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North American Construction Forecast

Sept. 11 and Green Building Are Hot Topics

It was a mix of good news and bad news at CMD's 6th Annual North American Construction Forecast conference, held Oct. 16 at the National Press Club in Washington, D.C.

More than 300 construction industry leaders heard from industry analysts and economic forecasters, who predicted that the rest of 2001 and much of 2002 will see declines in construction activity and the economy in general.

According to Bill Toal, chief economist for the Portland Cement Association, the U.S. construction industry can expect an overall decline of 6.3 percent in activity next year due to the economic downturn. He added that "by historical contrast this would put construction spending back to slightly above 1998 levels, which were record levels of activity."

David Seiders, chief economist for the National Association of Home Builders (NAHB) said that residential construction has been hurt and will continue to suffer in the immediate future.

Toal and Seiders agree that it won't take long for the construction industry to recover. Toal predicts the construction industry overall will see a 4.2 percent increase by 2003 and Seiders forecasts recovery for residential markets to begin as early as the first quarter of 2002.

Industry Leaders Predict Trends For 2002

Construction industry leaders discussed what they see as the major trends impacting business at the conference. Moderated by Jim Cramer of Greenway Consulting, the panel included Edward Friedrichs, FAIA, president and CEO of Gensler; Pat Priest, managing director/CFO of the Beck Group; Ray Messer, PE, president and chairman of the

board for Walter P. Moore; Harold Adams, FAIA, chairman

of RTKL; and Stephen Fiskum, COO of Hammel Green

and Abrahamson.

Speed of delivery was the most common theme the industry panelists said was affecting the course of their current construction projects. Clients are waiting until the last minute to build, then expecting rapid results.

Priest said that a re-evaluation of the design-engineer-estimate-construct process may be happening. She said that instead of operating in different silos, the members of the construction team, such as the designer and the estimators are working together, sometimes in the same facility, to create efficiencies, as well as "better design, quicker turnaround, better prices, and fewer surprises."

Other trends mentioned included:

• The nation's deteriorating highway infrastructure is

creating job opportunities for some construction

companies, according to Mercer. In particular, the North

American Free Trade Agreement (NAFTA) has had a huge

impact on the need for better infrastructure in Texas.

• Adams pointed out that while the rest of the world is

experiencing slowdowns in construction activity, China is

a hot market for his company. "We see China as a big

part of our future," he said.

• RTKL, like many firms is "tightening up ship" in

expectation of worsening conditions next year. "We're

going into next year somewhat scared," Adams said. "We

are still on budget, but are prepared to be flexible because

of the uncertainties of the market." RTKL has just received

a contract to help re-build parts of the Pentagon.

• Fiskum, as well as several of the panelists, noted his

company's backlog is shrinking-down 80 percent from a

year ago. Fiskum said that one of the greatest challenges

is to keep expenses down "and to broaden the existing

pond" instead of looking for new places to invest in the

marketplace. He also expects staff turnover will plummet

this year.

• "The most important factor right now is a sharing of expert

knowledge across the firm," Friedrichs said. "Employees

have the ability to get in touch with someone with the

knowledge they need when they need it."

• "Our firm has a strong commitment to innovation" Priest

said. "Until now, technology has had a superficial effect on

our business. But now we are close to a highly intelligent

system that can provide real time design and estimating."

• Sustainability and green building are coming to the forefront,

according to several panelists. Friedrichs said many design firms

have been slipping green building and sustainable concepts

quietly into design for years. He said that the events of Sept. 11

may accelerate that process. "People are now saying 'let's look at

what's important. If we're going to build it, let's do it right.'"

Bill Toal, Chief Economist for the Portland Cement Association Downgrades Expectations

Industry experts at the CMD Group’s 6th Annual North American Construction Forecast Conference said that the United States construction industry can expect an overall decline of 6.3 percent in activity in 2002. Industry experts did say that the construction industry will see a 4.2 percent increase by 2003 and residential markets will begin to see recovery as early as the first quarter of 2002.

