Non-Residential Construction to Remain Down in 2010; Single-Family Residential Will Continue to Recover
February 1, 2010

While economists are predicting the single-family residential construction market will continue to recover this year, the non-residential segment is going to have to stick it out a bit longer, as improvements are not likely in 2010. Ken Simonson, chief economist for the Associated General Contractors of America (AGC) shared his forecast during a recent webcast that was sponsored by the AGC, the American Institute of Architects and Reed Construction Data.

"The economy is in a recovery now; we touched bottom mid- to late-summer and it has been growing more slowly than usual after a recession," said Simonson. "Growth is pretty wide spread and I think it will continue through 2010, but it will leave construction far behind as there has been little good news coming out about the construction industry." Simonson said that even homebuilding, which has been on a generally upward path, saw a set back in December.

"Overall, the construction industry lost jobs in every state between December 2008 and 2009 and for the rest of the year I am afraid things will not get much better on the non-residential side," he said. "We still have sharply rising vacancy rates for offices and retail space, sluggish occupancy for hotels … and that combination means none of those income-producing segments are producing enough now to make them attractive prospects for more construction. In addition, multi-family markets are still plagued with excess supply coming in. Owners and banks have repossessed houses and are currently trying to rent them out rather than putting them on the market. Also, the availability of the first-time homebuyer tax credit means many of those people buying homes for the first time are moving out of rental properties. So there are rising availability and falling demand for rental properties."

Simonson also talked some about how the stimulus bill has affected the industry.

"The biggest portion [of the stimulus] for construction has been in the appropriated spending segment and the AGC estimates that to be about $135 billion."

Of the stimulus provisions, Simonson says the change that may be most beneficial to contractors is the extension of the five-year carry-back of net-operating losses.

"Originally it only applied to small businesses for 2008 net operating losses but now any company with a net operating loss in 2008 or 2009 can take advantage of that provision. I think that will provide significant cash flow boost to firms that otherwise would have to hang on until they can claim losses that exceeded the two previous years," he said, and added, "The timing on the stimulus money flowing I think will improve significantly this year, but we're but not ready to say in which quarter it will show up."

As far as construction activity over the past year, Simonson said total construction spending was down 13 percent from November 2008 to November 2009.

"Of that, private non-residential is dropping at a 21-percent rate. Public spending (where stimulus money shows up) was up 3 percent and private residential had dropped very sharply in early 2009 and now has been rising gradually. But year over year, it's still down 19 percent," said Simonson.

Taking a closer look at residential construction, Simonson pointed out that there has been an upturn in single-family construction over the past six months, while multi-family construction has continued to drop steeply.

"Looking at permits and starts, I think we can expect more of the same, with a strong rising trend for single family. For 2010 as whole, while we may have setbacks in [single family] construction spending … I think the single-family market will continue to grow and multi-family will continue to shrink," said Simonson.

On the non-residential side, total private and public is down 11 percent from November 2008 to 2009. Simonson said the most positive news from the past 12 months has been power construction, including solar sites. "I think this will continue to perform well this year," he said.

One bright spot Simonson pointed out is that within public construction spending, nearly every category is either higher or close to levels where they were a year ago and are likely to remain better than they were in early 2009 thanks to stimulus.

When it comes to employment levels, Simonson said the construction industry has been at "depression levels."

"The construction industry has been suffering with more than one-fifth of all job losses even though the industry accounts for only 1/20th of total employment," said Simonson. "In early 2009 residential construction was losing jobs at a greater rate, but since about May bigger losses have been in non-residential," says Simonson. "As we move through 2010 residential construction will turn positive and non-residential will remain negative for most if not all of the year."

In summarizing what the construction industry can expect from 2010 Simonson says:

Non-residential spending will be down 0 to -5 percent; single-family residential will be up 5 to 10 percent (multi-family will be down all year; total construction spending will be between -4 to +2 percent; materials costs will be between 0 to +8 percent; and labor costs will be up 3 percent or less.

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