Construction outlook released

McGraw-Hill Construction, part of The McGraw-Hill Companies, has released its 2009 Construction Outlook Spring Update, providing updated 2009 forecasts of construction starts for various project types. The major findings of the forecast, authored by Robert Murray, vice president of economic affairs for McGraw-Hill Construction, include:

* New construction starts for 2009 are estimated at $463.1 billion, down 15 percent, but cushioned by support provided by the recently enacted stimulus legislation, the American Recovery and Reinvestment Act of 2009.
* Public works will see the most immediate benefit from the stimulus act, with construction starts climbing 10 percent, including a 15 percent rise for highways and bridges. Without the stimulus funding, it is estimated that public works in 2009 would have fallen 10 percent, restrained by the deteriorating fiscal health of state and local governments.
* Institutional building in 2009 will retreat 6 percent, as the weak financial environment takes its toll on educational and healthcare facilities. The stimulus funding will provide a lift to military facilities and energy upgrades for federal buildings, which will moderate this year’s overall institutional decline.
* Commercial building in 2009 will drop 27 percent, steeper than the 17 percent slide reported last year. The tight lending environment has made it extremely difficult to obtain project financing, leading to more projects being deferred or cancelled. All commercial project types will register declines in 2009, with the most severe retrenchment anticipated for hotel construction.
* Residential building in 2009 will drop an additional 31 percent, continuing the downward trend that’s been underway since 2006. Similar declines are expected for single family housing (down 30 percent) and multifamily housing (down 31 percent). Steps taken in early 2009 to address the foreclosure problem should help to ease the rate of descent for housing as 2009 progresses.

“The construction industry is facing divergent forces in 2009,” said Murray. “The economy has weakened substantially, and despite all the efforts last fall directed at thawing frozen credit markets, there’s yet to be any sign that lending conditions for construction have improved. On the plus side, the federal stimulus bill is now in place, which will provide quick support to public works this year.”
-- Mark S. Kuhar

2009 construction forecast

McGraw-Hill Construction, part of The McGraw-Hill Companies released its 2009 Construction Outlook, which forecasts a drop in overall U.S. construction starts for next year, as the tough funding environment continues, construction projects are deferred, and financial stress gradually eases. Against this backdrop, the level of construction starts in 2009 is expected to decline 7 percent, to $515 billion, following a 12 percent decline predicted for 2008.

“The speed and scope of the events in September and October were startling,” said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction, addressing 400 construction executives and professionals at the Outlook 2009 Executive Conference in Washington. “Tighter lending standards are a major constraint for the construction industry. For single family housing, declines are continuing and showing no sign of an upturn. Home prices are continuing to drop, a 20 percent drop so far this year, and we expect another 10 percent decline through the first half of 2009. Then, things should level off. Store construction has taken the biggest hit; we’re looking at a 30 percent decline in retail square footage starts this year.”

Highlights of the 2009 Construction Outlook include:

* Single family housing for 2009 will be down 2 percent in dollars, corresponding to a 4 percent drop in the number of units to 560,000 (McGraw-Hill Construction basis).

* Multifamily housing will retreat 6 percent in dollars and 8 percent in units, after the sharp plunge witnessed during 2008.

* Commercial buildings will drop 12 percent in dollars and 15 percent in sq. ft., similar to the declines experienced in 2008. Stores and warehouses will continue to lose momentum, the office correction will be steeper, and hotel construction will finally pull back after its lengthy boom.

* Institutional buildings will slip 3 percent in dollars and 6 percent in sq. ft., as the financial crisis affects funding coming from states and localities.

* Manufacturing buildings will plunge 32 percent in dollars after an exceptional 2008 that was lifted by the start of several massive oil refinery expansion projects.

* Public works construction will fall 5 percent, given flat funding at the federal level combined with restraint by state and local governments.

* Electric utility construction will retreat 30 percent after surging 55 percent to a near record amount in 2008.

Murray comments on financial markets

According to Robert Murray, McGraw-Hill Construction economist, the upheaval in the financial markets during September has altered the financial landscape, which will affect funding for construction projects and in turn construction activity.

"The situation with the financial markets continues to be fluid, particularly regarding the shape of the $700 billion mortgage buyout proposal," Murray said. "Given the sense of urgency coming from Treasury Secretary Paulson and Fed Chairman Bernanke, Congress is anticipated to pass some measure with revisions to the Treasury proposal, including oversight of the process by which the distressed mortgage securities are purchased. The expectation is that the purchased securities will increase in value as the housing market begins to improve in 2009 and beyond, which would allow them to be resold and decrease the potential cost of the bailout from $700 billion to something less. The key, of course, is that the decline in home prices comes to an end, and we don’t expect to see that until 2009 at the earliest.

"The steps taken to provide stability to the financial markets will require time. The lending environment for commercial projects will probably grow even more difficult in the near term, before some credit easing begins to take hold, perhaps in the latter half of 2009. This means that the downturn in construction starts shown by commercial building in 2008, particularly for stores and warehouses, will grow more widespread in 2009, dampening offices and hotels as well. This had been our expectation prior to this September’s events; if these steps are successful, a rebound in commercial construction could occur earlier than expected, perhaps as soon as 2010 or 2011.

"The institutional structure types, such as schools and hospitals, respond in a lagged manner to shifts in the economy and lending conditions. We expect to see a loss of momentum for 2009, given the deterioration in state and local fiscal health, although funding already raised through the bond market should help the initial stage of a construction slowdown remain gradual. In other words, the response to September’s financial turmoil is expected to be delayed and diffused. The same applies for public works, and a near-term plus for that sector is that Congress recently transferred $8 billion from the general fund to shore up the Highway Trust Fund. As for single-family housing, the steps to stabilize the financial markets, if successful, should help to stabilize homebuilding in 2009, although at a very, very low level." Your comment?