Looking Ahead
Construction Forecast Mixed, Generally Favorable for Long-term Growth
by Brigid O'Leary

The future of any industry is hard to predict and forecasts for the future can be as uncertain and as diverse as weather. Such was the case at the National Press Club in Washington, D.C., on October 15 when Reed Construction Data held its annual North American Construction Forecast conference. Speakers at the event had the long term in mind, discussing what each thought was in store for the construction industry over the next two years—not easy to do, considering weather forecasters only calculate week in advance and we all know the accuracy rate of weather forecasts.

On the Bright Side

Predictions ranged from almost no change at all to a 3.5- to 4-percent increase in industry growth in the early part of 2004. Overall, though, feelings about the future remained optimistic, with the consensus more or less seeing a small growth in 2004 with 2005 being the boom year. The focus of the forecasted construction, it is anticipated, may be less on the residential aspect of the industry and more on the non-residential side.

Portland Cement Association chief economist Edward Sullivan is predicting that spending will remain constant during the upcoming year but at a high level and figures in an assumption of growth in the United States in 2005. Sullivan believes rising interest rates will restrain the residential building trend that has been the recent leader in the industry. This is especially true since 80-percent of all mortgages taken out today are for refinancing activity.

He sees a small 1-percent decline for the remainder of 2003 and a gain of a little less than 1-percent in real construction activity in 2004. Sullivan also believes there are factors in place that are developing and that suggest strong growth in 2005.

“We have sustained consumer spending strength and the investment environment has improved dramatically,” Sullivan said. “Unlike the past, where all you had was consumption added to economic growth, you now have consumption in the investment sector supplementing one another to achieve these growths.”

Sullivan is optimistic about the job market. He feels the markets will reach a turning point of zero job losses and zero gains in October 2003, which will be followed by small but consistent and sustained gains in new jobs into next year.

To date, investment banking has been the weakest point in the economic chain, but Sullivan sees this as a situation turning around as well. He noted that business confidence is up by more than four-fold since the end of the war in Iraq and the financial realm is regaining its trust and eagerness about investing in corporate America—indications that the economy is changing. Sullivan attributes these scenarios to the considerably optimistic views economists espoused.

Other Areas of Hope

Aligned with Sullivan, but for different reasons, is Glenn Mueller, managing director, Real Estate Investment Strategy, Legg Mason Inc. and professor and investment strategist at Johns Hopkins University Real Estate Institute. Mueller also believes that 2005 will see a surge in the industry leading back to a 2-percent growth (the long-term average in the field) and he, too, believes the growth is not likely to be the private residential arena. Multifamily housing, he indicated, will remain steady, with the ever-increasing number of college graduates entering the job and rental market and an expected growth of 2.4 million people per year for the next ten years. Despite the steadiness of this market, the growth is expected in other areas besides the residential market.

“It is believed that we will achieve about a 2.7-percent demand growth in office space over the remainder of this decade, which is a strong indicator,” Mueller said.

Mueller feels the construction of more community centers for urban (and urbanizing) America will contribute to the new upswing in the industrial market greatly, along with the need for more office space.

The Residential Outlook

Those involved with residential construction remain positive, however. David Seiders, chief economist for the National Association of Home Builders maintains his confidence in home construction as a constant in the industry, calling it a “heroic performer.” He says home sales and housing production are not as likely to falter from the current, high levels that the industry has seen of late, despite increasing mortgage rates that may curtail the large flow of people from apartments to home ownership.

“We’re a little worried about the refinance market—as it continues to lose steam as interest rates climb, but we’re not concerned about equity accumulation and people using it to help support spending on remodeling or other consumer goods,” Seiders said.

Employment in construction has remained steady and, according to Seider, the housing industry—from the construction aspect to sales—is currently supporting nearly 20 percent of the U.S. economy.

Where homes already exist, residential remodeling will follow, presently doing very well, according to Seiders, who believes it will remain strong. The first quarter of 2003 saw a $180 billion market in residential remodeling, which continues to grow, and he expects a 4- to 5-percent growth in this sector in 2003 and 2004.

Don’t Count Your Chickens

Despite the positive tone of the conference, some were more hesitant than others to be the voice of hope for the future.

One of those voices of reason is Ray Owens, vice president and senior economist for the Federal Reserve Bank. He opined that while economic improvement and the restrictions on new construction are a good start for future growth, it is still a gamble concerning what is to come. The correlation between job availability, commercial real estate and industry growth on which others have placed some hope, Owens countered, may work against the industry: if the growth remains slow it could still limit the possible upswing in demand growth.

“We’re seeing hints of improvement, but not deepseeded improvement in the labor markets,” he said.

Owens also indicated that there is no guarantee that the sudden expansion that followed the recession of the 1990s will be present again this time.

Gene Sperling, former national economic advisor and director of the Economic Council under President Clinton, is also less enthusiastic about very positive predictions for the coming years. As he sees it, the United States’ recovery from the recent recession has been disappointingly mild. To illustrate this point, he expounded upon the fact that between the second quarter of 2002 and the first quarter of 2003, there were three quarters below 1.5-percent growth and that there remains a period of job loss nearly 22 months after the recession. These are, to Sperling, signs of a still unstable and uncertain economy.

“I’m not in the pessimist camp … just cautious,” Sperling said.

Brigid O’Leary is an editorial assistant for Door & Window Maker magazine.