2002 Construction Economy Predictions

The start of a new year often makes people wonder what lies ahead.
When it comes to the global economy no one can ever forecast what
will definitely happen—it’s like the experiment where monkeys and
economists with master’s degrees tried to pick winning stocks, and
the monkeys did at least as well as the seasoned analysts.

But we have to rely on industry experts to give us some kind of basis,
some kind of roadmap to help us plan ahead Therefore, in this article
we present information presented at CMD’s 6th annual North
American Construction Forecast conference and from F.W. Dodge’s
Outlook 2002 Executive Conference.

The CMD conference was held at the National Press Club in Washington,
D. C., on Oct. 16. The event was attended by more than 300
construction industry Leaders. CMD is a worldwide provider of construction information products and services designed to advance the
businesses of its customers with timely, accurate and actionable project, product and cost data. CMD collects, adds value to and distributes construction industry information through print and online
references and resources for architects, engineers, contractors, manufacturers
and other professionals in the construction industry. Founded
in 1975, CMD is an active participant in the construction industry,
partnering with its customers and industry associations to meet
customer information needs. CMD is a division of Cahners Business
Information, a member of the Reed Elsevier plc group.

That outlook presented at F.W. Dodge’s Outlook 2002 Executive Conference
was given by Robert Murray, vice president ofeconomic affairs
for the Construction Information Group, a division of the McGraw-Hill
Companies. That conference was held Oct. 30 at the Capital
Hilton in Washington, D. C.

Murray is the author of the F.W. Dodge Construction Outlook and
also coordinates the five-year industry forecast, the Construction Market Forecasting Service, which analyzes national and regional trends
for building products.

F.W. Dodge, a division of The McGraw-Hill Companies, is the construction
industry’s project marketplace and a source of construction
information since 1891. F.W. Dodge is part of the Construction
Information Group that includes Sweet’s, Engineering News-Record,
Design-Build, Architectural Record and www.construction.com.

That said let’s get down to business. Read on, and plan ahead for
continued success in 2002.

CMD Conference: North American
Construction Activity Expected to Decline 6.3 Percent in 2002 but Is
Predicted to Recover by 2003

Construction industry analysts and economic forecasters at
CMD’s 6th annual North American Construction Forecast conference
delivered bad and good news: the rest of 2001 and much
of 2002 will see declines in construction activity and the economy
in general. But most presenters also predicted quick recovery
by 2003.

According to Bill Toal, chief economist for the Portland Cement
Association, the U.S. construction industry can expect an over all
decline of 6.3 percent in activity next year due to the economic
downturn. Still, “by historical contrast, this would put construction
spending back to slightly above 1998 levels, which were
record levels of activity,” he said.

“We expect a 10 percent decline in private, nonresidential construction spending [in 2002] after a 5.4 percent drop [in
2001],” Toal said. On the residential side, increased unemployment
and stock market volatility will hit the consumer,
causing home sales to decline by 8.5 percent [in 2002] after
increasing by 1.2 percent [in 2001].

David Seiders, chief economist for the National Association of
Home Builders, agreed that the residential market has been hurt
and will continue to suffer in the immediate future. He pointed
out that industry sales are now about the same as they were
in the mid 1990s which is “not that bad … baby talk when
compared to the 1980s and early 1990s.”

Toal and Seiders said 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. Toal, Seiders and other construction industry analysts,
as well as experts from Canada and Mexico, shared their
outlook on the economic state of the nation and the construction
industry.

U.S. Construction Outlook

Toal attributed the decline in construction activity in part to a
“hole in the economy The economy was already weakening significantly
before the events of Sept. 11.” Forecasts have been revised
down further because of those events. For the overall economy,
Toal revised his spring forecast of 1.7 percent growth in economic
activity down to 1 percent growth for 2001. He revised
his overall economic growth rate predictions for 2002 to 1.8 percent,
down from his prior forecast of 2.7 percent.

In the construction industry, the hardest hit segment will be non-residential,
which 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,” Toal 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
had been predicted to rise to about 10 percent by the end of
2001, but we may see a greater rise in vacancies going into 2002.

The weakening in consumer confidence and increase in unemployment
have contributed to declines in residential building.
“Along with expected drops in consumer spending, home sales
will most likely fall,” Toal said. As a result, residential construction
will decline by 8.5 percent next year after finishing
this year with a 1.2 percent increase. 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.

