Construction Webinar Asks: Have We Hit Bottom?

The Associated General Contractors (AGC) of America and Reed Construction Data co-hosted a webinar today that asked the question: "Have We Hit Bottom?"

According to Jim Haughey, chief economist of Reed Construction Data, "Total construction spending is likely to hit bottom before the end of this year." For the nonresidential sector specifically, starts are expected to reach a bottom later in the fall of this year.

Haughey offered three landmarks to watch for to know when the economy has reached its bottom. First is the consumer confidence index.

"This has been a major contributor as to how quickly this recession has developed," he says. He says this marker needs to rise to about 70 and stay there for several months, and that's not likely to occur until "well into the year."

U.S. Nonresidential Construction Spending Outlook ($ millions, annual rate)

Source: 2009 Market Insights Webcast, Reed Construction Data

The second point is the inventory/sales ratio; he says this factor will have to decline for several months back down to around 1.3 before factories will recall workers, and that's expected to occur in the summer.

The third item is that we'll "have to see some improvement in the credit market."

During the question and answer session, one listener asked for suggestions of things company owners can do to whether the storm.

Haughey suggested first that owners "recognize that we may have the bottom in sight but we're not there yet." As he noted, there's "a good part of a year ahead." Haughey further added, "Be sure that you can get there; if you can't get there now's the time to get out. Remember, changes in who the market leaders are usually take place at the bottom of a recession-prepare to take advantage when it's over."

Haughey also reminded listeners, "There's still a lot of business out there. … stretch your market concept a little bit."

What does this all mean for commercial construction?

Change in Producer Prices for Construction vs. Consumer Prices, 2003 -2008 (December 2003 = 100)

Source: BLS, 2009 Market Insights Webcast

According to Haughey, "The commercial space surplus started to grow only in the last 3 or 4 months and that's going to expand through 2009." As he explained, nonresidential construction will begin to slow in many markets where commercial buildings now are cheaper to buy than to build. This is "not true in every market but probably will be in a few months," he said.

Nonresidential construction increased 12.1 percent last year, however, "we expect this year and next year to be barely positive," Haughey said, predicting a mere 1.4-percent in construction spending next year.

Commercial starts are off about 10 percent, he commented, while office and retail construction both saw about a 30-percent drop this year. However, there has been a big surge in sports arenas (160.7 percent) keeping things afloat. As Haughey pointed out, the money for these multi-million dollar projects typically was raised over the course of several good years of economic times. He further expects to see healthcare and educational buildings-especially college buildings that rely on donor contributions-to hold up a little better than other areas of commercial spending.

Ken Simonson, chief economist for AGC, said that he was somewhat more optimistic than Haughey on the housing market; he noted that realtors have reported a slight increase in December in home sales-mostly foreclosures and related homes, but inventory that still would have been clogging up the market if not sold. Simonson said he believes this year we're really going to see an upturn in housing because more people will be able to afford homes due to lower interest rates and even factors such as lower gas prices that put more money back in taxpayers pockets.

While single-family residential may see improvements, for multi-family construction, "I don't see any improvement before 2010 at best," Simonson said.

Looking ahead at 2010, Simonson noted, "My guess is that residential will continue to grow probably [in the] high single digits; nonresidential, unfortunately, will probably continue to shrink. While we may start to see selective retail construction in 2010, following residential construction, and remodeling … most other private nonresidential construction will lag the economic recovery."

Regionally, Haughey explained that that the recession is deepest in those states where the housing collapse has been most severe. However, one part of the country-the Gulf Coast-was expanding as of November. He pointed to Texas as a good market. He noted, on the other hand, that recession has barely gotten started in Northeast, since "this part of the country always feels the slowdown late because of the industry here" and predicted that would be one of the last areas to see improving construction.

When one listener asked where to refocus construction efforts, Simonson said, "I would pick out very small spots, those around military bases that are getting realignment money."

Haughey added, "College towns always hold up better," supporting his comment that educational building would stay strong by further explaining that with students "once they're there they're there."

However, Simonson said, "by and large this is a national slowdown," meaning the entire country is feeling the impact.

Simonson also addressed labor costs. He pointed out that the construction has seen large drops in employment in the last 12 months (CLICK HERE for related story), yet average hourly earnings rose rapidly. "That's because in part there were union contracts signed at the beginning of the year … that locked in rates," he explained. He also noted that the construction work that has continued largely has used specialized workers who are likewise more highly paid.

Unemployment is expected to peak at 9 percent sometime next year, according to Haughey.

"It's going to be several more years of a somewhat sluggish economy," Haughey said.

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