North American construction activity expected to decline next year

August 11, 2010

Construction industry analysts and economic forecasters at CMD's 6th annual North American Construction Forecast conference delivered bad and good news: the rest of 2001 and much of 2002 will see declines in construction activity and the economy in general. But most presenters also predicted quick recovery by 2003. The event was held Oct. 16 at the National Press Club in Washington, D.C.

According to Bill Toal, chief economist for the Portland Cement Association, the U.S. construction industry can expect an overall decline of 6.3 percent in activity next year due to the economic downturn. Still, 'by historical contrast, this would put construction spending back to slightly above 1998 levels, which were record levels of activity,' he said. 'We expect a 10 percent decline in private, nonresidential construction spending next year after a 5.4 percent drop this year.'

Toal said it won't take long for the construction industry to recover. Toal predicts the construction industry overall will see a 4.2 percent increase by 2003.

Toal and other construction industry analysts, shared their outlook on the economic state of the nation and the construction industry. Following are excerpts:

U.S. Construction outlook

Toal attributed the decline in construction activity in part to a 'hole in the economy. The economy was already weakening significantly before the events of Sept. 11.' Forecasts have been revised down further because of those events. For the overall economy, Toal revised his spring forecast of 1.7 percent growth in economic activity down to 1 percent growth for 2001. He revised his overall economic growth rate predictions for next year to 1.8 percent down from his prior forecast of 2.7 percent. He expects public construction to grow slightly, albeit at a much slower rate than it has for the past two years.

Retail/industrial/commercial

Glenn Mueller, professor at the John Hopkins University Real Estate Institute, said there are two ways to look at how construction is faring: the physical realities of demand and supply and the financial realities of where capital is flowing and how it affects pricing. For example, demand and supply in the office sector has reached some equilibrium after several decades of dramatic swings in what was available and who wanted it, he said. Those levels will remain somewhat balanced, though both sides will be lower for the next year or so, he said.

Except for the short-term displacement from the tech bubble bursting and the 9/11 economic slowdown. As far as financing for the different segments, the late 1980s saw a phase of false price appreciation from too much financing that peaked in the first quarter of 1996, then began to fluctuate widely through the 1990s as the public markets became more involved in financing real estate. Originally, Mueller predicted the physical cycle would be bottoming in 2001 then returning to a growth phase by late 2002, but the Sept. 11 events may push that into 2003 he said. Capital flows will be affected by fear. However, the lowest interest rates in this lifetime have created significant opportunities for investing in real estate, he added.

Major projects and trends for 2002

A panel of design, construction and engineering professionals outlined the trends for the built environment based on recent and planned projects:

 * Edward Friedrichs, president and CEO of San Francisco-based architecture firm Gensler, mentioned several adaptive-reuse projects of structures that had not attained sufficient occupancy rates, such as turning a large plant into a mega-church.

* Ray Messer, president and chairman of Houston-based engineering firm Walter P. Moore and Associates, said new business is coming in from many areas of the country that need to build up deteriorating infrastructure.

* Pat Priest, CFO and managing director of Dallas-based contractor The Beck Group, noted that early signs indicate changes in the basic design/engineer/estimate/construct process. Instead of acting in different 'silos,' companies are forming teams among its experts to deliver projects quicker, with fewer prices and at less cost.

* Harold Adams, chairman of Baltimore-based A/E RTKL Associates, which just won a contract to work on replacing parts of the Pentagon, observed that while the rest of the world is seeing slowdowns, China is an active market.

* Stephen Fiskum, COO of Minneapolis-based A/E Hammel Green and Abrahamson, said one of the greatest challenges firms face is to maintain strong balance sheets by containing expenses instead of looking for new ways to invest.

Canada and Mexico outlook

Alex Carrick, chief economist for CanaData, expects that most provinces will see a decline in commercial, industrial, and institutional construction starts, which he predicted would be off by just over 1 percent for the country as a whole. Mario Rodarte, chief economist for the Center for Economic Studies for the Private Sector, said the Mexican economy is still growing and inflation levels are lower than predicted. However, the construction industry, which comprises 4.2 percent of the nation's GDP and employs 6.3 percent of the workforce, is not faring well under current economic conditions and is expected to decline modestly in 2001.

For more information on CMD's annual North American Construction Forecast conference, visit www.nacf.com.

         
 

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