The highs and lows

The under-construction Bank of America tower in Charlotte, N.C., with glazing installation by Trainor Glass Co., Alsip Ill. Office building construction suffered major declines in 2009 and will continue to fall in 2010. Photo by Trainor Glass Co., Alsip, Ill.

Nonresidential construction spending, which fell 5.7 percent in 2009, is expected to drop an additional 5 percent in 2010, with an expected 6.3 percent rebound in 2011, said Jim Haughey, chief economist, Reed Construction Data, Norcross, Ga. He spoke during Reed’s Oct. 22 forecast Webinar, The Year Ahead for Construction: A Perfect ’10. Haughey’s forecast is in line with other construction economists, including Robert Murray, vice president, economic affairs, McGraw Hill Construction, who forecast a 3 percent to 4 percent decrease in nonresidential spending in 2010, and Ken Simonson, chief economist of The Associated General Contractors of America, who forecast a 0 percent to 5 percent drop.

“We anticipate sometime in early [2010], the decline will be over for nonresidential construction spending, and we’ll see some slow progress over latter part of 2010,” Haughey said.

Read an overall construction outlook that includes the residential forecast in Closer Look. Read the retail glass forecast.

Numerous factors are at play in nonresidential construction for 2010, including: continuation of tight lending; rising vacancies for office, retail and hotel; rising unemployment; tax revenue shortfalls; an expected rebound in residential spending; and the stimulus funds, Haughey said. These factors affect the segments of nonresidential construction differently, offering rays of hope for some segments, and some increasingly dismal news for others.

Commercial

In 2008, commercial construction starts dropped 26 percent. In 2009, the decline for commercial buildings in square footage was 54 percent, and in dollars down 43 percent to $48.2 billion, according to the Construction Outlook 2010 report from McGraw Hill Construction.

This developer-based construction segment that includes retail, hotel, and office, will fall 6 percent in 2010. The segments are expected to rise 11 percent in 2011, Haughey said during the Reed Webinar.

Retail. Stores and shopping center construction, which plummeted 33 percent in 2008 and an additional estimated 52 percent in 2009, could be a brighter spot in 2010. According to Construction Outlook 2010, the segment will see a small drop of 5 percent next year. However, Haughey offered a more optimistic picture for retail, saying the segment could see a 22 percent gain in the value of construction starts.

“Retail was the first commercial market segment to fall, hence it will be the first to recover,” he said. “And this segment can recover very quickly, as much of retail is off the shelf.”

Simonson, echoed some of that optimism for retail during the Reed Webinar. “Housing is picking up, and that is associated with retail growth. We are not getting back to 2008 levels, but it will be better than the dismal record of the last few months,” he said.

Office. Office construction, which suffered a 25 percent decline in 2008 and an estimated 51 percent decline in 2009, will continue to fall in 2010, though at a slower pace, according to Construction Outlook 2010. Office construction is forecast to drop all additional 9 percent in 2010, the lowest level for this structure type in at least the past 50 years, according to Construction Outlook 2010. Haughey forecast a slimmer decline of 4 percent for the segment in 2010.

The continuous declines reflect the drop in office employment. Office-using jobs were estimated to fall by 1.5 million in 2009, and are expected to see an additional decline of close to 400,000 in 2010, according to Construction Outlook 2010.

Hotels. Hotel construction, facing sagging consumer confidence, high vacancies and the freezing up of the credit markets, is expected to fall 14 percent in 2010, Haughey said. The drop follows a 7 percent decline in 2008 and an estimated 56 percent plummet in 2009, according to the Construction Outlook 2010.

Manufacturing buildings. The category jumped 41 percent in 2008 to $28.9 billion, with square footage sliding 13 percent to 79 million square feet. This structure type follows the economy with a lag, more specifically the pattern for capacity utilization. During the first eight months of 2009, only $1 billion worth of manufacturing project broke ground, and for the year manufacturing plant construction was estimated to plunge 49 percent to 40 million square feet and 62 percent to $10.9 billion. The 2009 estimated square footage is the lowest amount for this structure type in at least the past 50 years. The amount of excess manufacturing capacity means more construction declines are forecast for 2010, as activity slips 3 percent to 39 million square feet and 14 percent to $9.4 billion, according to the Construction Outlook 2010.

One area that’s likely to run counter to 2010’s overall decline is alternative energy. The federal stimulus act provides numerous incentives to alternative energy, such as solar. For example, the Solyndra photovoltaic panel manufacturing plant in California, with an estimated construction cost of $367 million, obtained much of its financing through a loan from the U.S. Department of Energy under a program established by the stimulus act according to the Construction Outlook 2010.

