2011 May Show First Signs of Improvement in Construction Starts, Forecaster Says
November 2, 2010

Robert Murray, vice president of economic affairs for McGraw Hill, closed the McGraw Hill Construction Outlook Executive Conference on October 29 with these remarks: "As we meet again next year, I hope we'll be able say, yes, an expansion is close at hand."

As one might infer from these remarks, it's become clear that, for the nonresidential construction industry, 2010 was not that year.

Whether or not 2011 will be the year of expansion seems rather uncertain. For 2011, single-family housing is predicted to see a 25-percent increase in new construction starts, and nonresidential is expected to see an 8-percent increase, even factoring in the dour situation for institutional buildings (a 2-percent decline is predicted in 2011). Still, there seems to be a large number of "ifs" between now and this time next year.

A Look Back

Rather than greeting his audience with "what a difference a year makes" Murray found himself looking at last year's forecast and asking "what happened?"

That isn't to say last year's predictions weren't correct-the predicted declines were simply much steeper than expected. Last year, Murray projected a 4-percent decline for commercial buildings; in actuality that became a 17-percent decline. "Institutional building also has shown a greater loss of momentum than expected," he noted. Rather than the expected marginal gains, this segment saw a 7-percent decline in starts, with a further 1-percent decline projected for 2011.

In other words, instead of moderate improvement in new construction starts for 2010, "we're looking for, at best, stability and predicting, I think, a 2-percent decline," Murray said. "Essentially we're talking about activity more or less flattening out."

Murray did try to offer his audience a "ray of hope." He noted that commercial building is estimated to be down in 2010 only 17 percent, compared to a 43-percent decrease in starts for 2009. "So the slope of descent is easing," he said, "and if you're grasping for any rays of hope I think this could be a ray of hope right there."

Looking at these predictions gone wrong, 2011 is coming in with its share of uncertainty. The economy is still facing headwinds, Murray said, "And there is still the risk of a double-dip recession taking place." In addition, "If you look at spending and employment, the downturn is still underway. Looking at [construction] starts, it's a little more indeterminate whether we've leveled out and are heading up."

Murray offered some forecasts for several segments:

• Multi-family housing: This segment was one of the pleasant surprises of 2010, Murray noted. Last year he had predicted a slight increase of 5 percent, which became a 9 percent increase in actuality. That segment is expected to see further growth in the area of 24 percent in 2011.
• Stores: Murray expects a nearly 18-percent decrease in 2010, followed by a 19-percent increase in square feet started in 2011. Rather than starting construction on new stores, Murray said, "Some of the more financially viable retail chains are engaged in some renewal of formats in order to be competitive."
• Hotels: While Murray forecasted an 11-percent increase to 20 million square feet in 2011, he commented, "20 million square feet for this category is still pretty paltry."
• Offices: Following a 28-percent decline in office building construction in 2010, Murray predicts a 13-percent increase in 2011 to 59 million square feet. "The stage is being set for some resumption of the office building market," Murray said, pointing to a few early signs. According to Murray, a number of large corporations are beginning to post gains in their earnings, and if those companies want to continue growing some investments in buildings, and people, will be necessary. He also pointed to expectations that office employment will start to pick up in 2011 or 2012."
• Institutional: Overall that category saw a 17-percent decrease in construction starts in 2010, with a predicted 2-percent decline in 2011. "Schools essentially have lost momentum," Murray said. "This year we're looking at an 18-percent decline and it's going to continue in our estimate in 2011." Fortunately, he added, "The college and university segment has not seen as steep a drop as has K through 12." Health care was flat last year at 68 million square feet in starts, and Murray predicted a modest pickup in 2011 of 6 percent.

Overall, nonresidential construction is predicted to have an 18-percent decrease in construction starts in 2010, followed by an 8-percent increase in 2011

The good news is that increases in commercial construction are in sight. "Personally, I think commercial building could pop in a positive way in 2012, 2013," Murray said. To get to that point, he added employment growth must strengthen and banks must start lending.

The bad news? There's a lot of uncertainty regarding the long year ahead.

Construction Starts
(in millions of square feet)

Source: McGraw-Hill Construction

Need more info and analysis about the issues?
CLICK HERE to subscribe to USGlass magazine.