Ups and downs from East to West
2011 could be a mixed bag across the U.S., with the possibility of both growth and even deeper losses, depending on the region. The majority of forecasts show the Northeast improving the most, followed by the Midwest. The West and South will continue to face difficult conditions throughout much of the year. Some states and metro areas, however, could tell a different story.
"Overall, I think the commercial construction market is bouncing along the bottom right now. But it's important to remember that North America is not created equal," says Garret Henson, director of sales, North America, Viracon Inc., Owatonna, Minn. "Think about Florida, for example, which felt the recession early compared to Texas, which felt it later. We're seeing a positive trend in Florida, while Texas is migrating into a deeper spot," he says. "The upper Northeast is carrying a lot of excitement, with projects that have been on hold coming back. These are shovel-ready projects. ... We don't feel great about anything out West."
At press time, North Dakota, California, Michigan, New York, Minnesota, Idaho, Massachusetts, New Hampshire and Nevada showed the most growth potential for 2011, according to Reed Construction Data, Norcross, Ga. These predictions stemmed from the firm's Expansion Index, which offers a 12-month to 18-month projection of construction activity for states and more than 300 metro areas. The Index, updated monthly, indicates whether a location's construction volume will expand or shrink in the next year. An Expansion Index below 1.0 indicates a shrinking market, and anything above 5.0 indicates rapid expansion. The index is available on the Reed Construction Data Web site (www.reedconstructiondata.com/market-intelligence/expansion-index/).
"The Index tracks anticipated value of construction projects that appear to be ready to start in the next year," explained Jim Haughey, chief economist, Reed Construction Data, during the Reed Construction Data forecast webinar, "After the Fall: When and Where Construction Will Rebound," held in fourth quarter 2010. "I should note that California and Michigan are two troubled states that have high indexes. This doesn't mean they will get back to normal, but it does indicate a turnaround in the making," Haughey said.
In November 2010, the expansion index was below 1.0 in 13 states, indicating markets in Alabama, Colorado, Delaware, Georgia, Idaho, Kansas, Maine, Montana, North Carolina, Oregon, Pennsylvania, Texas and Tennessee are shrinking.
Looking by metro area, forecasters weren't in total agreement. Julian Anderson, president, Rider Levett Bucknall, Phoenix, provided insight on how close 13 large cities are to recovery during McGraw-Hill Construction's Outlook 2011 Executive Conference, Oct. 29. According to Anderson, Denver, Seattle and Washington, D.C., have reached their low levels and are poised to grow. Cities such as Boston, Las Vegas afnd New York still have some sliding to do, he said. [See Fig. 1].
Construction activity cycle
Looking ahead, Denver, Seattle and Washington, D.C., have reached their low levels and are poised to grow, according to Julian Anderson, president, Rider Levett Bucknall, Phoenix. Cities such as Boston, Las Vegas and New York still have some sliding to do, he said during McGraw-Hill Construction's Outlook 2011 Executive Conference, Oct. 29. Not all forecasters are in agreement, however. According to Jim Haughey, chief economist for Reed Construction Data, Norcross, Ga., "New York, San Francisco, Washington, Los Angeles and Boston have the largest dollar amount of potential starts in the next year." SOURCE: Rider Levett Bucknall, Phoenix, Construction Activity Cycle.
According to Haughey, however, "New York, San Francisco, Washington, Los Angeles and Boston have the largest dollar amount of potential starts in the next year." These are vibrant cities with "new high-tech industries, government centers, electronic technology, finance and other hot industries of the day. It looks like the comeback in those areas is going to be reasonably quick and reasonably strong," he said.
"San Francisco, Sacramento, Detroit and Memphis are the only large cities with an expansion index over 4," Haughey continued. Meanwhile, there are "121 cities with an index value below 1. This shows that there are a lot of cities in the index with very little in the pipeline. It's going to be a long slow recovery in older towns, out-of-the-way manufacturing towns, old agricultural centers in the Midwest, Rocky Mountains and West, where there's virtually nothing in the pipeline," he said.