Residential Construction Outlook

Seiders said NAHB adjusted its housing market index following
the Sept. 11 attacks. About 10 days after the attacks, housing production
fell by about 5 percent, he said. In a supplemental survey
of homebuilders, 56 percent of respondents said new home
sales had declined even further in the wake of the attacks. Figures
released a few hours after Seiders’ speech showed the NAHB
monthly index dropped 8 points from 56 to 48.

By the fall of 2000 the U.S. economic slowdown was in process,
but as Seiders pointed out, it began with the Federal Reserve tightening
monetary policy to purposely slow down a rapidly growing
economy in late 1999 and early 2000. In 1999, Seiders had
predicted the home building market would bottom out by mid
2001. In reality energy prices, the rapid retreat of the stock market,
the fall of the technology sector and other factors made the
rest of 2000 and much of 2001 a darker picture than originally
envisioned; the situation was exacerbated by the terrorist attacks.

The government has stepped in to provide stimuli that should
keep the slide in the home building market to a two-quarter
event, Seiders said. In the meantime, there are positive trends
occurring in the housing industry, he added. The upward trend
in house sizes and numbers of amenities continues to rise, so
housing values are on an upward trend, rising at about 5 percent
per year. Also, the stock market woes mean “the perception of
housing as an investment has strengthened,” Seiders said.

Retail/Industrial/Commercial Outlook

Glenn Mueller, professor, John Hopkins University Real Estate
Institute and managing director, Real Estate Investment Strategy,
Legg Mason, Inc., said there are two ways to look at how construction is faring: the physical realities of
demand and supply, and the financial
realities of where capital is flowing and
how it affects pricing. For example,
demand and supply in the office sector
has reached some equilibrium after several
decades of dramatic swings in what
was available and who wanted it, he said.
Those levels will remain somewhat balanced
though both sides will be lower for
the next year or so, he said.

As far as financing for the different segments,
the late 1980s saw a phase of false
price appreciation from too much financing
that peaked in the first quarter of
1996, then began to fluctuate widely
through the 1990s as the public markets
became more involved in financing real
estate. Originally, Mueller predicted the
physical cycle would be bottoming in
2001 then returning to a growth phase by
late 2002, but the Sept. 11 events may
push that into 2003 he said. Capital flows
will be affected by fear However, the lowest
interest rates in this lifetime have created
significant opportunities for investing
in real estate, he added.

The commercial real estate market is
weak in most regions of the country, a
fact Ray Owens, research officer and
senior economist for the Federal Reserve
Bank in Richmond, Va., largely attributes
to the anemic high technology sector.
Relative to a decade ago, however,
the commercial real estate sector appears
sound, according to Owens.

The early 1990s found the commercial
real estate sector in worse condition the
economy was in a recession just as the
commercial real estate market was feeling
the effects of a giant “overhang.” That
overhang was caused by a spate of commercial
building brought on by favorable
depreciation write-offs created by the
Economic Recovery Tax Act in 1981.
The incentives were removed in the Tax
Reform Act of 1986.

“The U.S. economy was dramatically
overbuilt at the same time balance sheets
were weakened,” Owens said. At the
tie, economists predicted it would take
10 to 15 years for the overhang to disappear,
but by the mid-1990s vacancy rates
fell below the 10 percent level for the first
time since 1984.

In the late 1990s the growing technology
work force needed more office space
about 20 million square feet were built
between 1998 and 2000. Then “the year
2000 party came to an end,” Owens said.
The stock market plunged, high technology
companies started to go belly up
and metropolitan areas again saw vacancy
rates climb into the double digits.

What happened in Northern Virginia
mirrors the rest of the country, according
to Owens. Between 3.5 and 5.5 million
square feet of space available for subleasing
hit the market between 2000 and
2001, and the area recorded its first negative
net absorption amount (500,000
square feet) in years during the first quarter
of 2001. Average office vacancy rates
reached 8 percent, which is lower than
current vacancies in some areas such as
the Mid-Southwest (16 percent), the
Southeast (14 percent) and the Midwest
(13 percent).

As a result of the Sept. 11 attacks, he said
the Washington, D.C./NorthernVirginia
corridor has seen the strongest rebound
as the Pentagon and other federal agencies
aggressively lease office space available
due to the dot-com meltdown. Across the
rest of the country, he said that the events
appeared to have weakened the sector further
but the weak period, “doesn’t appear
to be terribly long.”

A panel of design, construction and engineering
experts outlined the trends for the
built environment based on recent and
planned projects. Speed of delivery was
the most common theme the industry
panelists said was affecting the course of
their current construction projects.

