Recession finally hits education construction

August 11, 2010

Education construction spending peaked in June 2009 and has declined 12% through January 2010, with lower project costs accounting for one-third to one-half of the decline. The Bureau of Labor Statistics reports that the total cost of a standard elementary school fell 4% during this period. Since the materials price index for nonresidential buildings increased 5.6% and wage rates paid by nonresidential general contractors inched up 1.5%, overall cost reductions come from contractor margins if they aren't covered by productivity gains.

Job site spending has been steady during the last three months, but further small declines are likely through the summer before increased spending returns toward the end of the year. This situation is consistent with recent trends in the value of education construction starts, as reported by BD+C. Education starts soared in the three months before the September 2008 financial crisis, but starts then dropped 20% over the next year and have only rebounded in the last few months—and only to levels 10% below where they were a year ago. Starts are projected to range from steady to slightly down for the rest of 2010. The project pipeline is full enough to prevent any further significant slide in education construction activity, but it's not full enough to generate a rise in construction until the second half of 2011.

Growth in education construction spending paused for a year during the previous recession but there was no sustained decline. The relatively large spending decline in 2009-10 is the result of the deep collapse of state and local government tax receipts, as well as the loss of university building funds generated from high-return speculative investment of capital funds in 2008-09.

K-12 construction spending dropped 19% over the last 10 months while higher education spending continued to expand slightly, mostly at public colleges, until just a few months ago, but is still higher than a year ago. The decline from peak spending has been largest for college residence halls (down 34%), which are often funded by bonds, and for middle schools (down 29%), where enrollment trends are now the weakest.

—Jim Haughey, BD+C Economist

         
 

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