Last year's construction activity trends offer good indications of what to expect going into 2011. The AIA's Architectural Billings Index, for example, is an economic indicator of construction activity that reflects the approximate nine-month to 12-month lag time between architecture billings and construction spending—any score above 50 indicates an increase in billings. At press time, the latest figures available were for September 2010 and October 2010. The September ABI was 50.4, pushing the index into growth territory for the first time since January 2008, thanks to activity in the Northeast and Midwest. In October, the ABI dropped below 50 again, to 48.7, indicating a decrease in demand for design services nationwide. However, the Northeast and Midwest stayed in positive territory. While the South and West both showed decreased billings in October, the West returned the lowest score nationwide, at 44.3. [See Fig. 2]
Northeast and midwest leading the nonresidential recovery at present
Billings scores since 2007; index: 50 = no change from previous month
Architectural billings are on an upswing from the lows of early 2009, though still not in growth territory nationwide. According to the latest data available at press time, the Northeast and Midwest showed gains in architectural billings during September 2010, reaching 56.7 and 51, respectively. The South and West lagged, with scores below 50, indicating a decrease in billings activities, scoring 47 and 44.5 respectively. SOURCE: Architectural Billings Index, American Institute of Architects, Washington, D.C.
Despite the somewhat negative ABI, all regions showed remarkable improvement from the trough that occurred in late 2008 and early 2009, when the Northeast hit a low of about 32, the Midwest 34, and the South and West, 35.
The economic activity index—a compilation of state economic growth indexes calculated by the Philadelphia Federal Reserve Bank—provided similar projections to the ABI's. Based on state employment and income data, the index splits the country into eight regions. At press time, the latest figures available were for the June-August 2010 time period, during which the index showed growth in the Northeast, Midwest, and Gulf States, and slow to no growth in the Western, Rocky Mountain, and Mid- and Southern Atlantic states. The New England states were leading the recovery with 5.3 percent growth, followed by the Great Lakes states with 4.2 percent growth.
When presenting this data during the Reed Construction Data forecast webinar, Haughey remarked that the Plain states were doing reasonably well, showing 3.9 percent growth during the June-August 2010 time period. "The Gulf states, with the energy industries, remained strong [with 3.4 percent growth]. The South Atlantic is sour [showing 2.9 percent growth], and the Mid-Atlantic is a bit sour [showing 2.3 percent growth], though not as serious as anticipated," he said. "The Pacific states and the Rocky Mountain states remain weak [with 1.2 percent growth and 0 percent growth, respectively]. It's a big problem. There is no economic growth in the Rocky Mountain states," he said.
2010 construction employment figures also provide a good indicator for statewide construction activity going into 2011, according to Ken Simonson, chief economist of the Associated General Contractors of America, Arlington, Va. Simonson provided 2010 statewide construction employment data during the Reed forecast webinar.
At press time, construction employment had started a modest upswing in some places, according to the data Simonson presented from the Bureau of Labor Statistics, Washington, D.C. Nationwide, construction employment fell 5 percent between August 2009 and August 2010. However, nine states plus Washington D.C. showed construction employment gains of 0 percent to 10 percent, indicating building construction activity during that period. Of those nine, New Hampshire led the pack with 10 percent growth; followed by Oklahoma with 9 percent; Kansas with 8 percent; Washington, D.C., with 4 percent; Arkansas, Massachusetts and West Virginia with 3 percent; Rhode Island and Wisconsin with 2 percent; Maryland with 1 percent; and Pennsylvania with 0 percent.
"Ten out of 51 is not that many, but it's better than what we've been seeing in the past two years," Simonson said. "In 2009, almost every state had declines. Additionally, the number of double-digit declines shrank to just a handful. It will continue to get better."
The states with declines of 0.1 percent to 5 percent construction employment from August 2009 to August 2010 included: Alabama, Alaska, Arizona, Connecticut, Florida, Georgia, Hawaii, Indiana, Iowa, Louisiana, Nebraska, New York, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, Utah and Virginia. States with declines of 6 percent to 9 percent included: California, Delaware, Illinois, Kentucky, Maine, Michigan, Mississippi, Minnesota, New Jersey, New Mexico, North Carolina, Oregon, Wyoming,
Seven states experienced double-digit declines: Colorado (12 percent), Idaho (13 percent), Missouri (10 percent), Montana (10 percent), Nevada (20 percent), Vermont (14 percent) and Washington (11 percent).
Construction employment has a ways to go before it returns to peak levels of 2007, Simonson said. "Every state is below peak. The closest state to its peak is North Dakota, 4 percent down from peak," he said. At press time, five states were less than 10 percent below their peak construction employment levels. Thirteen states were off peak by 10 percent to 25 percent. Washington, D.C., and 29 states were off peak by 25 percent to 50 percent. Two states were off peak by more than 50 percent—Nevada, with construction employment down 59 percent from peak, and Arizona, down 53 percent.