The outlook for the construction industry as a whole during 2003 depends, as always, to a large extent upon the timing and strength of the overall economic recovery. In general, the fluidity and unpredictability of the year ahead means that the direction of the global economy is more important than ever. The combination of plunging business and consumer confidence, higher unemployment, and slow/no growth in household income can't help but have negative implications for construction end-markets.
Nonetheless, the major positive force — the stimulative impact of low interest rates — will continue to provide significant support for the industry during the year ahead. Although office and industrial vacancy rates have risen steadily over the last two years, they are still reasonably low by historical standards.
The likelihood of a bust of the kind that hit in the late 1980s and early 1990s is negligible, since space has been added with much more restraint and less speculation over the past decade. Without an overbuilding boom, we should avoid any real danger of bust in this period of diminished demand.
So we can take some comfort in the fact that the construction industry entered the 2001 recession in reasonably good shape — certainly much better than the manufacturing sector. While the rest of the U.S. economy struggled to keep its head above water throughout 2001 and much of 2002, the construction sector held its own, as measured by total dollars spent.
In sum, we believe that the weakest sectors during 2003 — in terms of absolute declines or paltry growth in the actual dollar value of construction work completed — are likely to be:
Hotels (except those anchored by casinos or other specialty attractions)
Office and retail buildings
Airport terminal construction and renovation projects (except for security purposes)
Public projects requiring substantial state or local funding
Convention centers, sports stadiums, movie theaters, theme parks, and other recreational facilities (possible exception: gaming facilities)
The relatively strongest sectors for 2003 are likely to be:
Institutional (i.e., noncommercial, non-industrial) buildings, especially educational and health-related
Multifamily apartment buildings
Retail buildings that are focused on consumer basics (e.g., strip malls anchored by grocery stores; drugstores; discount department stores)
Off-site back-up capacity facilities (new-built, as well as renovation/retrofit) for critical functions, such as financial and operation record keeping, in commercial, financial, transportation, and industrial sectors
Security-enhancing redesign/renovation projects for existing buildings (including enhancements for the nation's more than 400 airports)
Research facilities, especially in the biotech and pharmaceutical sectors.