Experts Say Nonresidential Construction Will Not Turn Around Until Middle of 2012
October 13, 2011

By Sahely Mukerji,

The expected recovery for nonresidential construction has been pushed back to the middle of 2012, according to the economists who presented during today’s economic forecast webcast, “Flat, Down or Up? Where is Construction Heading?” hosted by Reed Construction Data. Speakers included Ken Simonson, chief economist of AGC of America in Arlington, Va.; Kermit Baker, chief economist of American Institute of Architects in Washington D.C.; and Bernard Markstein, chief economist of Reed Construction Data.

Weak gains should improve in GDP, personal income and jobs, said Simonson. “Sluggish growth in GDP has kept private sector hiring down, and has put a damper on all kinds of growth. No double-dip recession in my forecast. Construction will depend on a lop-sided activity. On the positive column there’s power and energy construction. Manufacturing construction has had a recent upturn and will continue strongly in 2012. Warehousing construction has good prospects and hospital construction has come up after a 3-year slump. Apartments should boom. Federal, state, local cuts will continue. There will be little inflation.”

Total construction spending has been dropping since 2006, Simonson said. In August 2011 it was $799 billion, reflecting a 1 percent growth from August 2010 to August 2011. “There’s strong rally in multifamily construction with a 1-month change of 1 percent growth and 12-month change of 13 percent growth.” Nonresidential construction spending was $553 billion up until August 2011, reflecting a 0-percent net change in the last 12 months, he said.

Total construction spending is estimated to go up 6 percent to 10 percent in the next 5 years, and private nonresidential spending will go from -2 percent to 2 percent, Simonson said. Materials cost will also go up 3 percent to 8 percent in the next 5 years, labor cost will rise 2 percent to 4 percent and bid prices will rise 2 percent to 5 percent.

In the nonresidential segment, recovery has been pushed back, said Baker. “There’s a 9- to 12-month lead in design and turnaround activity. We expected the recovery in the beginning of 2011, but we went through a weak spell, so we’re still in the middle of 2012 before we see a full-blown recovery in the nonresidential front.”

“Housing typically is an early sector to rebound in the 20 percent to 30 percent range in the first year of recovery,” Baker said. “We haven’t seen that this time. Prices fell off 30 percent from the peak. The low point in housing was in early 2009. Following that there was growth in the next few quarters. New home sales are down 15 percent. Housing starts are up 10 percent. Home sales are up 5 percent.” The outlook for home building is under 600,000 this year, under 800,000 next year, and nowhere near the 1.6 million range peak in 2009, he said.

Commercial property values fell further than house prices, Baker said. “House prices fell 30 percent from 2006 to 2009. Commercial property fell 40 percent from 2007 to 2009, but has recovered 15 percent of their loss.”

Commercial real estate lending fell off during the downturn and now seems to be lagging demand, Baker said. “Banks began tightening their lending standards in 2007, and have only recently started easing up some. During 2007-2009, owners/developers weren’t looking to borrow, but now the demand has started to pick up, but lending’s not easing up. In the last 6 to 9 months, 70 percent of architect firms nationwide reported stalled projects due to financing problems.”

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