Total construction to rise 5.1% in 2011
Spending for U.S. nonresidential building projects plunged nearly 23% in 2010, even as construction spending for heavy/engineering and residential projects dropped less than 2%. Nonresidential’s decline pushed total 2010 construction spending down 10%. The fourth consecutive annual decline brought the level of total construction spending to 30% below the pre-recession peak. Construction spending will be rising from the end of 2010 through 2011 and for several years beyond. The construction recovery comes an unusually long 18 months after recovery began in the overall economy and will be relatively slow.
Total U.S. construction spending will increase 5.1% in 2011. The gain from the end of 2010 to the end of 2011 will be 10%. The biggest annual gain in 2011 will be 10% for new residential construction, far above the 2-3% gains in all other construction sectors.
The delayed and slow construction recovery is due to both the subpar economic recovery and the unique restraints in the construction market, notably the collapse of the highway and housing finance systems (with no replacement in sight for either), a large surplus of residential space, and the weakened financial condition of developers and homebuyers.
Contractors and their suppliers will begin 2011 in a recession-cost environment. Labor is abundant, with annual wage gains still in the 0.0-1.0% range. Credit rates are extremely low but cautious loan approval standards exclude a relatively large share of loan applicants from the capital market. Costs are steady to slightly down for construction materials priced in the U.S. market, such as lumber and concrete, but erratically rising at a 5% or more annual pace for materials priced in international markets, such as metals, plastics, and energy. In order to get work contractors will still set their margins below the bottom of the usual range, and new projects will continue to draw far more than the usual number of bids.
The economic environment for contractors will improve in 2011. But it will continue to worsen early in the year for many types of public work and in the most depressed markets along the southern border and in the Rocky Mountain states. Some improvement will be clearly noticeable by the summer, with that pace accelerating late in the year. Credit rates will be rising but still very low by mid-year. The improved environment will firm materials pricing first before some contractors are able to raise bid prices. By the end of 2011, the materials price inflation trend will be back in the 5-6% annual increase range due to relatively stronger economic growth in the rest of the world as well as the 10% pickup in U.S. construction spending over the previous 12 months.
U.S. GDP growth will move from the 2% pace during most of 2010 to a 2.5-3.0% pace in 2011. This is unusually slow at the mid-point of an economic recovery: 4% or more is typical. Subpar economic growth has a magnified impact on all capital goods industries, including construction. Economic growth will be restrained by the lingering credit problems that began late in 2008 and investor and consumer uncertainty after the massive changes in operating rules made in Washington in the last two years. Note that the details of many of the changes are not yet known, and the results of the November election may revise or rescind some of the changes. Uncertainty always means caution and delayed spending. Beyond 2011, GDP growth will again be above 3.0%, permitting a quickening of the construction recovery.
Construction spending for nonresidential buildings will increase 3.0% in 2011 and 10% from the end of 2010 to the end of 2011. The gain will jump to well over 10% in 2012. For developer-financed projects the turnaround will be dramatic. Spending will rise 2% in 2011 after two years of 30% declines. This market will be expanding at a 15% annual pace by the end of 2011. The steep decline in project starts has already ended. Architects are already reporting rising design activity.
Spending for institutional buildings will rise 4.2% in 2011, mostly for nonprofit and private projects; spending on public buildings will not improve and may slip slightly under pressure from ebbing stimulus funds and cuts in state and local budgets after rainy day funds have been depleted. State taxes began rising in spring 2010 but remain 15% below the pre-recession level.
Housing starts will rise 24% in 2011 but only to about half of the underlying demographic demand trend. Nonetheless, this will generate the usual associated site and utility work as the development of new residential communities resumes, especially in the South and West. Note that new homes will be up to 10% smaller and on smaller lots than in pre-recession developments.
Heavy construction spending, as usually happens, slowed but did not decline while the overall economy was in recession. Then the usual drop in heavy construction activity early in the recovery period was unusually slim because of the massive amount of federal spending in the stimulus plan and a variety of smaller initiatives, such as Build America Bonds. Nominal dollar heavy construction spending is currently about the same as two years ago. Only a 5-6% gain in nominal dollar spending is expected in the next two years but rising project costs will account for more than all of this gain. The price of stimulus funding in 2009-10 is no growth in 2011-12 when federal emergency funding ebbs.