Toal downgraded his expectations for this year and early next year because of the events of Sept. 11, but he expects most sectors of the U.S. economy, including construction, to recover by 2003.

He said overall construction activity will decline 6.3 percent in 2002, a figure he revised from a forecast made last spring in which he predicted 0.1 percent growth. Still, 2001 will end with an overall increase of about 1 percent in construction activity, and by 2003, Toal said construction activity will rebound sufficiently to achieve an increase of 3.8 percent.

"Confidence levels will take a year to recover so we'll have a hole in the overall economy [for 2002]," Toal said. "But by the latter part of next year, we'll be out of the hole."

Toal said that the hardest hit segment will be nonresidential construction, which he says will see an overall decrease of 5.4 percent this year. Next year, that sector will decline by 10 percent, but it should begin recovering by the end of 2002 and experience a 3.5 percent increase in 2003. "The weaker areas of nonresidential construction are hotels, industrial, office and retail," he said.

The technology sectors, which fell about 20 percent in growth in the first two quarters of 2001, will hold down the office markets. Office vacancies, for example, had been predicted to rise to about 10 percent by the end of 2001, but there may be a greater rise in vacancies going into next year, Toal added.

The weakening in consumer confidence and increase in unemployment have contributed to declines in residential building. As a result, residential construction will decline by 8.5 percent in 2002, after finishing 2001 with a 1.2 percent increase, according to Toal. He added that the sector should recover sufficiently by 2003 to see a 5.8 percent growth rate. Housing starts will be at about 1.6 million for 2001 following 1.93 million starts in 2000. Next year, the residential markets will have about 1.485 million housing starts.

Public construction, the "silver lining" of the construction industry, as Toal says, may show some signs of weakening next year. The public sector saw 10.3 percent growth this year, however, states are beginning to see tax revenues lower than expected for the year and are cutting back on programs such as highway construction.

"Iowa just cut $3 million out of its highway budget," Toal said. "We now expect a 0.5 percent increase in public construction and a 2.0 percent increase in highway construction." He said that California is looking at cuts of 10 to 20 percent. By 2003, public construction will experience a 1.2 percent increase and highway construction will grow 1.5 percent.

David Seiders of the National Association of Homebuilders Predicts Temporary Dip in Home Buying

LCM predicted in last year’s Forecast issue that activity in residential markets would increase with spending on residential improvements at more than $73 billion, and housing starts going into 2003 rising to a level of 1.56 million. LCM also predicted that much of the development industry would see a downturn through the first quarter of 2002 followed by an increase almost industry wide into 2003 and 2004 total housing starts reaching over 1.6 million in 2004.

Seiders is forecasting only a temporary dip in home buying and building activity in the wake of Sept. 11. His organization has surveyed its members several times since the attacks. A telephone poll the weekend following the events "revealed that the industry was holding up amazingly well; people were going ahead with signings," Seiders said.

A mail survey conducted several weeks later, showed that the outlook was increasingly gloomy. Thirty five percent of builders said their sales were off by 10 percent, and 22 percent of respondents said sales were off 5 to 10 percent. The main reason in both was the loss in consumer confidence. Two thirds of respondents also said traffic through potential properties has decreased and 20 percent said contract cancellations were up to some degree.

By early October, the NAHB monthly Housing Market Index survey revealed a drop of 8 points from 56 to 48. An accompanying supplement showed that 56 percent of builders polled said new home sales had declined in the wake of the terrorist attacks.

"If it pans out the way we have mapped, we'll see a brief and mild setback," Seiders said. "That will be followed by a slow recovery that will begin as early as next year." He added that the government and legislators have stepped in to provide stimuli that should keep the slide in the home building market to a two-quarter event.

Seiders did say that there are some positive trends occurring in the housing industry, which include the upward trend in house sizes and numbers of amenities, which increases the value of homes at an upward trend of 5 percent a year. As a result of stock market woes, "the perception of housing as an investment has strengthened in the last year," Seiders said.

