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As the economy continues to struggle in North America, the construction industry remains one of its strongest sectors, according to presenters at Reed Construction Data's North American Construction Forecast Conference, held October 16 at the National Press Club in Washington, D.C. Ken Simonson, chief economist of Associated General Contractors, expects the next several months to be very uneven for construction. He stated that any construction related to consumer activity should remain strong and business-related construction will pick up gradually in 2003 if the economy continues to strengthen. However, according to Simonson, government-funded projects are likely to diminish once current jobs are completed. In addition to Simonson's forecast, other construction industry analysts and economists presented forecasts and trends for the individual sectors of the construction industry such as commercial real estate, residential construction, retail/office construction and the outlook for Canada and Mexico. Major Projects & Trends for 2003 A panel discussion was held at the conference that looked at major projects and trends for the coming year. Several issues were brought up by the panelists, with homeland security, and higher education markets as the most common theme of the discussion. The panel consisted of Hugh Hardy, FAIA, founding partner, Hardy Holzman Pfeiffer; Henry Mann, chairman/CEO, Perkins and Will; Leo A. Daly, III, chairman/CEO, Leo A. Daly; Scott Simpson, co-chairman, The Design Futures Council; Rod Kruse, Partner, Herbert, Lewis, Kruse and Blunck; and William Geuerin, deputy chief architect, U.S. General Services Administration. Construction Activity Stagnant, but Improvement is Promised Although Simonson reported an unfavorable outlook for government and private non-residential sectors in the short term, he expects overall construction activity to show gradual improvement. There are two key indicators, according to Simonson, of construction industry health: employment and value put in place. He said both factors are suggesting relative stagnation in construction nationally. The Bureau of Labor Statistics reported that seasonally adjusted construction employment nationwide in September had changed little since April and was down almost 2 percent from September 2001. Also, the Census Bureau reported nationwide construction that was in place for the first eight months of 2002 was virtually unchanged from the same period of 2001. Single-family home construction has received a significant amount of attention in the residential sector, but multifamily is the growth champion, up 13 percent, verses three percent for single-family. "It's doubtful that this can be sustained, " Simonson said. "The single family market may be able to remain on its near-record plateau if interest and unemployment rates stay low, but housing sales are drawing tenants out of multifamily housing and this construction seems poised to fall." Although the public sector has had the best August-to-August comparisons, it has the bleakest outlook according to Simonson. When tax receipts and bond referendums were coming in, many contactors were busy with projects authorized years ago. Widespread cutbacks are expected in every category of spending funded at the state level. The only levels of government that have favorable numbers are the local jurisdictions that have benefitted from rising property values. "Because of the long lag in public projects, once downturn in construction is underway," Simonson said, "it may take two years or more to return to present levels." The mixed picture is within the broad private nonresidential segment. The largest published subsector is retail building construction, which was at a seasonally adjusted annual rate of $52 billion in August, down by 25 percent from August 2001. However, given the jump in consumer spending on homes, autos and health-related items, building supply store construction is up by 16 percent; auto sales facilities by 20 percent; drug stores by 30 percent; and healthcare by 20 percent, according to Simonson. Commercial Real Estate Market Projected to Improve Prospects for improvement are in place for the commercial real estate market, said Ray Owens, vice president and senior economist for the Federal Reserve Bank. In the late 1990s, information technology companies were the single largest absorbers of office space. The growing technology workforce led some firms to contract for more space than they initially needed. Between 1998 and 2000, approximately 20 million square feet of office space was constructed. Things changed in March of 2000 with sharp corrections in the stock market. It appeared that those corrections weren't going to be sharply reversed. This changed the attitudes in the economy. Venture capitalists started to look closely at projects they were investing in and technology tenants in commercial buildings began to realize that without prospects for growth on the horizon, further funding would be in shorter supply. Many began to adjust their space needs. As a result, vacancy rates began to rise. The good news according to Owens is that net absorption, which had been negative at about 30 million square feet, is now working its way back. One of the signs of improvement is a decrease in class "A' space, which is the best quality commercial space. During this recent recession, the commercial real estate market deteriorated less sharply compared to steeper deterioration experienced during the previous 1990-91 recession. Vacancy rates are also moving up, but they are still several percent below what was seen during the early 1990s. "Even with a sluggish economic recovery, prospects for improvement in the commercial market appear in place," Owens said. "We're seeing improvement