Nonresidential construction to rise through next year
Manufacturers of curtain walls and architectural glass can celebrate the New Year early. Economists who spoke at the Reed Construction Forecast in Washington, D.C., Oct. 11, expect nonresidential construction to continue its boom throughout 2007.
The economy as a whole “is downshifting from a very rapid rate of growth,” says Martin Regalia, vice president and chief economist with the U.S. Chamber of Commerce. Residential construction has taken it in the chin, with starts peaking at 2.265 million in January and then diving to 1.665 million in August, said Jim Haughey, chief economist at Reed Construction Data. He expects starts to drop to 1.433 million in 2007.
However, the consensus among conference economists is that the decline in residential construction will not impact the robust performance of nonresidential construction.
“Nonresidential construction has yet to hit its peak growth,” Haughey said. It may top out in the spring, but he projects that the sector will continue strong through 2007. Nonresidential construction spending is projected to advance by 12 percent in 2007, according to Reed’s publication, U.S. Construction Outlook 2007-2008.
The sector will cool in 2008, but not much, continuing to grow by 8 percent higher than 2007. That rate remains “comfortably ahead of inflation,” according to the outlook publication.
High corporate profits, readily available, low-cost credit and increased state and local tax revenues will fuel nonresidential construction spending.
Investment in the sector is demographic, with upticks in each segment. Spending on construction for lodging, though unable to match a surge of 54 percent in 2006, will post a year-over-year gain of 20 percent in 2007.
Construction spending for office and retail space will be up 15 percent and 11 percent, respectively. And office construction expenditures will continue to grow by 19 percent in 2008.
Dollars invested in institutional construction remain on the upswing. The health care industry is expected to up its construction spending next year by 18 percent; followed by a growth of 12 percent each in public safety and amusement and recreation. Educational and religious communities are expected to increase their outlays by 10 percent.
Construction spending is growing faster than starts, Haughey said. Construction starts, which increased 11.8 percent year over year in 2006, will climb 6.7 percent next year and 4.4 percent in 2008, he predicted.
Material costs account for much of the difference in the rates of growth. “Construction suffered from more inflation than the rest of the economy,” Haughey said.
The core rate of inflation in the United States hovers between 2.5 percent to 3 percent, Regalia said. However, in the 12-month period ending in August, the cost of construction materials experienced a 9 percent increase and will likely rise another 7 percent in 2007, Haughey said.
Nonresidential construction is experiencing skilled labor shortages – a phenomenon not ameliorated by the decline in residential construction, Haughey said. As a result, he expects wage costs for these workers “to rise significantly.”