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USGNN Original StoryWhat's in Store for '08? Forecasters Say A Pretty Good Year

What can the construction industry expect for 2008? Another good year for nonresidential, although not as good as 2007, say Ken Simonson, chief economist for the Associated General Contractors of America; John Cross, vice president of the American Institute of Steel Construction; and Daryl Delano, principal and chief economist with Delano Data Insights. The forecasters discussed what's in store for next year's construction market during a recent webinar. The forecasters agreed that nonresidential will continue to stay positive and, although there will likely continue to be a declining residential market, it will be a less severe decline than that of 2007. But just how much change can we expect? That's a figure on which the forecasters and economists could not agree. Simonson said he anticipated between 3 and 7 percent growth; Delano's and Cross's predictions each fall on the high and low end of that range.

"Coming off 12.3 percent growth in 2006 and what looks to be about 14.5 percent in 2007, I would think we'd be about half that [on the high end] in 2008," Delano said.

"And I'd say on the lower end, looking at a square footage basis, not dollar basis, it'd be in the 2 to 3 percent range," Cross said.

The fact that this year saw declining as well as positive nonresidential sectors might be one reason it is difficult to pinpoint a specific growth percentage for 2008. This year, 15 of the Census Bureau's 16 nonresidential categories reported positive growth before adjustments for cost increases. The only one down was religious structures. Simonson said part of the reason that segment was down can be contributed to the slow residential market because "most of that [type of work-churches, temples, etc.] happens after a new neighborhood is constructed."

While nonresidential will stay positive in 2008, it will be a better year for some sectors than others. Sectors expected to stay strong are hospitals and higher education, while lodging/hotel and office space will see more of a decline.

"In 2008 the commercial sector [hotels/lodging] will be impacted by the slowdown in consumer spending," Delano said.

Simonson also predicted a slowdown in school and other local public government projects that will likely be hurt by the drop in real estate property tax receipts. "But quite a few markets will remain strong and counterbalance [that] decline," he said.

One specific segment likely to continue growing is the energy/power sector, which has been in a building boom that's just starting to take off.

"We see several years of growth in this type of market power plants are adding capacity as well as environmental retrofits," Simonson said.

This is also a segment expected to thrive for some time to come.

"We're in a scramble to have enough energy lines to deliver [power] to where the customers are," Simonson said. "We've had six years of economic growth and with that a demand for electricity that means it will be hard to avoid blackouts and brownouts."

The construction industry may also see tightening in credit availability for commercial projects in 2008.

"I don't think there are many, but there might be some projects that have been canceled or put on hold because of concerns about credit availability," Delano said. "I think the commercial market did benefit from the fact that there was very easy money available for a long time and there were some projects, probably in the planning stages, that at this point are probably not going to go forward until there is more confidence in the credit availability and the quality of credit in the system. I think the major issues facing the commercial market are not really about credit availability, but more the fact that there are certain sub sectors of [commercial construction] that do have a relationship to overall residential construction and the overall strength of the economy to the extent that I think most people will agree the economy is just going to skirt a recession over the next six to nine months."

The future of green building was also discussed, and the forecasters agreed that while it may have started out as somewhat of a marketing tool, it's evolved into something the industry can definitely expect to see grow, especially as more governments require and ask for it.

"It's mainstream so the premium you pay [for green products] has gone down," Simonson said. "There's also more of a push from the government at all levels. That will help drive the materials chosen, but it won't make much difference in the total volume of construction."

Cross agreed, green building is here to stay.

"There's a real perspective change taking place, [in that] the view of what the project costs through its entire life is being taken intuitively and that should help construction overall," Cross said.

The increasing cost of oil and its impact on the construction industry was another discussion point.

"I think oil prices are insidious because they show up in so many ways," Simonson said. "Many [contractors] have no alternatives but to use diesel fuel." He explained that for companies using construction vehicles there is no flexibility; they have to use diesel fuel.

"Diesel fuel also shows up as a surcharge on deliveries. Beyond that you have many materials that use energy, so it shows up in many forms. There's no good way contractors can avoid energy price shocks," Simonson said.

Employment, labor issues and wage pressures will also continue to be an issue for construction companies in 2008.

Cross said expect to see labor shortages in the construction field, and that that increasing the level of automation could help companies become more productive.

Looking at the glazing industry specifically, Simonson said the curtainwall arena is one area that may feel wage pressure.

"Very few companies can put up a high-rise curtainwall. It's an area you may see extra expense," Simonson said.

Overall construction expectations for 2008: Nonresidential will stay relatively strong; it will take time, though to
re-establish the residential market. Forecasters predict home sales to be up by next spring, but starts will not be up till late next year.

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