Edward Friedrichs, FAIA, president and
CEO of Gensler, mentioned several
adaptive reuse projects of structures that
had not attained sufficient occupancy
rates, such as turning a large plant into a
mega-church.

Ray Messer, PE, president and chairman
of the board for Walter P. Moore, said
new business is coming in from many
areas of the country that need to build up
deteriorating infrastructure.

Pat Priest, CFO/managing director of
The Beck Group, noted that early signs
indicate changes in the basic design/engineer/
estimate/construct process. Instead
of acting in different “silos,” companies
are forming teams among its experts to
deliver projects quicker, with fewer prices
and at less cost.

Harold Adams, FAIA, chairman of
RTKL Associates, Inc., which just won a
contract to work on replacing parts of the
Pentagon, observed that while the rest of
the world is seeing slowdowns, China is
a hot market for his company. “We see
China as a big part of our future,” he said.

RTKL, a worldwide planning, architecture,
design and creative services organization,
“is tightening up ship” in expectation
of worsening conditions this year.
“We’re going into [2002] somewhat
scared,” Adams said. “We are still on budget,
but are prepared to be flexible because
of the uncertainties of the market.”

Stephen Fiskum of Hammel Green &
Abrahamson, as well as several panelists,
noted his company’s backlog is shrinking.
“Our backlog is down 80 percent from a
year ago,” he said. Competition is up as
evidenced by a recent preproposal meeting
where 70 firms showed up to get information.
Fiskum says one of today’s
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 expects to see staff
turnover plummet this year.

Several panelists foresee that training and
education, as well as technology and communication
within firms will be vital in
the coming years. “The most important
factor right now is a sharing of expert
knowledge across the firm,” Friedrichs
said. To accomplish that, his firm is highly networked-“Employees have the ability to get in touch with someone with the
knowledge they need, when they need it.”
The firm also created a series of educational
programs and has an active internship
program with a local university.

Sustainability and green building are
coming to the forefront, according to several
panelists. Friedrichs said the events of
Sept. 11 may accelerate that trend: “People
are now saying let’s look at what’s
important. If we’re going to build it, let’s
do it right.”

Outlook for Canada

While the Canadian overall economy is
following the U.S. in a downturn made
worse by the events of Sept. 11, there are
some bright spots ahead, according to
Alex Carrick, chief economist, CanaData.
One of those bright spots is the institutional
building market where several
segments of have hit seven year building
level highs.

The segments include hospitals, which
climbed in 2001 to more than $4.4 billion
in commitments to new projects for
2001; schools, which had more than $2.3
billion allocated for education related
projects in 2001; and senior homes,
which hit a high of $1.35 million and
hold promise for further growth.

Unfortunately, other sectors of the construction industry don’t look as bright.

The biggest drop in construction starts occurred in the industrial market, which fell almost 50 percent, from 23.5 million
square feet in 2000 to 12 million square
feet in 2001. A large part of the decrease
was due to events in the automobile industry
where a lo-year boom just ended and an anticipated three- or four-year decline began.

Other aspects of construction in Canada
are tracking closely to what is occurring
in the United States, and some of these
areas will most likely feel the effects of
decreased consumer and business confidence
that was exacerbated by the terrorist
attacks.

Commercial construction starts for 2001
are expected to be 45.5 million square
feet, slightly less than the 47.9 million of
2000. Carrick predicts starts will continue
falling to 42.5 million square feet in
2002, but rebound to 44.5 million by
2003. The probable effects on commercial
construction of the terrorist attacks
include more office building in the suburbs
rather than downtown skyscrapers;
lowered retail construction activity because
of consumer anxiety; and negative
impacts on the hotel industry. Conversely, the entertainment industry, including casinos and entertainment complexes, may flourish as people seek escape from
their worries.

Carrick said residential housing starts for
the year were fairly strong going into September
rising to 162,000 average units
per month from January to August as
compared to 153,000 starts for the same
period the year before. But, he predicted
that the year will end at about 157,000
housing starts per month and that in
2002, starts will fall to an average of
153,000 units. That number is much
closer to the year 2000 when starts were
just over 150,000.

It is anticipated that decreasing immigranon
levels will contribute to falling housing
needs and that Sept. 11 may lower
broad-based demand for commercial and
residential high-rise space. The residential
side will be further impacted by empty
nesters who choose to stay in their homes
longer rather than go to high-rise retirement
communities.

