USGlass -2009 December

Volume 44, Issue 12 - December 2009

feature

The Long & Winding Road
Economists Share Their Forecasts for the 2010 Construction Market
by Tara Taffera and Ellen Rogers

It’s the time of year when everyone begins to plan for the year to come, and economists have been among those taking a hard look at what’s to come in 2010. While there are bright spots, according to these experts, 2010 promises to be another year where wise planning and spending will be required of business owners throughout the glass industry.

Construction Market Forecast to Increase
When Robert Murray, vice president of economic affairs for McGraw Hill Construction, offered his annual construction forecast in October to attendees of its annual Construction Outlook Conference, there was a great deal of bad news to report, mainly consisting of large drops in virtually all construction segments in 2009. But there were a few glimmers of hope as well, including the fact that the level of construction starts in 2010 is expected to climb 11 percent to $466.2 billion, following the 25-percent decline predicted for 2009.

“This is the end of that lengthy cycle,” Murray said.

Murray also noted that more optimism is being seen in the market in recent months. “In January-February there was a pervasive sense of gloom, but that is changing,” he said.

2009-2010Forecast Highlights
That lengthy cycle Murray mentioned has included significant drops in most areas of construction. Following are some highlights from Murray’s forecast:

• A 25-percent decline in construction starts is expected for 2009, a drop that Murray said is bigger than previously expected.

• “The commercial building market really got clobbered this year,” added Murray. That segment is down approximately 55 percent.

• The retail segment took a huge hit in 2009, according to Murray, and another decline may come in 2010. He pointed out that this is causing some big box retailers to “scout out new locations.”

• Murray pointed out that the hotel market has posted another steep decline in 2009. The top list of commercial hotel projects has no Las Vegas projects on it, a sign of just how much that market has declined. The list now includes smaller hotel projects such as Embassy Suites.

• The decline in the construction of educational buildings was surprising to Murray, who added that everything was down in this segment except for research labs. The bright spot here is that school enrollments are increasing, so he forecasted improvement in this market for 2010.

• “Government-related buildings are cushioning the overall decline,” Murray added.

• The previous resilient institutional buildings market took a hit in 2009, as this segment is predicted to have decreased 15 percent overall.

• Healthcare facilities have posted a 36-percent drop thus far this year after an all-time high in 2008.

• Airline terminal projects posted a fairly large pick-up in 2009. “There are some large projects that are moving the numbers up,” Murray said.

• Multi-family housing has seen a 55-percent drop in 2009. Murray forecasted a modest increase for 2010.

A New Obstacle and a Potential Bright Spot
While the construction market may be clawing its way up in 2010, Murray said another huge obstacle for the industry may be looming.

“The big unknown and threat is commercial mortgages in 2010 and 2011,” he said. “That could be the next financial crisis.”

He said tight credit is affecting large projects, such as the Echelon in Las Vegas, the World Trade Center Towers 2 and 3 and the Chicago Spire, to name a few.

After his caution for next year, however, Murray offered a bright spot on the horizon. He pointed out that $130 billion has been designated in the stimulus bill for construction-related spending for 2009-2011. Not much of the money has been spent yet, Murray said, but that should change in 2010.

“Our data shows the stimulus money is starting to come out,” he said. “Money for energy-efficient upgrades really hasn’t hit construction starts yet.”

He added that the institutional buildings segment shows the most benefit of the Stimulus Act thus far, which has included an increase in courthouse projects. He also said public works is a guaranteed area of growth in 2010 if the stimulus money comes through. If it does, he forecasts a 13-percent increase.

“Overall, the market is stabilizing after some very steep drops,” Murray said. “It is a cyclical business, and the nonresidential market has another year of entrenchment to go through.”

Status of Homebuilding Market
In his Outlook for Residential Homebuilding and Remodeling, Kermit Baker, chief economist for the American Institute of Architects, was positive about the future, specifically of the residential housing market.

“A slow recovery is better than no recovery,” Baker said.

“If you didn’t know it before, now you know how closely the economy is tied to housing,” he added. “It’s difficult for the economy to recover without housing helping out.”

Overall, Baker said the long-term prospects for housing are favorable. He said the housing market appears to be recovering, but “excess inventory needs to be worked off and prices need to stabilize before we see a full-blown home building expansion.” This excessive inventory is a moving target, according to Baker, as foreclosures keep getting added to it.

Baker added that a big indicator of a future upturn in housing is related to household growth—almost 15 million new households are coming in the next decade.

“The coming decade is shaping up to be a strong one in terms of housing,” Baker said.

One interesting trend he noted revolves around how the housing market has affected design.

“When the downturn hit, builders began building smaller homes,” he said. “This seems to be more widespread than in previous recessions. This won’t change, even as the market recovers.”

He added that special features are becoming less common but some that remain popular are those that accommodate special needs or accessibility. One room that homeowners keep adding to the home is an office.

Although the remodeling market has fared better than housing, Baker said that it is down as well, though that is starting to change.

“There are signs that recovery is starting to occur in some segments,” he said. “The pendulum is starting to swing back and the market is looking more like it did in the mid-1990s.”

He added, “We are at or near the cyclical low and should see recovery at the beginning of next year for remodeling.”

