Slow recovery slated

The nonresidential building construction recovery is restrained by the slow recovery in the overall economy, lingering credit access problems, and the ebbing of the federal stimulus construction funds.

10/17/2010


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Consulting-Specifying Engineer editors recently sat down with Jim Haughey to get his take on the construction market.

CSE: What is the forecast for commercial (nonresidential) construction through 2011?

Jim Haughey: Nonresidential construction spending will drop 22% in 2010, a 35% decline from summer 2008 through the end of 2010. Spending will rise sluggishly by 3.7% in 2011. The pickup in job-site spending will be 11% from the end of 2010 to the end of 2011. The recovery pace will pick up slightly in 2012 leading to an 13% gain over 2011 for the full year. Given the length and depth of the recession, this is an unusually slow recovery. The nonresidential building construction recovery is restrained by the companion slow recovery in the overall economy, lingering credit access problems (especially for smaller projects), and the ebbing of the federal stimulus construction funds that dampened the recession.

Table 1: MEP Giants indicate revenue sources in 2009. Source: Consulting-Specifying Engineer

 

Type of project

 

0 or n/a

 

1 to 10%

 

11 to 30%

 

31 to 50%

 

51 to 75%

 

76% to 100%

 

New construction

 

3%

 

5%

 

17%

 

34%

 

33%

 

4%

 

Retrofit/renovation

 

1%

 

3%

 

30%

 

42%

 

17%

 

4%

 

Maintenance/repair/operation

 

43%

 

33%

 

20%

 

1%

 

0%

 

0%

 

Commissioning (new buildings) or retrocommissioning (existing buildings)

 

28%

 

59%

 

9%

 

3%

 

0%

 

0%

 

 

CSE: What’s the driving force behind commercial construction, and what sector will see the most spending in the near future (12 to 18 months) and in the longer term (up to 5 years)?

Haughey: Several years of much-reduced building starts in the developer financed sector (retail, office, hotel, and warehouse) will result in space completions approximately equal to net added space demand in the next few months. Stable and soon slowly rising rental and occupancy rates, together with record low borrowing rates, will raise the expected profitability of building starts and set off recovery in this sector at a double-digit annual pace. Already, the value of starts, tracked by Reed Construction Data, has been stable since spring 2010 at a level more than 25% above the cyclical low point in spring 2009.

The public and institutional sector held up much better during the recession and the first year of overall economic recovery but will have a slower expansion in the next few years (see Table 2). The institutional market was boosted by stimulus funds in the last year. This will continue less significantly in the next two years. The collapse of state finances will be a major restraint in late 2010 and through 2011. State tax collections have recently begun to recover, but “normal” is several years ahead.

Table 2: Nonresidential building market

 

Annual percentage change

 

2007

 

2008

 

2009

 

2010

 

2011

 

 

 

Nonresidential buildings

 

 

 

 

 

 

 

 

 

 

 

 

 

For lease

 

18.7

 

8.6

 

-13.2

 

-22.4

 

3.7

 

13.3

 

Institutional

 

23.1

 

4.1

 

-29.8

 

-32.2

 

3.1

 

15.1

 

Manufacturing

 

25.3

 

31.1

 

10.6

 

-29.1

 

0.4

 

14.6

 

Total

 

-1.4

 

-7.4

 

-14.3

 

-10.1

 

5.3

 

11.4

 

 

CSE: What geographic areas of the country are seeing robust commercial construction?

Haughey: New England has the strongest regional economy, and the Rocky Mountain region has the weakest regional economy. In the past few months, the rapid expansion of manufacturing has made the Great Lakes states, led by Michigan, the most rapidly growing region. But this recovery is from the country’s deepest recession and will have little impact on building space needs in 2011.

Economic activity in the Rocky Mountain and South Atlantic states, as well as in the Pacific Northwest, remains unusually depressed compared to the rest of the country and will slow construction recovery in these unusually expanding regions. New England and the Gulf region (TX, OK, AR, LA) were the only regions with an increase in starts in the last year compared to the prior year.

Ahead, the growth pace in New England will subside but remain strong. Expansion in the Gulf region may be slower due to recently weaker oil prices and volumes and the offshore drilling ban. The big drop last year in the Mid-Atlantic states (NY, NJ, PA) will be substantially but not fully offset in the next year. The pipeline of projects in planning is full, but permitting is a long process in this region. Small declines in the other regions over the past year are expected to turn to small increases in the next year, except in the Rocky Mountain region.

CSE: What government stimulus projects do you feel have most helped the nonresidential construction market? Do you see that continuing?

Haughey: Initially the stimulus money was spent mostly on road paving. Now most of the spending is on transportation facilities and federal buildings. The increment of stimulus funds from month to month has been slowing since earlier this year but remains significant. Spending for federal office buildings, labs, and military facilities has had the most impact.


- Haughey is chief economist with Reed Construction Data. He has 22 years of experience at Reed Construction Data and parent company Reed Business. He has worked with British Petroleum, Ford Motor Co., and the Michigan Budget Office. He has taught economics or business at University of Michigan, Ohio University, Michigan State University, and the University of Massachusetts.


For more information on MEP Giants 2010 go to www.csemag.com/giants

Related MEP Giants 2010 articles:

[Commissioning on the Rise]

[Consolidation Nation]

[MEP Giants 2010]

[View From the Top]

 



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