Economist Says Construction Continues to Slowly Show Signs of Improvement

The construction industry is on the cusp of a turn around, though some sectors more so than others. That was the sentiment of Kermit Baker, chief economist, for the American Institute of Architects (AIA), who provided a construction outlook for the non residential, housing and remodeling markets, during a recent market insights webinar.

Taking a look at non-residential construction, Baker said all major sectors are edging into a recovery phase. However, his non residential construction outlook for this year and moving into 2012, is still weak.

“Architects are reasonably pessimistic about prospects for 2011,” he said. “They expect only moderate revenue gains in 2011.”

In discussing employment trends at architectural firms, he said they are still seeing weak payrolls.

“Firms lost over 65,000 positions since the high in the summer of 2008,” Baker said, adding that this figure does not include cutbacks to part time, salary freezes, etc.

Baker also talked about the AIA’s Architectural Billings Index, which he said began moving up in the fourth quarter of last year.

“January was just exactly 50 indicating there was no change from December 2010,” he said. “The trend has been steadily improving and it looks like we’re in the midst of a design recovery now. Certainly we feel it’s a design recovery that can be sustained as we move through 2011.”

Looking at residential construction, Baker said homebuilding continues to be a disappointment for the industry. Challenges include inventory overhang, weak demand, and low mobility. He also noted that the remodeling market appears to have hit bottom in 2010, and the current upturn is reasonably healthy.

“The housing market is still not fully recovered,” Baker explained. “Generally we see a rebound of 20-30 percent during the first year of recovering and we’re two years into what thought was the low point of the housing cycle.” He said new home sales are below where they were in 2009 and prices are down 30 percent from their peak and may not have hit bottom yet.

“Oversupply of homes is a severe problem. Nationally, we spent decades building more homes than we needed,” said Baker. “There are 3 million excess vacancies at present. That’s a lot of inventory that needs to be worked off.”

He said the second part of the housing problem is weak demand. He explained that previously one of the reasons so many homes were built was because we needed to house new households.

“Now household growth is below levels of the past several decades,” Baker said, explaining that because of the economy people are delaying marriage and young people are moving back in with their parents after college, etc.

Taking a closer look at remodeling, he said at the market’s peak in 2007 it was estimated to be a $325 billion a year industry. By 2009 spending had dropped by about $40 billion. “So while the market saw a serious downturn, it paled compared to the housing recession,” said Baker. Remodeling dipped about 15 percent during the last cycle while homebuilding dropped about 75 percent.

So where is remodeling heading?

“It’s a market that has been bumping around near the bottom these past few quarters … now looks like remodeling spending will be up some in the mid-single-digit range for 2011,” said Baker.

For his overall construction forecast, Baker said he expects to see a recovery later this year and 2012 to be better.

“2010 had a very steep decline so from that vantage point 2011 looks to be almost flat,” he said. “2012 could be called a true non residential recovery, so it looks like we’re moving in the right direction.”