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What to Expect in 2012
Experts Shed Light on the Future of Commercial Construction
by Sahely Mukerji

Will the economy be able to avoid a double-dip recession? That was a question asked by Robert Murray, vice president of economic affairs for McGraw-Hill Construction (MHC) in October during the 2012 Dodge Construction Outlook, part of MHC’s 73rd annual Outlook Executive Conference.

According to Murray, the construction industry will remain flat in 2012, with Gross Domestic Product (GDP) growth of 1.6 percent this year and 2 percent next year.

“Nonresidential building had a steep drop in 2009, and hasn’t shown a lot of movement,” Murray said, “but the expectation is that if the economy can avoid another recession, it might grow. The one bright spot for the nonresidential sector is multifamily housing …”

Multifamily housing is expected to rise 18 percent next year per Murray’s baseline forecast or decline 5 percent if the recession forecast is accurate.

“Affordable housing projects received a boost from the stimulus,” Murray said, who noted that both empty-nesters and now young adults are boosting the multifamily bottom line.

Kermit Baker, chief economist for the American Institute of Architects, added that the upward trend in multifamily housing could be attributed to the growing number of renters.

“The number of renters is growing by 1.5 million per year, and the number of owners is falling by half a million per year. There is a negative attitude toward home ownership: it’s constraining, and you can lose money.”

Housing starts are up about 10 percent, Baker said. “We’ve seen a dramatic scaling back in production, but not much on the consumer side. We’re not seeing much improvement in the national numbers of housing recovery. We’re several years away from pre-recession numbers.”

But for the economy to grow and avoid a double-dip recession, Murray stressed that private financing is essential. And the other key factor is job growth.

“We’ve lost close to 9 million jobs since the recession began, and have only picked up 2 million since,” he said. “This year started off well with the addition of 179,000 jobs per month from January to April, but from May through September, it fell back to a pace of just 72,000 per month.”

Stella Dawson, U.S. specialist economics editor, Thompson Reuters, noted for an economic recovery to be self-sustaining, employment gains at about 200,000 jobs per month are necessary.

Furthermore, the lift that construction got from the Federal Stimulus Act has fallen considerably.

“Public works and electric utility projects designated as ‘stimulus related’ climbed from $0.2 billion in the first quarter of 2009 to $8.5 billion by the third quarter of 2009, and then maintained an elevated pace in the first two quarters of 2010,” Murray said. “These projects fell back to $0.9 billion in the third quarter of 2011, down 89 percent from the 2009 quarterly peak.”

On the positive side, corporate profits have been relatively healthy and firms are sitting on more cash, Murray pointed out.

“Back in 2008, corporate cash for U.S. nonfinancial firms had fallen to $1.4 trillion, but since then the level has gone up to $2 trillion.”

The banking system is also healthier now than a few years ago. “Low interest rates should remain low through next year,” he said.

Still, the risk of a second recession has grown from less than 20 percent at the start of 2011 to about 40 percent in September 2011.

“New construction starts for 2012 will be $412 billion, essentially flat with 2011,” Murray said. Under his recession forecast, total construction starts would decline 7 percent in 2012. While the top-line numbers are not expected to change, Murray expects some variation within the major sectors next year.

For commercial buildings, Murray predicted the segment will grow 8 percent per baseline forecast, but would be down 6 percent per the recession forecast. Store construction, which peaked in 2007, fell 75 percent over the next four years.

Murray also pointed out, “Construction fell sharply for warehouses in 2008-2010, but a very slight upward trend is beginning to emerge. Starts are estimated to be 17 percent up this year, and 18 percent next year.”

Hotel building saw steep declines in 2009 and 2010, but there is now a slight upward trend.

“We’re estimating to see a 34-percent increase in 2011, and 17 percent in 2012,” Murray said.

“School construction continues to lose momentum,” Murray added. “Many states have passed school construction bond measures, especially California and Texas. Major universities re-evaluated capital spending plans due to shrinking endowments.”

He added, “In 2010, square footage for K-12 school construction was 3.6 times the size for colleges/universities/community colleges. In the same year, dollars for K-12 school construction was 2.3 times the size of colleges/universities/community colleges.”

Hospital chains were hard hit in 2009 by tight credit conditions, Murray said. “The debate over healthcare reform created near-term uncertainty, but the sector is still supported by an ongoing need to replace aging facilities and growth of the elderly population,” he said, noting that healthcare facility construction is expected to remain flat this year, and decline 1 percent next year.

Institutional public buildings “got clobbered” by the terminus of the stimulus funds, Murray said. “Public buildings had a steep drop in 2010 that’s continued in 2011,” he said. This year, construction is down 27 percent, and in 2012 will be down 9 percent.

Airport terminal work in square footage jumped in 2009, but retreated in 2010, Murray said. The category is down 20 percent in square footage this year, and is expected to be down 5 percent next year; in dollars, it is up 5 percent this year, and expected to be down 7 percent next year.

In the manufacturing building category, Murray’s baseline forecast predicts an increase of 4 percent next year, but the recession forecast says a decrease of 5 percent, after a 35-percent gain in 2011.

Highlights from the Dodge Construction Outlook
• Multifamily housing will rise 18 percent in dollars and 17 percent in units, continuing its moderate, upward trend;

• Commercial building will grow 8 percent. Warehouses and hotels will see the largest percentage increases; improvements for offices and stores will be modest;

• The institutional building market will slip an additional 2 percent in 2012, after falling 15 percent in 2011. The tough fiscal environment for states and localities will continue to dampen school construction, and the uncertain economic environment will limit growth in healthcare facilities;

• Manufacturing buildings will increase 4 percent, following the 35-percent gain in 2011, as the low value of the U.S. dollar continues to support export growth; and

• Single-family housing in 2012 will improve 10 percent in dollars, corresponding to a 7-percent increase in the number of units to 435,000 (McGraw-Hill Construction Dodge basis).

Sahely Mukerji is a contributing editor for the Architects’ Guide to Glass & Metal (AGG) magazine. She can be reached at smukerji@glass.com or follow her on Twitter @solarglazingmag.

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