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New Construction Stars in December Recede 2 Percent

The value of new construction starts slipped 2 percent in December to a seasonally adjusted annual rate of $575.2 billion, reports McGraw-Hill Construction, a division of The McGraw-Hill Companies. Both nonresidential building and housing settled back from their November pace, while nonbuilding construction held steady. For the full year 2004, total construction climbed 10 percent to $582.9 billion. This follows a 5 percent gain in 2003, and marks the largest annual increase since the 10 percent rise back in 1999.

The December statistics produced a 173 reading for the Dodge Index, down from a revised 176 for November. For all of 2004, the Dodge Index averaged 176, compared to 160 for 2003.

“The year 2004 was led by further growth for single-family housing, as low mortgage rates continued to support strong homebuyer demand,” stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “At the same time, the emerging expansion for commercial building became more broadbased during 2004, including the first increase for office construction after the steep declines in the prior three years. The institutional building sector in 2004 was mixed—renewed growth for healthcare facilities, but school construction was constrained by tight fiscal conditions for states and localities. Public works was also mixed; environmental projects rebounded after a weak 2003, but highway construction was essentially flat, and bridge construction weakened. Going forward in 2005, it’s expected that single-family housing will ease back from its record 2004 pace, and the most likely candidate to pick up some of the slack appears to be commercial building.”

Nonresidential building in December dropped 2 percent. Reduced contracting was shown by most of the commercial structure types, with stores down 8 percent; offices down 29 percent; and hotels down 55 percent. Manufacturing-related construction was also lower in December, sliding 34 percent; and declines were reported for school construction, down 8 percent; and amusement-related projects, down 18 percent.

On the plus side, December showed warehouses bouncing back 92 percent, boosted by the start of two large distribution center projects located in California ($80 million) and South Carolina ($60 million). Also showing growth in December were transportation terminals, up 10 percent; healthcare facilities, up 19 percent; churches, up 45 percent; and public buildings, up 119 percent. The public building category was helped by the start of a $78 million detention facility in California and a $70 million military facility in Texas.

For 2004 as a whole, nonresidential building grew 3 percent to $160.0 billion. This marked a change from 2003, when nonresidential building was flat in dollar terms, and the 2001–2002 period when nonresidential building fell a combined 11 percent.

In 2004, the commercial structure types provided much of the upward impetus. Store construction increased 5 percent, supported by the ongoing expansion of major retailers such as Wal-Mart and Home Depot, plus the trend toward open-air shopping centers. Hotel construction advanced 7 percent, buoyed by a number of large hotel/casino projects in Las Vegas, Nev., as well as the start of several major convention center–related hotels. Warehouses increased 10 percent, and office construction climbed 15 percent as this structure type turned the corner following the 43 percent decline in dollar volume reported during the 2001–2003 period.

The metropolitan area with the highest dollar amount of new office starts in 2004 was New York City, surging 276 percent with the boost coming from groundbreaking for such major projects as the Freedom Tower, One Bryant Park and the New York Times headquarters. Growth for office construction was also reported in such cities as Atlanta, Chicago, Dallas, Los Angeles and Phoenix.

Murray indicated, “The level of office construction remains substantially below what took place in the late 1990s, but this structure type’s sharp correction is now over, and the modest improvement in market fundamentals should enable construction to strengthen some more during 2005.”

The 2004 nonresidential total included a 6 percent increase for manufacturing-related construction, consistent with the greater activity now being experienced by the nation’s industrial base. The institutional structure types in 2004 showed growth for public buildings, up 4 percent; amusement-related projects, up 7 percent; and healthcare facilities, up 9 percent. However, school construction fell 7 percent for the year, continuing to slide back from its peak 2001 amount, as fiscal pressures are still having a dampening impact. Churches and transportation terminals also registered declines for the full year 2004, as each dropped 2 percent.

Residential building in December retreated 2 percent from the previous month, with single-family housing slipping 3 percent while multifamily housing increased 5 percent. For all of 2004, residential building soared 16 percent to $328.5 billion, as both the single- and multifamily sides of the housing market posted 16 percent dollar volume gains.

The low cost of financing was once again the big plus for single-family housing—after edging up to 6.3 percent during the spring, the 30-year fixed mortgage rate stabilized below 6 percent during the latter half of 2004. The full year average for this series, at 5.8 percent, was unchanged from 2003. With strong homebuyer demand, single-family housing in 2004 achieved a new high in dollar terms ($281.1 billion) and the number of starts (1.549 million units).

Multifamily housing in 2004 was aided by downtown revitalization efforts and the growing amount of condominium development, with activity especially strong in the nation’s top five markets ranked by dollar volume: New York City, up 51 percent; Chicago, up 12 percent; Boston, up 34 percent; Miami, up 45 percent; and Washington D.C., up 19 percent.

On a regional basis, residential building in 2004 performed as follows: the South Atlantic, up 19 percent; the Northeast, up 18 percent; the West, up 17 percent; the South Central, up 16 percent; and the Midwest, up 9 percent.

The annual statistics for total construction in 2004 showed growth in all five of the nation’s major regions. Leading the way was the South Atlantic, up 13 percent; followed by the West, up 12 percent; the Northeast, up 8 percent; and the South Central and Midwest, each up 7 percent.

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