Glen Mueller of Johns Hopkins University Says It’s all Cyclical When It Comes to the Construction Industry

Physical and financial cycles will dictate how well the construction industry does according to Glenn Mueller, Ph.D., professor, Johns Hopkins University Real Estate Institute and Real Estate Investment Strategist for Legg Mason, Inc.

The demand and supply cycle is local in nature, Mueller said, and different cities in the United States are at different points in their cycles. For example, in the office market cycle analyses, Washington, D.C., San Diego, Los Angeles, and parts of New York, as well as a host of other metropolitan areas, are in the "hyper supply" stage of their cycle--they are experiencing increasing vacancies, but new construction is still occurring. Dallas, Jacksonville, Tampa, and Salt Lake City, however, have bottomed out--they have low or negative demand growth and construction starts have greatly slowed, but completions are still occurring. They have actually entered a recession stage in their office market cycle, according to Mueller.

In the industrial market, none of the nation's major cities had yet entered the recession stage at the end of the second quarter. But, in the hotel market, most are moving toward that stage and some markets like Charlotte, Cleveland, Indianapolis, Philadelphia, Phoenix, and Portland, have already entered it.

On the demand side of things, population growth at a rate of about 2.4 million people every year for the next decade will keep demand rising for all property types, Mueller said. Baby boomers are at the highest income earning years of their lives; thus a second home market wave is occurring among the most populous age group, which is 40- to 55-year-olds, while their echo boom children are just entering the job and apartment rental markets.

As far as supply, construction labor has been the hardest to find in 2000, Mueller said, but that situation is easing rapidly this year. Meanwhile, materials costs are increasing and the nation's infrastructure have not been expanded, which restricts new approvals and thus new construction.

Mueller predicts that demand growth will be slower, and once supply growth slows to match it, equilibrium will return. For most of the construction industry, Mueller said a growth phase should begin in either late 2002 or early 2003. As far as capital markets, fear will play a role, but how great a role will be dependent on how long the fear lasts. He also predicted that public market real estate debt will be more acceptable to people and that Real Estate Investment Trusts will play an increasing role in the real estate capital markets.

Edward Feiner, Chief Architect of the U.S. General Services Administration Forecast More Green Building

Population growth at a rate of about 2.4 million people-per-year for the next decade will keep demand rising for all property types. Last year LCM predicted that multi family and single family housing construction will see a slight dip in 2002, with things picking up in 2003 with an 8 percent increase. Followed by a 2 percent increase in 2004.

"The federal government's Office of Architecture has come a long way from the 1960s when its designers studied the many ways to build a box," joked Edward Feiner, chief architect of the U.S. General Services Administration (GSA) at CMD's annual conference.

Feiner said that today the government considers itself a reflection of the nation: its projects are designed to be aesthetically pleasing, but also environmentally friendly, to protect its occupants against today's dangers, and to last for centuries.

A large percentage of the government's projects involve historical buildings, Feiner said. Of the 150 million square feet of leased facilities the government operates, 40 percent are eligible for listing in the National Historic Register.

Feiner also reported that many of the current federal buildings are also receiving face lifts. He said that over 100 million square feet of buildings completed in the 1960s and 1970s are being retrofitted and are being made more aesthetically pleasing.

"We will not be scared out of downtowns," Feiner said in reference to the Sept. 11 attacks. He said many federal buildings are integrating new security enhancements and border stations will be a major part of that effort.

Feiner also added that the federal government is following its own mandate to make buildings greener. By 2002, all new federal buildings built must be at least a "silver" ranking in the Environmental Protection Agency's Leadership in Energy and Environmental Design Standards (LEEDS) program.

With an adjusting stock market throughout most of 2001, low interest rates, and the success of America’s involvement in the Middle East, home buying is seen as a much more stable investment going into 2002, possibly reversing what many figured would be a slow year.

CMD's annual North American Construction Forecast conference assembles leading economists and analysts in every area of construction - office, retail, industrial, residential, and infrastructure - who offer forecasts of coming year construction throughout North America and by specific region.


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