From 2010 and Beyond, AIA Economist Gives Reasons for Optimism
October 26, 2010

Kermit Baker, chief economist for the American Institute of Architects (AIA), says there are a lot of reasons to be optimistic about the future for the construction market. In a recent online forecast Baker provided his audience with a sense of where the market is now and where it's headed.

He began by reviewing where the market is now. He explained there was a steep downturn during the recession in 2008 through the first quarter of 2009, with some healthy recovery after that.

"But also the first quarter of this year the direction of the economy changed and that's when we started hearing more about the possibility of a double dip recession," said Baker. "But the numbers are starting to look positive and seems as though we are starting to pull out of the downturn, slowly, but it's a sign we're heading back to more growth and it looks as though, at least for the time being, we've avoided a significant downturn in the broader economy."

As far as employment in the construction industry, Baker said it's seen a fairly steady decline and is down about 90,000 payroll positions through the first nine months of this year.

"Construction is the last major sector of our economy that remains in recession," said Baker, who added that the same trend is happening at architectural firms.

"We saw the number of payroll positions at firms peek in the summer of 2008 and they're now down about 55,000 positions. The numbers recently have been more stable, trending up …" said Baker. "It looks like we're finally … near the bottom and expecting to see some stronger numbers in the months ahead."

While the construction industry and related disciplines have been the hardest hit of the economy, Baker said moving forward, the numbers are looking better. He explained that the AIA's Architectural Billings Index (ABI) had a positive reading for the first time in more than 2.5 years. And while he was quick to point out that it may be a little early to say we're in a full-blown recovery, he says there is room for optimism. For example, Baker noted that while the ABI was just barely over the 50 threshold, the numbers have been trending up for virtually the entire year.

"It took a little dip back in May-June … but everything is headed in the right direction since then," said Baker. "Secondly, a reason for optimism is the trends we're seeing in the billings index and the upward movement in these trends is really rather broad-based." According to Baker, when you look at the major sectors you can see a fairly strong upturn recently in the "more volatile" commercial and industrial index, which he pointed out has been up for five straight months.

"Another reason for some optimism about the construction outlook is the trend we've seen in commercial property values," said Baker. "We did see a very steep decline in commercial property values during this cycle. It peaked after the housing prices peaked in mid 2007, but fell harder than the housing prices decline; commercial property values fell about 40 percent, peak to trough, and housing prices nationally fell about 30 percent."

As far as commercial property values now, Baker said the second-quarter numbers released by the MIT Center for Real Estate were very positive.

"We think there is some hope that the significant decline we saw in commercial property values may turn around faster than the decline in housing prices," he said.

Another sign of optimism, according to Baker, is what's been happening with business investments. He explained that the Department of Commerce tracks business spending in two categories.

"The first is business investment in equipment and software-smaller expenses that can generally be expensed as opposed to more significant investments in structures, what we'd call nonresidential construction activity," said Baker, "and there is a relationship between those two spending trends." He explained that if there is a weak recovery in business investments in equipment and software there is typically a weak recovery in business investment in structures.

"Every cycle is different, but for this one, I think the early returns are very positive," he said.

Also a cause for optimism, Baker said, is that construction costs have gone down. "Generally [what we] see during a recession is a modest decline in the prices of these materials … and then fairly strong growth during the next expansion," he said. "We have seen a dramatic decline in prices, almost 10 percent overall." And while prices have increased a little bit, Baker still thinks a lot of building owners and developers are starting to recognize "that this is a window where prices are low and probably won't be sustained and it might be a good time to get involved with some planning in terms of building construction moving forward."

And as far as the future, Baker pointed to numbers from the AIA Consensus Construction Forecast Survey for 2010 and 2011. These numbers, he said, point to 2010 having a very dramatic downturn, "but the good news is that most is now behind us …"

Inflation-adjusted total nonresidential construction spending numbers are projected to be down 20 percent this year and about 30 percent on the commercial side. He said we can expect recovery for 2011 as a whole, but probably a very modest one, with a weak first half and a stronger second half for construction spending. Overall growth will be about 1 percent, though a little bit stronger on the commercial side.

"Finally, it looks like we'll emerge from the construction downturn and see some growth as we move in the latter part of 2011," said Baker.

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