Gloomy global construction forecast

According to an article posted by ARI, sustained worldwide economic recession is making itself felt everywhere, including global construction markets. Economic forecasting company Global Insight says that global construction growth is expected to dip by under +2 percent in 2009. The growth figures are expected to be the lowest since 2002.

The most severely effected of all is the North American market that will face a contraction of -9 percent, driven by the downturn in the U.S., while Western Europe will fare a little better with almost no growth. On the other hand, Eastern Europe may face a slight setback in terms of growth but will manage to stay in the positive territory. France and Europe may escape unscathed, but Spain and UK may be scalded with possible downturns in growth. Asia may still offer growth, despite a downturn in its export markets.

Global Insight predicts a bright future for the Middle East and Latin America even though the risk of falling commodity remains a source for concern. Many of the countries in these regions are relying on their foreign currency reserves and fiscal surpluses to cushion the shock of the global recession.

Global Insight expects the best opportunities over the coming years to be in the area of infrastructure construction in emerging markets, since developing economies are expected to continue to invest in infrastructure while their commercial, industrial and residential construction activity suffer a setback.

Recovery for the construction industry may not come before the year 2011. Global Insight director of construction services Scott Hazelton said, " No true recovery for construction markets is expected until 2011. However, the recovery could be steep and the needs of emerging markets remain great. The construction recovery, when it comes, should be strong." Your comment?

Black testifies on infrastructure

In testimony delivered to the House Committee on Transportation and Infrastructure, Doug Black, CEO of Oldcastle Materials Inc., Atlanta, addressed his concerns on infrastructure spending and investment in the nation’s surface transportation system. Oldcastle is a key member of the National Stone, Sand and Gravel Association.

Black pointed out that the construction materials industry is shrinking at a time when the nation’s infrastructure needs are growing. “Jobs in the United States today are issue number one.” He suggested there is no better way to add jobs, and good-paying American jobs, than to invest in infrastructure. He urged Congress to pass a short-term stimulus bill that will allow companies like his own to keep its workforce, add jobs and help preserve the nation’s highway system.

He disagreed with the suggestion that infrastructure investment cannot be a short-term stimulus to the economy since projects take too long to get started and to complete. Black informed the committee that all infrastructure projects are not the same. Some projects, like building new highways, bridges, light rail lines, runways, and sewer systems can take years to complete. He pointed out, however, that most highway maintenance and repair projects can be advertised, bid, let and completed in a short period of time. This is particularly true of projects already existing that state and local governments have ready-to-go if funding were available.

Fatality #20

According to MSHA, on October 17, a 45-year-old scaler operator with 8 years of experience was fatally injured at an underground stone mine. He was inside the cab operating a track mounted excavator, with a scaling attachment, when a rock fall occurred. A rock, about 13-ft. wide x 26-ft. long x 4-ft. thick fell from the back. Rescuers recovered the victim about 7 hours after the rock fell. Your comment?

Obama, McCain differ on infrastruture

There is a good article on CNN Money about where Barack Obama and John McCain stand on infrastructure issue. Both presidential candidates have acknowledged the importance of rebuilding the roads and rails, but have offered very different solutions. McCain advocates shifting financing from earmarks to high-priority projects, while Obama's plan would create a federally-funded bank to invest in improvement projects. Your comment?

Fatality #17

According to MSHA, the Metal/Nonmetal sector experienced its 17th fatality of the year. On October 7, a 56-year-old lead man with 18 years of experience was fatally injured at a crushed-stone operation. The victim was in a chute of an underground surge tunnel when material from above sloughed off and engulfed him. Your comment?

Housing starts at 17-year low

The U.S. Census Bureau and the Department of Housing and Urban Development jointly announced the following new residential construction statistics for September 2008, which put in historical perspective, marks a 17-year statistical low.

BUILDING PERMITS
Privately owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 786,000. This is 8.3 percent below the revised August rate of 857,000 and is 38.4 percent below the revised September 2007 estimate of 1,277,000. Single-family authorizations in September were at a rate of 532,000; this is 3.8 percent below the August figure of 553,000. Authorizations of units in buildings with five units or more were at a rate of 225,000 in September.

HOUSING STARTS
Privately-owned housing starts in September were at a seasonally adjusted annual rate of 817,000. This is 6.3 percent below the revised August estimate of 872,000 and is 31.1 percent below the revised September 2007 rate of 1,185,000. Single-family housing starts in September were at a rate of 544,000; this is 12.0 percent below the August figure of 618,000. The September rate for units in buildings with five units or more was 254,000. Your comment?

