Expert Forecasts What to Expect from the Construction
Market in Coming Months
May 5, 2010
As Kermit Baker, chief economist for the American Institute of Architects
(AIA), stated during a recent construction forecast, "It's
been a tough construction cycle. Even though most of the rest of
the economy has been performing reasonably well, the construction
sector has not caught up with it yet." Baker was one of the
economists who spoke yesterday during a construction market webinar
organized by Reed Construction Data, the Associated General Contractors
of America and the AIA (CLICK
HERE for related article). Baker provided perspective on trends
in the housing market and also some of what architects are saying
about conditions in the non-residential market.
"Housing is one sector that has posted disappointing results
so far in its recovery. It hit bottom over a year ago, but the key
housing indicators (housing starts, new and existing home sales,
etc.) have seen only modest gains to date and even though house
prices are stable, or even slightly increasing, they have fallen
more than we've seen in any recession over the past 75 years,"
said Baker, who explained that prior to this down turn housing prices
had never fallen during an entire calendar year on a national basis.
"Housing prices fell almost 30 percent, but all major indices
of housing prices show them stabilizing if not recovering,"
he said. "On the other hand, there are still some markets that
could see further declines, but that's a lower and lower number."
Looking at the country, Baker said there are two main categories
that saw the least in terms of price declines. These are old-line
manufacturing cities where prices really never boomed and benefited
from the recent uptick in manufacturing activity and the other group
is the energy-based economies.
"So the corridor from Austin to Boston has been the best in
terms of holding its prices," said Baker, adding that areas
that had been extremely over-built, such as Las Vegas, Phoenix and
parts of Florida, have seen very steep pricing declines.
"Falling house prices have put many homeowners in a precarious
situation where the outstanding mortgage balance is greater than
the value of their home and unfortunately this is an increasingly
common situation," said Baker. "Almost a quarter of the
homeowners with mortgages are under water as of the end of last
year; an additional 5 percent have less than 5 percent equity in
their home so they are vulnerable of going under water if the prices
were to drop any more in their area."
As he previously stated, Baker said housing market improvements
since the beginning of last year have been disappointing.
"Typically we see housing activity improve 20-30 percent in
the first year of a recovery; this time new and existing home sales
are up less than 10 percent and housing starts are up less than
20 percent," he said. "To get those numbers we needed
a strong performance in March; prior to March they were running
In terms of architectural trends, Baker referred to the AIA's Architectural
Billings Index (ABI), which he says is trending up, but very slowly.
In terms of its different sectors, single family residential has
been the strongest of late and, according to Baker, there have been
some signs that once we work off excess multi-family inventory there
might just be some improvement on the rental side as well.
Both the commercial and industrial sectors, as well as institutional,
have leveled off and "we have not seen much in terms of promising
signs in recent months and they don't seem like they are ready to
turn around," says Baker.
Looking at the ABI on a regional basis, architectural firms in all
regions are still reporting modest declines in activity. Firms in
the Midwest, though, seem to be the closest in terms of recovery
and the index also shows that firms in the Northeast have also done
a little better than average in recent months.
Baker says commercial property values are affecting the non-residential
construction outlook to a significant degree.
"The over-supply of buildings and the resulting drop in rents
has pushed down property values. Commercial property values have
dropped about 40 percent since their high in early 2007," said
Baker, who added that there are a couple of important implications
of this decline.
"One is it's very difficult to justify the cost of a new facility
when existing facilities have declined so much in value," Baker
explained. "Second is that as existing facilities come up for
refinancing lenders will no doubt re-appraise their value and cut
back on credit, which could lead to a serious default situation
in the commercial sector, akin to what we saw in the residential
sector: if values don't come back before refinancing need to occur
they may not cover the value of the outstanding mortgage."
So, where things are heading and when we might see the beginnings
of a turn-around? Baker says we can look at the last three recessions,
see how they unfolded, and find four major benchmarks to go by:
the stock market, gross domestic product (GDP), payroll employment
and non-residential construction starts.
Typically, according to Baker, we begin by seeing improvements in
the stock market, followed by some improvement in the broader economy
(GDP). If that is sustained, then businesses will bring back payroll
employment and if that continues to grow and businesses start to
think about adding new facilities, that's when non-residential construction
starts are likely to pick up.
In this recession, the stock market hit its low in March 2009 and
the general economy picked up around June or July 2009. In terms
of payroll employment, Baker expects that to pick up probably by
the second quarter and toward the end of the year we could possibly
see an increase in non-residential starts.
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