Slow Signs of Recovery Ahead
When Reed Construction Data held its 2009 market insights webcast in October, Jim Haughey, chief economist, predicted that it may be 2011 before the commercial construction segment sees a “good” year. Haughey said the economic environment for construction through 2010 is faced with a number of challenges, including sub-par Gross Domestic Product (GDP) growth through 2011. And, while spending confidence is up, the GDP is still depressed.

“We’ll also see residential foreclosures continue through next year [though] it will begin to slow,” he said. “Also, public construction is increasingly restrained by the largest decline in state tax receipts in over 50 years … it’s a problem that’s still ahead.”

Looking at construction spending, Haughey said it’s down about 11 percent this year and 2010 will be down slightly from 2009.

“It will start to turn around in 2011 [and we’ll see] about an 8- to 9-percent gain,” he said.

In terms of residential construction, Haughey said housing starts are beginning to pick up.

“We’re seeing progressive gains in housing, but we’re still a long ways below where we were in 2007,” he said. “The housing market is growing, but will stay depressed for at least two more years.”

And while Haughey said it will likely be another year and a half to two years before the nonresidential market sees a “good” year, he did have some positive news: nonresidential building declines are nearing the end.

“June of 2009 appeared to be the worst month,” he said, explaining that most of the expected decline has already occurred. “We still have four to six months to go.” He added, though, that he does not anticipate as big of an impact in the nonresidential market as he’s seen before in other recoveries.

Haughey said the dip in nonresidential construction spending has not been as grave as that of the housing market.
“I anticipate that early next year the [spending] decline will be over,” said Haughey. “I don’t anticipate any significant volume change until at least next summer.”

Looking at nonresidential starts, he said there have been a number of positives, but even more heavy negatives.

“The positive ones are those with a direct impact from the Stimulus [Act],” he said, adding that quarter-to-quarter change in stimulus spending is now peaking and spending will expand in 2010 but at a slower pace.

“Only about one-third of the stimulus plan was designed for a quick boost to the economy,” he said.

There are a number of segments seeing positive growth as a result of the stimulus, but unfortunately they usually include little glass work. Bridges, dams/marine work, miscellaneous civil, highway and government offices are all up compared to this time last year. On the negative side, private office and retail construction are both down 44 percent, while hotel construction is down 47 percent.

Before concluding his presentation, Haughey shared his thoughts on the top five construction segments he expects to show improvement in 2010. These are:

5. Retail, because “it was the first commercial market to fall and it will be the first to come back.”

4. Highway, “an obvious function of the stimulus.”

3. Amusement/recreation (i.e., sports stadiums, arenas, theaters, etc.)

2. Military spending. Haughey said this is from money for projects that was made available years ago in better economic times.

1. Single-family homes. Haughey expects to see 54 percent growth in units (not dollars). “The market will move from the worst we’ve ever seen to just miserable.”

Nonresidential Construction to Remain Down in 2010
“I wish I had better news,” Ken Simonson, chief economist for the Associated General Contractors of America, told his audience during Reed Construction Data’s 2010 construction forecast. “I think, though, we have seen some changes for the better in the economy in the last 12 months compared to the prior year period. A year ago there was the total collapse of the bond market and the banks lending. Currently there has been quite a revival of bond markets for state and private activity bonds; the problem is that state revenues keep dropping [and] states are still cutting construction.” He continued, “They already have the bonding out there, then there should be some relief for contractors, but in general there is a decline in state-funded developer financed and manufacturing construction.”

While there has been some improvement on the bonding side, Simonson said much help is coming from the stimulus legislation.

“The stimulus is the largest piece of federal spending ever directed to construction in one bill,” he said. Of the $787 billion package, $135 billion was attributed to construction-related spending and about $35 billion of that was for buildings.

However, he said he hears constantly that building contractors say they’ve yet to see business from the stimulus.

“It’s there, but it’s just scattered through a wide range of agencies, and many of them were not prepared.”

There have also been stimulus tax provisions that have been helpful to contractors. This includes increased expensing for those buying equipment this year; a five-year net-operating loss carry back in 2008; and new and extended bonds, such as the “Build America” bond.

“The next hurdle we’re seeing is project labor agreements. These are not part of the stimulus per se, but President Obama is encouraging agencies to include them [in contracts].”

Stimulus aside, Simonson said putting money into nonresidential construction should be a big job generator: 28,500 for every $1 billion.

“One-third of those jobs show up as direct on-site construction jobs,” he said. “One-sixth are supplying the materials and equipment and one-half are spread through the rest of the economy as workers and owners in construction.”

In spite of the stimulus money that has come out, Simonson said that total construction spending is down 12 percent in the past 12 months. Of that, private nonresidential is down 10 percent and public construction is up 3 percent (partly because of the stimulus).

“Private residential dropped very sharply until the spring and now it has leveled off and is beginning to pick up,” he said.

Simonson expects a big increase for 2010 in single-family starts, but he does not see any growth in multi-family starts until 2011.

For developer-financed nonresidential construction, all segments are down about 25 to 45 percent compared to last year. The only one Simonson sees hope for next year is improvement in retail, though it will be very low. All others are suffering from huge vacancy rates.

Looking ahead to 2010, Simonson expects nonresidential spending to be down 0 to -5 percent; residential spending to be up 5 to 10 percent; total construction spending to be anywhere from -4 percent to 2 percent; materials costs to increase 0 percent to 8 percent and labor costs to increase about 3 percent, perhaps a little less.

the authors: Tara Taffera and Ellen Rogers are contributing editors for USGlass.