Market volatility, nonresidential construction

This week's market volatility will have a downline impact on construction markets. According to Reed Construction Data Chief Economist Jim Haughey, a drop in commercial construction activity is coming, initially from the abrupt loss of access to credit and higher credit cost and then later, when credit markets stabilize, from the feedback on space demand from reduced spending in the economy. Together the two impacts will reduce expected profits from new construction and make buying rather than building a better option for real estate developers in an increasing number of markets.

The commercial mortgage backed bond market is virtually shut down because the usual bond buyers are conserving their scarce capital and demanding large premiums for what they now believe are more risky assets than they previously thought. Similarly construction financing from banks has been reduced to about half of previous levels. Funding is still available from insurance companies and other non-bank investors but at significantly higher rates than only a few months ago.

This situation will persist until banks have more capital more trust that their borrowers are solvent enough to repay them. The fixes are gradually being put in place. This includes the Treasury plan to buy and hence establish a price for depreciated mortgage bonds, continued cash injections from the FRB and other central banks and regulatory changes that end the requirements for financial firms to value some of their assets at temporarily distressed prices.

It is not yet clear how long this will take or whether enough resources have been committed to this task. Our forecasts assume that the dimensions of the problem are known and the credit problem is easing by the end of October.

How large the negative feedback from a slowing economy on construction spending will be is also unknown yet. Our only comparable experience is the post 9/11 period. The shock to the economy impacted everyone. Caution lead to deep cuts in spending over a few weeks. Then it became clear that the immediate threat had passed. There was a burst of make up spending and then a resumption of normal spending trends which, at that time, was very slow growth.

We assume the same pattern of shock, caution and slow recovery for the current shock to consumers’ retirement savings.

Other macroeconomic and construction forecasts are gradually being updated to Septembers’ credit crunch.

Converted to real, inflation, adjusted dollars, The Reed Construction Data forecast projects a 1.0 percent drop in nonresidential, including facilities, construction spending in 2009 and a 2.0 percent decline in 2010. The pace of decline will be much higher later this year and early in 2009. Spending will be rising at the end of 2010. Absent the credit crunch growth would have been marginally positive over the two years. Economy.com, a widely followed forecast has a generally similar outlook with slightly less drop late this year but 3 percent more next year. Wachovia bank projects a 12 percent fall in 2009 and a further 14 percent drop in 2010. The banks’ GDP forecast is about 1 percent below Reed Construction Data and Economy.com so they see some unique problems in the construction market, especially credit access for commercial developers.

Drops as large as projected by Wachovia bank have occurred before when a severe recession in the general economy occurred when the real estate market was overbuilt. Obviously, there will be surplus space in the next two years but we do not believe there was significant surplus space a few months ago. Reed works with closely on construction data and forecasts with Property & Portfolio Research, a Boston commercial real estate advisor. Their updated forecast is pessimistic for commercial rents, occupancy rates and building asset values but pessimistic enough to cause major cancellations of work underway or set to start soon. Your comment?

Simonson says

The last year has been a tough one for many in the construction industry, according to an article published on the ARI website. The next one could be just as difficult, said Ken Simonson, the chief economist for the Associated General Contractors of America. Speaking at a meeting of the group's Middle Tennessee members, Simonson predicted that residential construction will remain slow, that well-performing commercial sectors will turn sour and that costs will keep rising.

Home building, which has been down about 40 percent this year, will not pick up until midway through next year at the earliest, Simonson said. Construction of rental properties, which has remained flat, should also start to fall, as foreclosures and poor condominium deals create a shadow market that will drag down rents.

The housing market will also put a damper on school construction. Declining home values mean fewer tax dollars for improvements and new buildings. Likewise, higher gas prices will mean less driving and less gas tax revenue for highway construction. Meanwhile, lodging, retail and office construction will slow with the weakened economy.

Simonson threw his support behind the White House plan to borrow $700 billion to buy mortgage-backed securities from banks to help cure the ailing U.S. economy. Over the past few months, Simonson has been hearing for the first time from construction companies that credit has dried up. Without better access to loans, the industry will not be able to get back on its feet, he said.

That said, Simonson said the stakes aren't as dire as some believe. The nation remains in a better position to weather a downturn than it was on the eve of the Great Depression nearly 80 years ago. Your comment?