|The construction outlook for 2009-10 has been downgraded as a result of the worldwide credit crunch. Nonresidential construction spending is expected to rise just 1.2% in 2009 and 2.7% in 2010.|
The worldwide credit freeze caused a marginal drop in construction spending in September and October, a larger—but still modest—decline in new project starts, and much larger project delays and cancellations. The construction outlook for 2009-10 has worsened, and is dependent on how quickly the financial markets are corrected.
By late October, massive cash injections into banks and other financial firms had stopped the credit freeze from hardening, and access to loan capital for routine business operations of nonfinancial companies was being restored.
Progress is measured by the decline in the rates at which banks lend to one another or borrow from their central bank, as well as the decline in the spread or premium in the credit rates that nonfinancial companies pay to get short-term operating capital. Fully restoring a normal credit market will take until at least late next year, but qualified borrowers will have near normal access to capital within a few weeks. Credit will be more expensive than last summer, and some financially marginal firms will be hard pressed to get financing offers at affordable rates.
With the shock of the credit freeze now ending, the focus is on the spillover effects of reduced economic growth, which reduces the demand for added space and facility capacity. The U.S. economy is now in a recession, which began this summer and will last until winter 2009—or perhaps a little longer. U.S. GDP will decline about 0.5% over this period instead of growing about 1.5%, as was previously forecast. This 2% loss will include, as always, larger declines in the capital goods industries, including construction.
The good news: this recession should be a relatively modest one, and is not expected to be as deep as the one in 2001, and will certainly be much milder than the severe recession experienced in the early 1980s. However, delays in fixing the financial problems could still make this recession worse, although that doesn't appear likely.
The U.S. economy entered this recession with unusually lean inventories, which will moderate layoffs. Although economic growth outside the U.S. is slowing abruptly, it remains positive, so export growth will continue to offset shrinking domestic spending. Plunging energy prices will moderate declines in consumer spending.
BD+C now expects nonresidential construction spending to rise 12.2% in 2008, 1.2% in 2009, and 2.7% in 2010. Adjusting for project cost inflation, construction volume will be up about 7% this year, down about 2-3% next year, and then remain relatively unchanged in 2010. While financial problems interrupted the 2004-08 building boom, the construction market did not have the surplus of space and facility capacity that existed in 2000 and led directly to the deep recession in nonresidential construction in 2001-03.
Nonresidential construction will experience a single-digit decline for about a year, which started at the end of the summer, and then for another year will experience little to no growth until U.S. GDP growth returns to near its 3% long term average. While not deep, this construction recession could be long, paralleling developments in the overall economy. Recovery will be slow because credit costs will remain relatively high during the recession and will not drop sharply as they typically do during a weak period in the economy. The capital lost when subprime mortgages were not repaid has to be replaced, and lenders are reducing their leverage to protect their own solvency, which is very fragile, even in good economic times.
Private commercial construction will feel the impact of the recession first and will recover first because its financing is closely linked to credit markets. Public and institutional construction will experience a delayed negative impact because most of these projects are not financed through borrowing. Activity will decline more gradually with larger declines in 2010 than in 2009. Apartment construction will be hit hard and quick because of its links to both the credit and job markets, and because of competition from vacant single-family homes. The high rise condo/co-op market will fare similarly because it is concentrated in New York and other troubled financial centers, as well as over-built coastal resorts.
Regionally, construction will hold up better in the middle of the country, from Texas to the Dakotas, where energy and farm industries continue to grow and public budget balances are very high. The Northeast will fare better than the rest of the country because the region has relatively few foreclosures and a high share of the intellectual capital industries likely to grow through the recession.
Internationally, designers and other suppliers with a large share of their business in the Middle East and China will experience sales losses from construction cutbacks that will be more severe than in the U.S.
Credit freeze weakens construction outlook
November 01, 2008 |
Submitted by admin on Wed, 08/11/2010 - 15:32