Three heavy sectors will see modest spending gains in 2011 while the remaining three will see no change or small declines. The strongest sectors will be water and sewer (+7.8%), highways and bridges (+6.7%), and communications (+3.7%). The water and sewer gain is due to delayed stimulus funding and the residential market improvement. The highway gain is due to bringing private funds into the market. The weak sectors will be power (-2.8%), conservation (-1.9%), and transportation facilities (+0.2%). Power always declines at this stage of the business cycle.
In spite of sluggish construction activity, domestic manufacturers of construction equipment have increased their sales nearly 60% in the last year. The added sales have been to rebuild rental fleets and supply the relatively strong manufacturing, utility, farming, mining and export markets. Production is still short of capacity so equipment prices are up only 1.1% in the last year. Ahead, the added demand for equipment use on job sites will modestly boost both equipment prices and rental rates by mid-2011. BD+C
Related Stories
| Jan 19, 2011
New Fort Hood hospital will replace aging medical center
The Army Corps of Engineers selected London-based Balfour Beatty and St. Louis-based McCarthy to provide design-build services for the Fort Hood Replacement Hospital in Texas, a $503 million, 944,000-sf complex partially funded by the American Recovery and Reinvestment Act. The firm plans to use BIM for the project, which will include outpatient clinics, an ambulance garage, a central utility plant, and three parking structures. Texas firms HKS Architects and Wingler & Sharp will participate as design partners. The project seeks LEED Gold.
| Jan 19, 2011
Museum design integrates Greek history and architecture
Construction is under way in Chicago on the National Hellenic Museum, the nation’s first museum devoted to Greek history and culture. RTKL designed the 40,000-sf limestone and glass building to include such historic references as the covered walkway of classical architecture and the natural wood accents of Byzantine monasteries. The museum will include a research library and oral history center, plus a 3,600-sf rooftop terrace featuring three gardens. The project seeks LEED Silver.
| Jan 19, 2011
Architecture Billings Index jumped more than 2 points in December
On the heels of its highest mark since 2007, the Architecture Billings Index jumped more than two points in December. The American Institute of Architects reported the December ABI score was 54.2, up from a reading of 52.0 the previous month.
| Jan 19, 2011
Large-Scale Concrete Reconstruction Solid Thinking
Driven by both current economic conditions and sustainable building trends, Building Teams are looking more and more to retrofits and reconstruction as the most viable alternative to new construction. In that context, large-scale concrete restoration projects are playing an important role within this growing specialty.
| Jan 10, 2011
Architect Jean Nouvel designs an island near Paris
Abandoned by carmaker Renault almost 20 years ago, Seguin Island in Boulogne-Billancourt, France, is being renewed by architect Jean Nouvel. Plans for the 300,000-square-meter project includes a mix of culture, commerce, urban parks, and gardens, which officials hope will attract both Parisians and tourists.
| Jan 10, 2011
Michael J. Alter, president of The Alter Group: ‘There’s a significant pent-up demand for projects’
Michael J. Alter, president of The Alter Group, a national corporate real estate development firm headquartered in Skokie, Ill., on the growth of urban centers, project financing, and what clients are saying about sustainability.
| Jan 7, 2011
BIM on Target
By using BIM for the design of its new San Clemente, Calif., store, big-box retailer Target has been able to model the entire structural steel package, including joists, in 3D, chopping the timeline for shop drawings from as much as 10 weeks down to an ‘unheard of’ three-and-a-half weeks.
| Jan 7, 2011
How Building Teams Choose Roofing Systems
A roofing survey emailed to a representative sample of BD+C’s subscriber list revealed such key findings as: Respondents named metal (56%) and EPDM (50%) as the roofing systems they (or their firms) employed most in projects. Also, new construction and retrofits were fairly evenly split among respondents’ roofing-related projects over the last couple of years.
| Jan 7, 2011
Mixed-Use on Steroids
Mixed-use development has been one of the few bright spots in real estate in the last few years. Successful mixed-use projects are almost always located in dense urban or suburban areas, usually close to public transportation. It’s a sign of the times that the residential component tends to be rental rather than for-sale.
