Construction Expected To Decrease 5.5% in 2002

November 21, 2001
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Construction expert Bill Toal, chief economist of the Portland Cement Association, sees a tough year ahead for the construction industry. “In our final analysis, we see construction activity down about 5.5%.”

His overall economic forecast calls for the fourth quarter of 2001 to be down about 3%. The first quarter of 2002 “will be essentially flat,” he said. “Expect some very slow growth after that.”

The U.S. economy in 2002 “will see growth of less than 1% for the year.”

“Our forecast for 2003 is about 3.5% growth,” he stated. “But there are so many uncertainties out there” regarding September 11’s impact, it makes it difficult to predict.

Continued on page 30

“After a couple of down years, you would expect about 3% to 3.5% growth.”

Toal said that despite the repeated efforts of Alan Greenspan and the Federal Reserve to stimulate the economy, “I don’t think that the Federal Reserve’s short-term rate cutting will have an immediate impact.” Long-term rates, he noted, haven’t come down.

The most important factors in what will happen in the economy for the near term are “the fall in consumer and business confidence.” Confidence levels and spending will take a while to recover.

“The spike that’s been seen from auto sales,” due to the automobile manufacturers heavily promoted 0% financing incentive, “we feel is a one-time shot.”



Nonresidential Building

In 2002, the biggest drop off will be in nonresidential construction, he said, which will experience a 10% to 15% decline. “We see all sorts of overbuilding all over the place,” Toal declared.

The weakest areas of nonresidential construction are hotels, office, and industrial. The descent of the technology sector will keep the office market down. “Retail will be down 5% or 6%,” he said.

“A typical recession in the U.S. lasts about 15 to 18 months,” Toal related. Based on that, he would expect nonresidential building to recover and increase by about 3.5% in 2003.



Residential Construction

Toal expects home sales and residential construction to fall in 2002. With the current high unemployment rate, “it has to have an effect,” he said.

Housing starts, which were at 1.93 million in 2000, will be at about 1.6 million this year. He expects it to go down to 1.48 million next year. “But this is still a moderate decline compared to 1990-91, when we dropped under a million units of new construction,” he commented.

If we have a typical recession, residential construction will come back in 2003, Toal stated. When the Fed lowers rates, “it takes about six to nine months for mortgage rates to reflect that.” This should help housing activity down the road. “We have residential construction growing at 4.5% to 5% in 2003.”

However, Toal emphasized, “We’re living in totally different times now” because of the recent terrorist attacks. “The consumer psychology is totally different.” So long-term forecasting is difficult and he has more of a wait-and-see attitude. “We’ll just have to see where we are,” he said.



Sidebar: Construction Conference Provides Other Viewpoints

At CMD’s 6th annual North American Construction Forecast, held recently in Washington, DC, other economic experts also supplied their predictions on the impact of the economic downturn on construction activity.

Focusing on the housing market, David Seiders, chief economist and senior staff vice president of the National Association of Home Builders (NAHB), noted that several surveys were taken of its membership following the terrorist attacks.

The first weekend after the attacks, “The industry was holding up amazingly well,” he said. A few weeks later, however, 35% of builders said sales were down by 10%, and another 22% of them said sales were down 5% to 10%. The drop in consumer confidence was cited as the main reason.

The NAHB’s Housing Market Index in October showed a decline from 56 down to 48. Despite this drop, Seiders said, that index level puts residential construction where it was in the mid-1990s, which is “not that bad,” especially when compared to the 80s and the beginning of the 90s.

If the economic scenario turns out “the way we have mapped, we’ll see a brief and mild setback,” he stated, with gradual recovery that could begin as soon as next year.

His belief in a mild downturn for housing is partly due to the new numbers from the 2000 U.S. Census. As the 90s closed, housing start figures were approaching 2 million, but then-current census numbers did not show population growth at a rate that could support this supply.

Unsustainability and overproduction were discussed by analysts, although vacancies were not increasing. The new census showed the federal government had “substantially undercounted population and household growth,” he noted, partially because immigration was underestimated, with approximately 200,000 additional households being created each year.

Seiders also believes that the federal government’s stimulus efforts will help keep the residential building setback brief.



Demand/Supply In Office, Hotel, Industrial

According to Glenn Mueller, Ph.D., a professor at Johns Hopkins University Real Estate Institute and a real estate investment strategist for Legg Mason, Inc., the demand and supply cycle in the U.S. office and industrial markets is local and various cities are at different points in the cycle.

Looking at the office market, Los Angeles, San Diego, and Washington, DC, are some examples of cities that have reached the top of the supply stage. These cities have been seeing higher office vacancies, but construction is still taking place. On the other hand, Dallas, Jacksonville, Salt Lake City, and Tampa are at the bottom of their cycle. These metropolitan areas have low or negative growth in demand, and construction has significantly slowed down. Mueller said these cities are now in the recession stage of their office cycle.

In the hotel market, he said that most cities are moving toward the recession stage and that cities such as Charlotte, Cleveland, Indianapo-lis, and Philadelphia are already in it. For the industrial market, he said that, as of the end of the second quarter, no cities were in the recession stage.



Canadian Construction

Alex Carrick, chief economist for CanaData, indicated that the Canadian economy has headed downward like the United States, bringing construction activity down. However, the institutional market has been a positive, with several of its segments hitting new highs for the last seven years.

These strong institutional sectors include hospitals which went up to more than $4.4 billion in new projects for 2001. Another is schools, which saw more than $2.3 billion in new projects. Also, homes for senior citizens increased to the level of $1.35 million with future growth likely.

Nonresidential and residential construction, though, will see declines.

The industrial market has seen a huge drop of close to 50% this year. A major reason for this sharp slide is because of the automotive industry, which has seen the end of a 10-year boom period and is now in a decline that could continue for three to four years.

Carrick said that commercial construction will be down slightly, from about 47.9 million sq ft in 2000 to 45.5 million in 2001. New construction will continue to drop in 2002 to 42.5 million sq ft, but will come back to 44.5 million in 2003.

Residential construction had been relatively strong at 162,000 average starts per month through August. But he sees it slowing to 157,000 by the end of 2001, and slowing further in 2002 to 153,000 average starts. The 2002 level of starts, he said, should be close to year 2000 and the prior several years’ numbers.

Throughout North America, then, these experts see a slower year for construction in 2002, but expect improvement in 2003.

Publication date: 11/26/2001

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