Forecast 2010: Residential Rebounds While Other Sectors Struggle

A market rebound in 2010 is forecast, but with dried up backlogs and no immdiate projects in sight, contractors still face challenges.

By Bruce Buckley

After three years of declines, the construction market may be eyeing a rebound in 2010 thanks to a much improved residential sector, but for designers and contractors in other building sectors, it could be too soon to celebrate.

McGraw-Hill Construction is forecasting that total construction starts will climb 11% to $466.2 billion in 2010, following an estimated 25% decline in 2009.

After a 39% drop in construction between 2006 and 2009, an improving residential market and signs of strength in select public-sector markets such as transportation and infrastructure could spark an overall turnaround in 2010, says Bob Murray, vice president of economic affairs for McGraw-Hill Construction.

“This is not a booming market; it is just inching upward,” Murray says.

The main buoy for the industry is single-family housing, which could rise 30% from an estimated 430,000 units started in 2009 to 560,000 starts. That would be on par with 2008 when 549,000 units were started.

Murray says that even with the rebound, levels remain 65% below the mid-decade peak of the housing boom. Murray adds that his residential forecast hinges on continued low mortgage rates and the extension of first-time homebuyer tax credits.

advertisement

The outlook on multifamily housing remains mixed. Murray sees activity rising from 140,000 units started in 2009 to 160,000 units in 2010—a 14% rise. Although the sector could rebound, activity remains nearly three times below 2007 levels when 452,000 units were started.

Ed Sullivan, chief economist at the Portland Cement Association, is less optimistic. He predicts it will be 2011 before a comeback.

Although 2009 was challenging year, the worst is yet to come in nonresidential building sectors, analysts forecast. According to McGraw-Hill Construction estimates, the commercial and manufacturing sectors could continue to struggle next year with an estimated 6% drop in combined value of starts to $55.5 billion—nearly half the level seen in 2007.

Sullivan sees the market sliding even further, down 22% in 2010, and doesn’t expect a rebound until 2012.

Robert Murray

“If you look at vacancy rates, the job market, issues with credit—the fundamental markets will take a while to come back,” he says.

Murray estimates that office building starts will ease back another 3% in 2010 to $19.7 billion in starts, as employment remains weak and businesses curtail expansions.

As companies rein in travel expenses and consumers take fewer vacations, hotel construction is feeling the impact. Occupancies fell 57% in the first eight months of 2009 while revenue per available room dropped 18.3%, according to Smith Travel Research of Hendersonville, Tenn. Murray expects starts to decline by 9% to $4.5 billion in 2010.

Retail has been one of the biggest casualties of the economic crisis. After hitting an all-time high of 314 million sq ft in starts in 2007, Murray predicts only 95 million sq ft in 2010—the lowest level in nearly 50 years.

The one bright spot for retail is the rebound in residential, says Ken Simonson, chief economist with Associated General Contractors of America.

“New neighborhoods being built would create a demand for local retail,” he says. “It would be modest amounts. I wouldn’t expect any big shopping centers.”

The severe drop in demand for consumer goods hit the manufacturing sector hard. Murray says that capacity utilization rates plummeted from 78.8% in December 2007 to 65.1% in June 2009, curtailing the need for new space. Murray estimates a 14% drop in 2010 to $9.4 billion as capacity issues continue to hamper the sector.

Publicly funded projects represent a wild card for many analysts. Simonson says the impact of cautious consumer spending, high unemployment and drops in home values will be fully realized as tax revenues suffer in 2010.

“State and local budgets are continuing to shrink as tax receipts fall short,” and many government agencies reduced their budget projections in the second half of 2009, Simonson says.

Education is also suffering. Murray says that K-12 construction is likely to feel the pinch of lower property taxes, and higher-education projects are challenged to find funds because endowments dropped 20% in late 2008. McGraw-Hill Construction estimates that education buildings dropped 23% to 172 million sq ft in 2009 and expects the sector to continue its downward path in 2010 with 158 million sq ft of new starts.

While state and local governments tighten their belts, many federally funded projects are on better footing. Funding from the American Recovery and Reinvestment Act helped bolster highway construction starts in 2009. Total contracts by value for highways and bridges rose nearly $4.4 billion in 2009 to $57.3 billion.

And much of the stimulus has yet to hit the street. William R. Buechner, vice president of economics and research for the American Road and Transportation Builders Association, says the stimulus money could help total spending rise an additional $6 billion in 2010.

“Everybody agrees that the strongest impact of the recovery act will occur in 2010,” he says.

Still, Buechner adds that state and local budget issues could have a significant impact on highway and bridge spending for 2010. ARTBA estimates that 19 states are planning to cut highway investment in 2010. “That’s a black box in terms of what the impact will be,” he says.

While a new federal highway bill remains on the horizon, many analysts expect the regular federal highway program to remain at current funding levels. With highway program funding flat and more stimulus yet to come, Murray forecasts a 13% rise to $64.7 billion in total starts.

Ken Simonson

Several megaprojects—including the $1.6-billion Dulles Corridor Metrorail project in suburban Washington, D.C., and a new $8.7-billion Trans-Hudson rail tunnel connecting New Jersey to Manhattan—have offered a big boost to the mass-transit sector. In 2009, McGraw-Hill Construction estimates that starts jumped 29% to $5 billion, and another 18% rise to $5.9 billion is expected in 2010.

The prospect of billions of dollars for high-speed rail projects could also fuel added work over time, Murray says.

Stimulus funds could help buoy institutional building construction in 2010. After a 23% drop in square footage in 2009, McGraw-Hill Construction forecasts that the sector will flatten out with a drop of 2%. Public buildings got a big boost from the ARRA in 2009 and will continue to reap many of those benefits in 2010. Starts in the sector are expected to rise 8% to 51 million sq ft—on par with the 2007 peak.

Health-care projects took a big hit in 2009 in light of the tight credit market, but they may be on the road to recovery. McGraw-Hill Construction estimates suggest the sector dropped 36% in 2009 to an estimated 70 million sq ft of new space. That sector is expected to see 72 million sq ft of new starts in 2010.

Simonson says he’s “a bit more optimistic on health-care spending” going into 2010.

“Now that the stock markets have rallied and the bond markets have opened, that will enable health-care systems to resume their multiyear plans,” he says. “The demand is still there and now the money is there, too.”

Simonson says that, overall, contractors will be particularly vulnerable in 2010 as most nonresidential sectors continue to suffer and existing work comes to completion.

“I think 2010 will be a more difficult year for most nonresidential contractors than 2009,” he adds. “A number of them still had backlogs that they worked through in 2009, but few have enough to keep them busy through 2010. Only a minority is going to be winning stimulus projects. Next year will be tough.”