Institutional

The institutional building market stayed strong as the economy slipped into recession in 2008. Contracting in square footage held steady at 526 million square feet and climbed 10 percent in dollar terms to $129.3 billion. In 2009, the recession, tight lending markets, shrinking endowments at major universities and diminished charitable donations caught up with the institutional category, and contracting was estimated to slide 23 percent to 407 million square feet and drop 15 percent in dollar terms to $110.2 billion, according to the Construction Outlook 2010 report.

The institutional sector typically lags the pattern for commercial buildings, but the expected support from the federal stimulus act could alter that for this cycle, both in terms of direct funding for projects and the potential lift from the issuance of Build America Bonds. As a result, the institutional building group in 2010 is forecast to settle back 2 percent to 398 million square feet, and see a slight 1 percent gain in dollar terms to $111.1 billion, according to Construction Outlook 2010.

Some institutional segments will perform better than others in the coming year, Haughey said during the Reed Webinar. “[In 2010], we’ll see a little decline in education and a significant decline in buildings financed by taxes,” he said. “Much of healthcare and higher education construction is funded by user fees, and during the recession, tuition and hospital usage haven’t declined. That’s not the case with police stations and public parks.”

Education. Educational building edged up 1 percent in 2008, marking the fourth straight year of healthy contracting after the loss of momentum during 2002-04, according to the Construction Outlook 2010 report. Growth in 2008 was particularly robust for high schools, which climbed 10 percent, while colleges and universities edged up 1 percent after a strong 2007 gain. In 2009, the educational building category dropped back, as funding for school districts were scaled back. Through the first nine months of 2009, groundbreaking for new high schools was down 28 percent. Contracting was expected to be down 23 percent in 2009, and fall another 8 percent in 2010.

“Higher education [is] above year ago levels, but we’ve seen a real halt in new starts,” Simonson said during the Reed Webinar. “We’re hoping many endowments and capital campaigns that have suffered will begin to pick up as the Dow is improving. However, I predict quite a drop in school construction as property tax receipts fall in response to the decline in home values, an increase in delinquency and a reduction in sales taxes.”

Health care. The health care facilities category climbed 6 percent in 2008 to 110 million square feet, an all-time high, according to Construction Outlook 2010. The upward push came from hospital construction, surging 26 percent, while clinics and nursing homes settled back 8 percent. The weak economy, tight lending and unpaid medical bills, affected the sector, and in 2009 the category was estimated to drop 36 percent to 70 million square feet, the lowest amount in 14 years.

Going into 2010, the debate over health care reform at the national level has raised the degree of uncertainty affecting the sector, according to Construction Outlook 2010. For 2010, healthcare facilities will edge up 3 percent. Apart from the $87 billion from the federal stimulus to the states in additional Medicaid funding through 2010, the stimulus act carries direct support for health care construction. The Department of Defense also has allocated $1.3 billion of its stimulus funding to health care construction. In the long term, health care facilities will see rising construction to meet the growing demand expected from the aging baby boom generation, as well as to implement new health care technologies.

Other institutional buildings. Construction of public buildings in 2008 slipped 4 percent, and there was a slight loss of momentum in 2009. The strength in 2009 came from a surge of courthouses, up 61 percent during the first nine months of the year. In 2010, this category is forecast to rise 8 percent to 51 million square feet accompanied by a 10 percent gain in dollars reflecting faster growth for renovation projects, according to the Construction Outlook 2010 report.

The religious building category is in the midst of an extended slide, which in 2009 was estimated to lead to another contracting decline to 26 million square feet. In 2010, the sector is forecast to see another 3 percent drop to 25 million square feet, according to Construction Outlook 2010.

Economists disagree on the forecast for amusement-related projects. The segment, which dropped 10 percent in 2008, and an estimated 29 percent in 2009, will slip an additional 2 percent in 2010, according Construction Outlook 2010. Haughey, however, had a more positive report during the Reed Webinar, saying the segment could see a 46 percent increase in starts in 2010. “There are big projects that dominate this segment, and they are many years in the making,” he said. “These projects were planned during better times, with a lot put on hold. Now, some are coming back.”

Transportation terminal projects went up 3 percent in 2008, following a steep 18 percent drop the previous year. Activity in 2009 was estimated at 27 million square feet, essentially steady with 2008. In 2010, this segment will benefit from the stimulus funding, especially rain transit. Contracting in 2010 is projected to rise 13 percent to 31 million square feet, according to the Construction Outlook 2010 report.

Other government buildings could offer a small, but strong, segment of growth. Military construction spending in particular offers a bright area, Haughey said. The specialized category could see gains of 44 percent, Haughey said. “This is money made available in better times, mostly upgrades to older facilities,” he said. The stimulus package also provided up to $35 billion for buildings, much of which will begin to permeate the economy in 2010, Simonson said.