MHC economist: commercial construction to hit bottom by early 2011, then pick up

The 4th Annual ENR-CURT Construction Business Forum took place June 15-16 at the Sheraton National Hotel, Arlington, Va. Two hundred and thirty construction professionals attended the event, said Marguerite Herman, McGraw-Hill Construction, New York. Last year, the number of attendees was between 270 and 280.

Robert Murray, vice president, Economic Affairs, McGraw-Hill Construction, presented the 2010 Outlook for U.S. Construction Activity – Midyear Update.

“The U.S. has been in recession since December 2007," Murray said. "We have gotten through an extremely difficult 2009. The decline in total construction grew steeper in 2009 to  25 percent. There wasn’t such a decline since the 1960s. The forecast last fall was looking at 2010 as the first year of recovery, not in every sector, but a few. Recovery’s now emerging.” In the macroeconomic picture: the first GDP pickup was at the end of last year and first quarter of this year, he said. “The overall pickup is of 3 percent GDP growth in 2010,” he said. “It’s a U-shaped recovery, but a V-shaped possibility is gaining ground. It will be a slow, hesitant kind of recovery, unlike in the 1980s. It’s beginning to turn, starts will pick up in 2012. By early 2011, commercial will hit the bottom and start picking up thereafter.”

Employment is key in the recovery, Murray said. May employment was above 400,000, but that was mostly temporary Census hiring. March-May average job growth: total employment was plus 310,000, and private employment was plus 139,000. “Risk is still out there. Inflation is not a concern in 2010, maybe in 2011 or 2012,” he said.

Tighter lending standards are still a major constraint for 2010, Murray said. A survey of bank lending officers shows a loosening of lending standards in the commercial and industrial sectors, but it is not visible yet in the commercial real estate sector. The short-term rates are still low and will remain low until the end of this year, Murray said. “As far as cost of financing, now and until the end of this year is a great time to go ahead with construction projects.”

The $787 billion Stimulus Act allotted $130 billion in construction-related spending for 2009-2011. Of that $130 billion, GSA federal buildings got $5.6 billion; DOD restoration, modernization of facilities got $4.2 billion; Veterans Administration got $1.3 billion for hospital upgrades; and HUD got $4 billion. So far, projects in the public works and electrical utilities reaching construction start stage in March to December 2009 equal $20.4 billion, and January to April 2010 totals $9.8 billion, according to the MHC database. Project starts in the general building types equal $3.7 billion from March to December 2009, and $1.9 billion from January to April 2010.

For 2009, the Build America Bonds issuance was at approximately $65 billion; for 2010, there will be $100 billion more. An additional $17.6 billion jobs bill was signed on March 18, Murray said.

In the major construction sectors, single-family is now edging up, commercial building is still declining, institutional building is slipping, and public works is set to turn up, Murray said.

• Manufacturing building construction was down 54 percent in square feet and 66 percent in dollars in 2009, and is supposed to be down 8 percent in square feet and 18 percent in dollars in 2010.
• Single-family housing starts were down 21 percent in 2009 and are supposed to pick up 28 percent in 2010. “Mortgage rates remain low, and steps have been taken to improve funds available for mortgages,” Murray said. “Inventories are settling back, and new programs will limit foreclosures.”
• The multifamily housing construction decline accelerated in 2008-09. In 2009, construction was down 57 percent, but it is supposed to pick up 7 percent in 2010. “Multifamily was an attractive investment target, but is less so now due to mounting concern about overbuilding of condos and diminished credit availability,” Murray said. Affordable housing projects have received a boost through HUD’s stimulus bill benefits.
• Store and shopping center construction was at an all-time high in 2007, but is now in sharp retreat. Store construction was down 54 percent in 2009 and is expected to be down 6 percent in 2010. “Store renovations have seen a much smaller decline,” Murray said.
• Warehouse construction also peaked in 2007, but is now heading down. In 2009, construction was down 67 percent, and in 2010, will be down 5 percent.
• Hotel construction soared in 2006-07, retreated mildly in 2008, and plunged in 2009. Construction was down 65 percent in 2009, and will be down 17 percent in 2010.
• The office construction downturn accelerated in 2009 to 55 percent, and 8 percent in 2010. “Tight credit conditions are causing more and more projects to be deferred,” Murray said. “Market fundamentals, such as rent and vacancies, are deteriorating in difficult economic times."
• Institutional building declined 4 percent in 2009, but is expected to pick up 3 percent in 2010. Educational building was down 23 percent last year, and will be down 13 percent this year. “Numerous states in recent years have passed school construction bond measures, especially California and Texas,” Murray said. “Major universities increased capital spending plans, but are now under evaluation.”
• Healthcare building construction was down 38 percent in 2009, but is expected to go up 5 percent in 2010. “Hospital chains were hit hard by tight credit conditions,” Murray said. “Debate over healthcare reform created near-term uncertainty.”
• Amusement/recreational and churches are still declining. Total amusement and recreation construction was down 31 percent in 2009 and will continue to be down 5 percent in 2010.
• Airport terminal work picked up in 2009, and is expected to stay close to improved activity in 2010. Construction was up 68 percent in 2009, but is expected to be down 7 percent in 2010.

Total U.S. construction starts is expected to be up 10 percent in 2010, Murray said.

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