Construction Forecast: Then Versus Now and What to Expect in the Future
May 6 , 2010

Providing a rather optimistic forecast, Jim Haughey, chief economist for Reed Construction Data, took a look at some of what has changed since earlier in the year and covered “what we know now that we did not know then.” Haughey was the third presenter during this week’s construction forecast that was organized by Reed Construction Data, the Associated General Contractors of America and the American Institute of Architects (CLICK HERE and HERE for related articles).

“Overall economic recovery gross domestic product (GDP) seems to be very solid and sustainable,” Haughey said.

“The housing market recovery is continuing, and though it took a little pause in the winter it picked up in March. I think that will be one of the strongest parts of the economy, both this year and next year.”

He added, though, that foreclosures have continued to increase.

“The foreclosure problem will put a strain on residential contractors far into next year and possibly beyond,” he said.

In terms of the non-residential building recession, this has deepened since the beginning of the year with almost all markets declining.

“That will be a key concern for the rest of 2010,” said Haughey.

The credit situation, he noted, has changed only a little bit from a few months ago. “Interest rates have inched up a little bit and we will see that trend continue for the year,” said Haughey. “We are not going to get to the point where the owners don’t do projects because they think the credit rate is too high and [wait] till it comes down; we won’t get there this year and probably not next year either. Credit will be a bit of a constraint because some people simply can’t get credit because of all the loan losses in September 2008 and that problem is now heavily concentrated in construction and real estate.”

He added that there are still some lingering credit restraints, mostly in real estate and construction. One problem here is a lot of regional banks have closed and those are the ones where many small contractors had gone for their loans, he explained, saying that not all small contractors are able to borrow from large banks.

“So these problems have shifted from homeowners and small businesses to developers and contractors. This will gradually ease over the course of this year, but it won’t go away entirely,” said Haughey.

There are also a lot of damaged balance sheets, especially for contractors, developers and real estate investors.
“This will slow down recovery in the non-residential market, as it slowed down recovery in the housing market where people had difficulty getting mortgages,” he added.

  1. In terms of Stimulus spending, this peaked in late 2009, though the buildings Stimulus funds will not be spent at a significant pace until late 2010.
  2. “The stimulus is still positive but probably isn’t enough to give a big jump to construction,” he added.

Looking at the economic environment for construction for the balance of this year and going into next year, Haughey said this is dominated by surplus space for buildings and facility capacity. He expects this to start declining midway through this year.

“We will probably have a little bit more incremental surplus space in non-residential in the latter half of this year and that problem will be growing much more slowly and we will see further progress on the residential side,” he said.

The construction spending outlook will also see a decline this year of about 8 percent and next year Haughey is anticipating an increase of about 7 percent.

“Residential construction is up modestly this year and substantially next year, the number will be over 20 percent for single family and modest for remodeling,” he added.

As far as non-residential starts, overall they are up slightly. Those segments that are up are largely publicly funded heavy construction (airports, military projects, etc.), while those that are lower are largely privately funded.

“The developer-financed part of the market is way down and has not shown any uptick,” Haughey said.

Overall, though, he thinks the non-residential building decline is nearing its end.

“Most of the decline has already occurred in the private sector with a relatively larger share yet to come in the public and institutional parts; this will be milder in the private side,” said Haughey.

Looking at the big picture, he added, “The economy is clearly in a sustained growth mode, but how long will it take to transition into increased construction activity?” He answered, “It depends on the type of activity and the part of the country you’re in.”

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