Forecast 2010: Residential Rebounds While Other Sectors Struggle

After three years of declines, the construction market may be eyeing a slight rebound in 2010.

By Bruce Buckley

McGraw-Hill Construction is forecasting that total construction starts will climb 11% to $466.2 billion in 2010, following an estimated 25% decline in 2009.

Bob Murray is vice president of economic affairs with McGraw-Hill Construction.

After a 39% drop in construction between 2006 and 2009, an improving residential market and signs of strength in select public-sector markets such as transportation and infrastructure could spark an overall turnaround in 2010, says Bob Murray, vice president of economic affairs for McGraw-Hill Construction.

"This is not a booming market; it is just inching upward," Murray says.

The main buoy for the industry is single-family housing, which could rise 30% from an estimated 430,000 units started in 2009 to 560,000 starts. That would be on par with 2008 when 549,000 units were started. Murray says that even with the rebound, levels remain 65% below the mid-decade peak of the housing boom.

Murray adds that his residential forecast hinges on continued low mortgage rates
and the extension of first-time homebuyer tax credits.

The outlook on multifamily housing remains mixed. Murray sees activity rising from 140,000 units started in 2009 to 160,000 units in 2010–a 14% rise. Although the sector could rebound, activity remains nearly three times below 2007 levels when 452,000 units were started.

Ed Sullivan, chief economist at the Portland Cement Association, is less optimistic
about multifamily projects. He predicts that a comeback won’t be seen until 2011.

Although 2009 was challenging year, the worst is yet to come in non-residential
building sectors, analysts forecast. According to McGraw–Hill Construction estimates, the commercial and manufacturing sectors could continue to struggle next year with an estimated 6% drop in combined value of starts to $55.5 billion–nearly half the level seen in 2007.

Sullivan sees the market sliding even further, down 22% in 2010, and doesn’t expect a rebound until 2012.

"If you look at vacancy rates, the job market, issues with credit–the fundamental will take a while to come back," he says.

Murray estimates that office building starts will ease back another 3% in 2010 to $19.7 billion in starts, as employment remains weak and businesses curtail expansions.

As companies rein in travel expenses and consumers take fewer vacations, hotel construction is feeling the impact. Occupancies fell 57% in the first eight months of 2009 while revenue per available room dropped 18.3%, according to Smith Travel Research of Hendersonville, Tenn. Murray expects starts to decline by 9% to $4.5 billion in 2010.

Retail has been one of the biggest casualties of the economic crisis. After hitting
an all-time high of 314 million sq ft in starts in 2007, Murray predicts only 95 million sq ft in 2010–the lowest level in nearly 50 years.

The one bright spot for retail is the rebound in residential, says Ken Simonson,
chief economist with Associated General Contractors of America.

"New neighborhoods being built would create demand for local retail," he says. "It
would be modest amounts. I wouldn’t expect any big shopping center construction."

The severe drop in demand for consumer goods hit the manufacturing sector
hard. Murray says that capacity utilization rates plummeted from 78.8% in December
2007 to 65.1% in June 2009, curtailingthe need for new space. Murray estimates a
14% drop in 2010 to $9.4 billion as capacity issues continue to hamper the sector.

Publicly funded projects represent a wild card for many analysts. Simonson says the
impact of cautious consumer spending, high unemployment and drops in home
values will be fully realized as tax revenues suffer in 2010.

"State and local budgets are continuing to shrink as tax receipts fall short," and
many government agencies reduced their budget projections in the second half of
2009, Simonson says.

Education is also suffering. Murray says that K-12 construction is likely to feel the
pinch of lower property taxes, and higher education projects are challenged to find
funds because endowments dropped 20% in late 2008.

McGraw-Hill Construction estimates that education buildings dropped 23% to 172 million sq ft in 2009 and expects the sector to continue its downward path in 2010 with 158 million sq ft of new starts.

While state and local governments tighten their belts, many federally funded projects
are on better footing. Funding from the American Recovery and Reinvestment
Act helped bolster highway construction starts in 2009. Total contracts by value for
highways and bridges rose nearly $4.4 billion in 2009 to $57.3 billion.

And much of the stimulus has yet to hit the street. William R. Buechner, vice president
of economics and research for the American Road and Transportation Builders
Association, says stimulus could help total spending rise an additional $6 billion
in 2010.

"Everybody agrees that the strongest impact of the recovery act will occur in 2010,"
he says.

Still, Buechner adds that state and local budget issues could have a significant
impact on highway and bridge spending for 2010. ARTBA estimates that 19 states
are planning to cut highway investment next year. "That’s a black box in terms of what the impact will be," he says.

While a new federal highway bill remains on the horizon, many analysts expect
the regular federal highway program to remain at current funding levels. With highway program funding flat and more stimulus yet to come, Murray forecasts a
13% rise to $64.7 billion in total starts.

Several megaprojects–including the $1.6-billion Dulles Corridor Metrorail project
in suburban Washington, D.C., and a new $8.7-billion Trans-Hudson rail tunnel connecting New Jersey to Manhattan– have offered a big boost to the mass-transit
sector. In 2009, McGraw-Hill Construction estimates that starts jumped 29% to $5 billion, and another 18% rise to $5.9 billion is expected in 2010.

The prospect of billions of dollars for high-speed rail projects could also fuel added
work in the coming years, Murray says.

Stimulus funds could help buoy institutional building construction in 2010. After
a 23% drop in square footage in 2009, McGraw-Hill Construction forecasts that
the sector will flatten out with a drop of 2%. Public buildings got a big boost from
the ARRA in 2009 and will reap many of those benefits in 2010. Starts in the sector
are expected to rise 8% to 51 million sq ft– on par with the 2007 peak.

Health-care projects took a big hit in 2009 in light of the tight credit market,
but they may be on the road to recovery.

McGraw-Hill Construction estimates suggest the sector dropped 36% in 2009 to an estimated 70 million sq ft of new space. That sector is expected to see 72 million sq ft of new starts in 2010.

Simonson says he’s "a bit more optimistic on health-care spending" going into 2010.

"Now that the stock markets have rallied and the bond markets have opened, that
will enable health-care systems to resume their multiyear plans," he says. "The demand is still there and now the money is there, too."

Simonson says that, overall, contractors will be particularly vulnerable in 2010 as
most nonresidential sectors continue to suffer and existing work comes to completion.

"I think 2010 will be an even more difficult year for most nonresidential contractors
than 2009," he adds. "A number of them still had backlogs that they worked through in 2009, but very few have enough to keep them busy through 2010. Only a minority is going to be winning stimulus projects. It will be a tough year."

Sidebar

McGraw-Hill Construction is forecasting mixed numbers for the Southwest.

According to analysts at McGraw-Hill Construction, the parent company of this
publication, residential construction will be higher in 2010 in all three states, with Arizona at nearly $4 billion and Nevada rising to $1.4 billion. Both multi-family housing
and single family home construction will see increases over the previous year, but
will be nowhere near the levels seen in 2006 and 2007.

New Mexico will also see an increase in non-residential buildings to $1.6 billion, but engineering/highway projects will dip significantly to $935 million in 2010.

Nevada, on the other hand, will see a rise in engineering/highway construction
but the drop in non-residential buildings will continue, with just $1.8 billion forecast
for 2010.

Most sectors will be down in 2010 over the previous year, including public works,
utilities, manufacturing, institutional and miscellaneous commercial. Office, hotels,
environmental and health care will be a few of the bright spots, with health care seeing
nearly $1.2 billion of project starts in 2010.