Forecasters Share Insights on What to Expect from the Construction Market This Year and Next

Is this a stimulating time for construction? That was the question posed to economists during a webinar last week presented by the Associated General Contractors of America (AGC), the American Institute of Architects and Reed Construction Data.Jim Haughey, chief economist for Reed Construction Data, began the program by providing a 2009-2010 construction industry economic outlook.

“A lot has changed since January. We have a new economic team in Washington and the politics have changed considerably,” Haughey said. “The net impact of that is the recession got a little bit worse to start with, but it will come out quickly, at least the initial recovery, because of the massive amounts of [stimulus] approved by congress. Some of those are just beginning to go into place and more will [follow] over the spring and summer.”

Looking ahead at the next two years, Haughey said the outlook is up.

“$11 trillion is committed and a little more than $4 trillion has already been spent to lenders. This started out as mostly residential mortgages but now has expanded to include much more, including commercial mortgages … we think this will be enough to recapitalize lenders.”

As far as construction spending, Haughey said that the market will see a steep decline through the spring, increasing, though, by the end of the year.

“We won’t see the [same] 2006 construction spending peak until 2012,” he said, adding, “This is a good year if you’re buying construction materials and resources, but a bad year if you’re selling them, as pricing is weak and likely to dip lower in the coming months until inflation returns.”

Haughey said he expects the recession to continue into fall and then we will see sub-par GPD growth for a year.

“That same level of confidence will remain at recession levels; it will get better, but not back to normal this year or next so it will be difficult to get contracts,” he said. “We will see also worsening access to credit.”

Looking at non-residential construction specifically, Haughey said it peeked last summer and has been down since.

“It’s no longer a good investment; occupancy rates are falling, rental rates are falling so [it does not look like] a good place to put your money [for new projects]. It is a good market to buy up the existing buildings,” he said.

Haughey added that the market will not see as long of a period of depressed activity after this recession as it did compared to the last recession when the market was flat and sinking … and that is because there has been much less overbuilding in the non-residential market this time.

Ken Simonson, chief economist with AGC, followed with his outlook titled, “Good news the recession is over … but not for construction.” His discussion focused primarily on stimulus funding and what it means for contractors.

“We had such a drop in output in the fourth quarter of last year/first quarter of this year, I think we’ve dropped enough that consumers are going to start coming back into the market,” Simonson said. “We have reduced withholding and increased unemployment checks and a number of other measures are putting money into consumers pockets and that should be enough to turn around consumer spending, which accounts for about 70 percent of GPD. The stimulus bill also means the government is starting to buy construction.”

Total stimulus dollars for construction-related spending is between $135 and $144 billion.

“In the building segment quite a few government agencies have a hand in this,” said Simonson. “The Department of Defense is getting about $7 billion for military bases and housing; GSA is getting about $5.6 billion; and $9 billion is scattered through other government agencies.”

Simonson also said there are a number of tax provisions that are important for construction, including a one-year delay (until 2012) in a provision that would require government agencies to withhold 3 percent of all payments to contractors and send that money to the IRS.

“A 3-percent withholding could pretty much wipe out the entire profit for many construction contractors,” said Simonson.

He also noted that the stimulus includes increased expensing for anyone who buys equipment and puts it in service by the end of the year. “They will be able to write off 50 percent of the cost and then use accelerated depreciation for the rest,” he said, adding that as with any stimulus money, there are a few “strings” attached. For example, the Davis-Bacon act has been extended to all stimulus contracts and the buy-American provision has been expanded to all stimulus and all manufacturing.

Looking at construction spending overall, Simonson said it dropped 10 percent over the last year and that was concentrated in private residential.

“Public construction was actually up a bit,” he said.

And as far as the spending outlook for 2009? Simonson expects that the single-family market will come back by the end of the year, perhaps enough to raise total residential spending, even though multi-family will be down for probably the next two years.

“Non-residential spending, in spite of the stimulus money starting to show up, is still dragged down by severe contraction in the developer finance project, a big cutback in manufacturing and sluggishness in the hospital and university market,” Simonson said.

Labor has also dropped, and much faster in construction than the overall economy.

“One out of eight construction jobs disappeared in the last 12 months and the unemployment rate in construction in March was a staggering 21 percent,” said Simonson. “While the increase alone in that rate was more than the rate for the total private economy, hourly average earnings in construction rose more than in the rest of the economy. This is because a year ago non-residential construction was so strong that many union contracts were signed to 4 ½ – 5 percent increases for both last year and this year. Even non-union contractors that had to pay prevailing wages or project labor agreements … they’ve also put in the increase. This year, though, I think those increases will be more moderate, about 3 percent.”

Looking at the rest of 2009, Simonson expects non-residential spending to be down between 3-9 percent, total construction spending will be down, material costs will be down and labor costs will be moderate.

“By 2010 I think non-residential could be down again, at best it will be break even; residential should be up solidly.”