in absorption of class 'A' space and cosntruction adjusted rather promptly. In turn there is still some coming on line, but not nearly the amount we saw a decade ago." Cycles Clash in Real Estate Outlook Two types of real estate cycles determine how a particular industry is performing: the physical market cycle of demand and supply, and the financial market cycle which is capital flowing to real estate to buy existing buildings as well as to construct new ones, explained Glenn Mueller, managing director, Real Estate Investment Strategy, Legg Mason, Inc. and professor at Johns Hopkins Univerity Real Estate Institute. Today, occupancy and rental rates are sliding while at the same time, prices are increasing because the capital markets are concerned about the stock and bond markets. Therefore, they are looking to real estate as a safe haven, which presents a unique time for the economy at the moment. "The demand and supply cycle is local in nature," he said. "Different cities in the United States are at different points in their cycles." For example, in the office market cycle analysis, Jacksonville, Kansas City, Minneapolis, Richmond and a host of other metropolitan areas are in the recovery stage of their cycle. These cities are experiencing decreasing vacancies and no new construction. Miami, Houston, Cleveland and Portland are in the recession stage meaning few construction starts, but many project completions. On the demand side, population growth at a rate of 2.4 million people each year for the next decade will keep demand rising for all property types, Mueller said. On the supply side, construction labor has been difficult to find. But Mueller said the situation was improving. Meanwhile, materials costs are increasing and the nation's infrastructures have not been expanded, which restricts new approvals and thus new construction. LASN predicted last year that the industrial construction sector would see steady growth through 2004 with nearly $44 billion in office construction alone. New Year Promises Solid Housing Sector Despite the recession of 2001, the housing sector held steady, doing remarkably well in 2002, according to David Seiders, chief economist for the National Association of Home Builders. Last year's residential forecast contained a great deal of uncertainty and caution due to the events of September 11. But looking back to the fourth quarter of last year, GDP and housing numbers, sales and starts came through the entire episode in very good condition. "Consumers have been the real bulwark, because spending has been very well maintained," Seiders said. "Housing has done quite well. It didn't give way to recession and it is imperative that we have growth out of other sectors of the economy, such as corporate and capital investments. These and other non-residential sectors will have to kick in at the first half of 2003." Key to the overall outlook of the economy is home price increases, equity generation and consumer extraction of equity, which is supporting consumer spending. One of the reasons the housing markets have done so well through the recession has been because of excellent inventory balance throughout. Unlike other expansion periods, homebuilders didn't overbuild the market so they wouldn't be left with heavy inventory if the economy were to give way. But Seiders cautions to not look to housing to be a growth engine because it is moving sideways. The multifamily housing sector is experiencing a mild setback due to the strength of single-family homes. The most recent vacancy rate for rental properties is about 9 percent nationally, but a little over 10 percent in a few regions of the U.S. This will take a modest toll on production numbers going forward. Remodeling is a large piece of construction activity. So large in fact, that it is at 28 percent and growing at a rate of 9 percent so far this year. The equity generation and extraction of it all support this market. Canadian Construction Strong Citing forecasting information provided by CanaData, Reed Construction Data's Canadian research organization, Roger Grant, Vice President and Product Manager for RS Means, told attendees that Canada is believed to be doing better than the U.S. from a GDP growth standpoint and is expected to continue this trend into 2003. While housing is remarkably strong, non-residential building is off, led by the commercial sector, with engineering work relatively stable. The housing market is at a 10-year high with close to 200,000 starts, well above a more sustainable rate of 160,000. More than 385,000 jobs have been added through August, well ahead of average year growth of 200,000. Looking ahead to 2003, the trend for all but housing is pinted upward. Based on the strength of the Canadian economy, the overall outlook for Canadian construction looks solid for 2003 barring any significant downward changes in the U.S. or world economies. Mexican Construction Projected to Grow Grant also reported that housing in Mexico is a major influence on the market. More than 50 percent of the total construction value is housing, which is a larger percentage of construction than in the United States or Canada. Economy housing is moving up 8-12 percent over a two year period and is projected to grow steadily in 2003. Industrial construction is also projected to grow this year by about 8 percent in tracked projects moving to 11 percent in 2003 on the strength of trade driven manufacturing. In the non-residential sector, the office vacancy rate for 2002 in Mexico City is 15.4 percent, holding down office construction. A 70-year ban on the construction of casinos may soon be lifted, which will create opportunity in resort areas.

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October 17, 2019, 6:28 am PDT

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