Economy Will Stay Strong; a Slight Dip in 2001

December 15, 2000
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WASHINGTON, DC - The construction economy is still looking good. After a small, brief slowdown in 2001, it should pick up again in 2002.

That’s a quick synopsis of the outlook of the CMD Group’s 5th Annual North American Construction Forecast, held recently at the National Press Club here. The wide range of speakers, however, provided a very thorough discussion of construction activity and where it’s headed.

Hugh Kelly, chief economist, Landauer Associates, Inc., talked about the retail and industrial markets. “Follow the money,” he said. That’s a pretty good hint of where and what builders will build.

“We’re in the midst of a bi-coastal economy,” stated Kelly. Most of the economic growth in the late 90s was in the coastal states.

He noted that 72% of real estate investment has been in the coastal states, and it has peaked as high as 85% recently. The office sector has led that push. The tight office market is creating a substantial demand for “flex space.”

Kelly predicts the Boston/ Washington corridor will be the Silicon Valley of the coming decade. “Biotech will be the next big thing,” he said. “The strength of the biotech industry stretches from the Massachusetts Institute of Technology in Boston through the pharmaceutical industry in New Jersey to the National Institutes of Health in Washington.”

The retail sector is experiencing a 5% to 6% annual growth rate, driven by the growth in number of households. “In retail, small is beautiful,” he remarked. The greatest number of transactions involve spaces less than 75,000 sq ft. “Community and neighborhood activity, grocery, drug store, strip centers are where the action is.”



No New Economy

And the rules of the old economy still apply, asserted Kelly. “There is no new economy. You still have to follow supply and demand.”

Taking a closer look at the office market, Ray Torto, principal and managing director, Torto Wheaton Research, said that the demand for space in office buildings has been very strong, but so strong that it is not sustainable at this level.

“If you come to grips with this notion,” said Torto, “then 2001 will be a good year for you.”

Why has demand been so strong? Because technology-oriented markets are strong. There are record levels of absorption this year, with completions relatively low.

The cities with the lowest vacancy rates are also the ones that are generally associated with the technology economy. Vacancy rates for selected cities in the third quarter were: San Jose, CA — 1.2%; New York, NY — 2.5%; San Francisco, CA — 3.3%; Seattle, WA — 3.4%; and Boston, MA — 3.7%.

“Construction will heat up,” Torto predicted, “returning to the level of the 1980s. Construction loans are really picking up and are already back to their previous highs.” He sees completion rates beginning to overtake absorption rates nationwide in 2001.

Discussing the housing market, David Seiders, chief economist for the National Association of Home Builders (NAHB), said that despite some cooling off ahead, construction of homes should remain solid.

Is recession a possibility? At this point, the risks have shifted, “but we have a very high probability of getting through this in good condition,” he opined. “We are looking for a slight slowdown, actually already underway, but there should be a soft landing.”

Housing starts peaked in the first quarter and are in a slowdown process now. Single-family housing is seeing some setback, stated Seiders. Multifamily housing has been fluctuating.

Manufactured homes had gross overbuilding, he said. “It’s in a collapse mode.”

Total housing starts will experience a slight dip and recovery over the next two years. Starts will go from about 1.59 million this year to 1.52 million in 2001, then bounce back to 1.56 million in 2002.

Remodeling activity, he said, was flat, “but should hold steady.”

The home ownership rate is at a record high µ 67% in the second quarter. He also noted that the “inflation rate will remain historically quite good.”



IT’S A ‘WEBOLUTION’

Frank Feather, futurist and author who coined the phrase, “Think globally, act locally,” believes very firmly in the power of the Internet. In fact, he claimed, the Internet revolution is “the biggest in history, much larger than the Industrial Revolution, which will pale in comparison.”

The “webolution” smashes the factory model of the Industrial Revolution to smithereens, he said. “There will be no ‘Internet Depression.’ PCs are transforming society. They are in the home to stay, and 98% of American homes will be wired to the Internet in less than 10 years. There will be 1 billion cell phones worldwide by 2003, and half of these will have web access.”

B2B (business to business) will continue to grow. So will B2C (business to consumer). “By 2010, 31% of all retail consumption will be online,” he stated.

“Anything which can be digitized will be digitized. Eliminate paper,” he recommended. “It’s one of the big choke points in any company.”

He continued, “We have to go way beyond design-build,” partnering to make projects work. Plus, he said, “There are far too many different standards.”

We’re moving into a cyberspace — or “locationless” — world. Being close to the customer will depend on your e-relationship. Finally, Feather told the audience to focus on the growth markets, which include the high-tech industry, leisure market, and airports.

Bill Toal, chief economist, Portland Cement Association, provided an overall U.S. construction outlook.

“Is a volatile economy a thing of the past?” he asked. There have been a number of economic cycles in U.S. history. From 1991 to 2000, though, we had one cycle, he pointed out.

Toal is forecasting 4.9% economic growth for this year, with growth next year of 3% to 3.5%.

Output per worker is on a rise of 4% to 5%, with unit labor costs headed down. However, population trends to 2005 show that the 25- to 44-year old market is shrinking, going down 4.4%. This will affect the housing market, he said.

In residential construction, most of the strength has been in single-family housing, noted Toal. It is now slipping. Nonresidential construction should be up about 4% to 4.5% in 2000, but flat next year.

Total inflation-adjusted construction activity is expected to rise 1.3% in 2000, decline 1.9% in 2001, then rise another 1.3% in 2002, he stated. Hot spots in construction will be: multifamily, school, airports, office, and institutional. Regionally, he reported, the top areas will be: California, the Pacific Northwest, the Southeast, and Texas.



Sidebar: Labor Shortage Is Really a Skills Shortage

Addressing the labor shortage in the construction industry at the 5th Annual North American Construction Forecast hosted by the CMD Group, William Rodgers III, chief economist, U.S. Department of Labor (DOL), related, “Instead of a worker shortage, we think there’s a skills shortage.”

Over the next five years, Rodgers said, “We are projecting that the demand for skills will continue to grow.” The unemployment rate is near a 30-year low, while the employment rates of all groups are at or near record highs.

Rodgers believes that skills shortages exist in several industries, including construction. This has led the DOL to look at the “untapped pool of workers not being utilized.” Describing this untapped pool, Rodgers said it includes 13 million people:

  • Six million unemployed who are looking for work;
  • Four million not actively looking, but who want to work; and
  • Three million employed part-time, but who would like to work full-time.
  • Most of these potential employees are minorities, with 8.7 million of them 25 years of age or older.

    Business-led initiatives to add workers include increasing the number of women. A DOL initiative is using the Internet to connect workers to jobs through a job bank.

    In summary, said Rodgers, the DOL suggests creating educational and training opportunities, lowering the costs of the job search on both sides, and “removing barriers that prohibit participation.”

    Publication date: 12/18/2000

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