Outlook for Mexico

Mario Rodarte, chief economist for the
Center for Economic Studies for the Private
Sector, said the Mexican economy
is still growing and inflation levels are
lower than predicted. However, the construction
industry, which comprises 4.2
percent of the nation’s Gross Domestic
Product and employs 6.3 percent of the
work force, is not faring well under current
economic conditions and is expected
to decline modestly in 2001.

“. . . the real driver of the Mexican economy
is consumption,” Rodarte said,
“And consumption has fallen over the
year.” Mexican export trends follow U.S.
industrial production levels very closely
since the United States is Mexico’s main
market. Both Mexican exports and U.S.
production levels have fallen steadily
over the year, reaching negative levels in
March and April before falling even further. Retail sales have also fallen off in the country to an annual variation of about
-0.4 in the month of July.

Additionally, the current administration
faces a $9 billion dollar deficit. Since
much of the construction industry depends on public spending, as well as
investments from other countries including the United States, “this is not
good for the construction sector,” Rodarte said.

This year Mexico’s gross capital formation
saw a negative growth rate after years of positive growth. Fixed gross capital formation for the construction industry has fallen into negative numbers every month this year, and some of the construction related sectors have had an especially hard time. The pinewood industry, for example, fell 29.5 percent and the brick industry fell 17.2 percent.

F.W. Dodge’s Outlook 2002 Executive Conference:
Construction Industry Will Continue to Lose Momentum Through
Early 2002; Second Half Improvement Will Enable 2002 to Match
2001 Activity

Hesitant home-buyers, cautious real
estate investors, the weaker fiscal standing of state and local government and a
reduced demand for commercial space will pose the biggest challenges to the
construction industry during the first half of 2002.

But despite those issues, low interest
rates and the potential support of a federal
stimulus package should help construction activity improve during the
second half of 2002.

The result is that the value of new construction
starts for all of 2002 is projected
at $481.0 billion, just slightly
below the $481.4 estimated for 2001,
according to Robert Murray, vice president
of economic affairs for the Construction
Information Group, a division
of The McGraw-Hill Companies.

“Against the backdrop of a slowing
economy, construction has stayed reasonably
healthy for most of 2001,
helped by an offsetting pattern by project
type. It’s true that commercial building
has lost considerable momentum
this year, dampened by weaker business
conditions and tighter bank lending
standards. However, further expansion
was reported for public works, electric
power plants and schools. In addition,
single-family housing for much of 2001
has stayed strong-even factoring in a
fourth quarter decline, single-family
housing should be able to match 2000
levels,” Murray said.

For all of 2001, Dodge construction
starts are projected to climb 2
percent from 2000 levels (reaching
$481 billion). Although it is
only modest growth, 2001 will
have marked the 10th consecutive
year of expansion for construction
activity, when viewed
on a current dollar basis.

Prior to the terrorist attacks on
Sept. 11, the economy was already
teetering close to recession.
Economic growth during the
first quarter of 2001 was reported
at 1.3 percent, followed by
0.3 percent in the second quarter.

According to Murray, “the impact
of the events of Sept. 11 will
be to deepen and lengthen the
economic slowdown already
under way. Substantial layoff announcements
in travel related
industries join high technology
as depressed sectors of the economy.
The weak job market,
along with diminished confidence
levels, means that consumer
spending will not provide
the same support as in previous
years. However, the stage has
been set for the economy to
improve as 2002 proceeds, given
lower interest rates and the
fiscal push coming from the federal
government. This will also
have a positive impact on the
construction industry.”

Murray had the following to say
about the year ahead for specific
areas of the construction industry:

Single-family housing will retreat through
early 2002, as home sales and construction
are adversely affected by the weak
job market and diminished consumer
confidence.

When uncertainty eases, homebuyer demand
will be able to show a greater response
to low mortgage rates

The full year is projected at 1.175 million
units (F.W. Dodge), a 2 percent
decline from 2000, which translates into
no change in dollar terms.

Income properties will slide an additional
3 percent drop in dollar volume,
corresponding with a 5 percent drop in
square footage.

The steepest decline is projected for
hotels, while stores, warehouses and
offices will experience moderate retrenchment.
Apartment construction is the
income property type most likely to
avoid a decline, since it continues to be
viewed favorably as a target by the real
estate finance community.

Institutional building will advance 3
percent, due to further expansion for
schools combined with a moderate increase
for healthcare facilities. However,
reduced contracting is expected for
courthouses, churches, amusement related
projects and airport terminals.

Manufacturing building is expected to
edge up 2 percent, as its extended four-year
decline reaches bottom in early
2002. This category will still be extremely
weak by historical standards, down 35
percent in dollar terms from its most
recent peak in 1997.