Kenneth D. Simonson joined the Associated General Contractors of America as chief economist on September 10, 2001. Prior to taking the AGC post, he was senior economic advisor in the U.S. Small Business Administration’s Office of Advocacy and vice president and chief economist for the American Trucking Associations. He has worked with the President’s Commission on Industrial Competitiveness, the U.S. Chamber of Commerce, and the Federal Home Loan Bank Board, and is the co-founder and co-chair of the Tax Economists Forum. Simonson holds a BA from the University of Chicago and an MA from Northwestern University, both in economics.
Kenneth D. Simonson, chief economist at the Associated General Contractors of America, on the construction outlook for 2011, construction materials prices, and where to find work and funding.
BD+C: What do you see in your crystal ball for 2011?
KDS: It will be a year of change, both positive and negative. On the positive side, I see an upturn in private nonresidential work, and private residential as well. Public spending will be flat through the first half of the year at best and then declining, with declines continuing into 2012. Overall, total construction, including highway and heavy construction, will be up, but by no more than 5%, and it’s starting from such a low base.
BD+C: What about specific sectors, like healthcare and higher ed?
KDS: Hospital work seems to be turning positive. There have been several announcements in recent months on hospital groundbreakings and design work going ahead. And I do think that higher education is going to pick up in 2011. The private institutions of higher learning are benefiting from an improvement in the stock market, which is boosting their endowments.
I expect warehouse construction will improve soon, even though there’s space out there. It’s pretty cheap [for owners] to put up tilt-up, and with imports continuing to grow, that will help those kinds of properties.
The hotel market is likely to revive. For more than six months, the key indicator, “revenue per available room,” has been rising at a double-digit rate year over year, so that means hoteliers see this as time to renovate and expand.
BD+C: That’s good news. What about the downside?
KDS: On the downside, local construction projects are going to be severely hurt by the ongoing shrinkage in the property tax basis due to falling house prices and the rising number of delinquencies on mortgages. And many of the markets where school construction has been hot, places like Las Vegas and parts of Florida, have gone from very rapid population growth to little growth, or even an outflow. Even though state tax receipts have started moving higher in the last few quarters, state priorities will be ending furloughs, restoring services, and putting more money into public employee pension funds. Construction will be the fourth item, so good luck.
Two categories I’m not optimistic about are office and retail. There is just so much excess space, particularly in the office market, where companies have shrunk in place. When they do start hiring again, they’ll just put those new employees in space they already have. As for retail, individual chains, like Dollar General, will be expanding. But we will see much less retail construction in the next few years than we did in the last decade.
The new Congress is going to ratchet back on discretionary federal spending. The President has signed a freeze on federal employee pay. And the winding down of the stimulus and Base Realignment and Closure funding means a flattening out or decline of money to federal contractors. Congress is going to tighten budgets for agencies like the General Services Administration for retrofitting federal buildings and courthouses, and for funds to the states for weatherization and energy-conservation projects for public buildings.
BD+C: Any geographical pockets of activity?
KDS: Texas has the best prospects of any large market. The Texas economy is somewhat more diversified than it once was, and they have not suffered as keenly as others. North Dakota had its biggest population growth in the last decade, up 4.7%. The Bakken Formation there is the source of oil from shale, and that’s producing jobs.
The military’s BRAC process is about to wrap up, and that means those contractors will have to find other work. But it also means that families will be moving in and looking for housing, as well as stores and services.
BD+C: What about construction materials prices?
KDS: The most extreme case is copper prices, which have been skyrocketing to more than 30% above a year ago. Diesel is now about 15-20% higher than a year ago, and that’s putting a squeeze on contractors, because it’s hard to pass along those costs. But I don’t expect these increases to be across the board. It won’t be a repeat of the first half of 2008. We may see periods of 6-8% increases, and prices could increase 4-6% this year, compared to 5.4% last year, but that’s at most a modest acceleration, not a case of runway prices.
BD+C: When will we see more capital flowing into construction?
KDS: The banks are still going to be very reluctant to lend for income-producing projects like retail and office buildings. It will be tough for a developer to make the case for paying the rent, and the banks are more constrained than they were a few years ago. But there will be pools of money that will be interested in investing, REITs and private funds, for example.
BD+C: How about the international construction market?
KDS: There are still going to be opportunities in China, India, Brazil, even Russia, and a lot of developing countries—Indonesia, the Philippines, Thailand—are growing rapidly. Mongolia is developing the largest copper resources in the world, Ghana just started pumping oil for first time, and Uganda is pumping oil, too. There’s plenty of turmoil in these countries, but the potential is huge.
BD+C: Any hope for the housing market?
KDS: Single-family housing repeatedly disappointed me in 2010, but I think we’ll see some improvement there. And the rental market has already turned positive and looks increasingly positive for this year.