. However, employment is expected to recover more slowly, due to a slow expansion ahead. The recovery is now pushed back to 2011 if credit markets continue to improve. The commercial building sector faces tight
lending and a further concern about deterioration in market fundamentals, with commercial mortgages coming due and regional banks being vulnerable.

The Association of Builders and Contractors agrees that the recession is over, and notes that 2009 was a year of diminished contracting opportunities, declining revenues and shrinking backlogs. The effect of the stimulus was seen beginning in spring with large increases in the ABC’s new Construction Backlog Indicator for infrastructure firms and steadily improving spending, a trend which is expected to continue in the future.
However, employment totals are down and are not expected to rise quickly. The forecast for 2010 is for nonresidential employment to be down in the mid-to-high single digits on a year-over-year percentage change. The construction jobs report remains consistent with the notion that the nation’s nonresidential construction industry sector remains mired in its own recession, says ABC chief economist Anirban Basu.
For all of 2009, nonresidential building construction shed 105,300 jobs, or 13.1%, to bring employment to 698,200. “The employment report was particularly negative for the nonresidential construction sector,” said Basu. “Some of the job losses were due to unseasonably cold temperatures in certain parts of the nation in December. Of the 53,000 construction jobs lost in December, roughly half could be attributed to weather.
More positively, construction materials prices have been on the decline, with a more stable structure that allows more confident long-term bidding. Market sectors on the decline will be office, retail and hospitality, except for big box, and manufacturing will decline sharply by 19%. Institutional construction will also be soft.

FMI, a consulting and investment banking service for the construction industry, has released its 2010 U.S. Markets Construction Overview, including a compilation of strategic issues in the current environment and important trends observed in 13 client groups. Some key findings:
n With slowing private markets, there will be increased demand for firms capable of performing large, complex projects.
n Engineering firms will continue to integrate up and down the supply chain.
n 2010 will be a year of fundamental change for many markets and firms.
n The global trend of “sustainable” will move to “actively beneficial.”
n Petrochemical, nuclear and utility
markets are particularly attractive for specialty
contractors.
n The FMI 2010 U.S. Markets Construction Overview is available for purchase
at www.fmistore.com. BXM