After a raucous surge in construction in the late 1990s and the dismal pace of growth in recent years, a 1 percent forecast for growth in 2004 sounds pretty darn good.
“If you view stability as a virtue, things are working out pretty good,” said Robert Murray, vice president of economic affairs, McGraw-Hill Construction, New York, at McGraw-Hill’s Outlook 2004 Executive Conference.
The mood at the conference, held Oct. 23 at the Capital Hilton, Washington, D.C., was cautiously optimistic, with forecasts for sizeable gains in several key market segments. Murray’s annual construction forecast pegs growth for income properties, which include offices, hotels, warehouses, multi-family housing and stores, at 9 percent, up to $100.9 billion from 92.9 billion last year. Construction of manufacturing buildings are also expected to grow 9 percent, from $5.5 billion to $6 billion in 2004.
The only project category expected to drop significantly is utility construction, which Murray expects to drop 19 percent to $7.5 billion in 2004. This follows declines of 23 percent in 2003 and 49 percent in 2002. It’s been a wild ride in this market segment, as utilities muddle through deregulation.
During the late 1990s, in anticipation of new power demands from other regions sparked by deregulation, Texas embarked on a utility construction binge that drove utility construction statistics to record highs. From 1998 to 2001, construction in that market grew at annual rates ranging from 43 percent to 180 percent. That power demand did not materialize, however; and it will take some time to soak up the excess generating capacity.
Educational buildings and single-family housing were two of the market drivers that supported much of the 1990s construction boom, but construction in these markets is expected to drop back in 2004, albeit to very healthy levels. Murray expects single-family housing to slide 2 percent to $226 million, the second highest-level in the past seven years.
He and David Wyss, chief economist, Standard and Poors, New York, said relatively low interest rates and increased levels of home ownership among immigrants as they become more established in the United States will continue to support a vibrant housing market.
Forecasting the need for construction of educational facilities is largely a game of demographics, and although Murray expects this market to cool down in 2004, declining 7 percent, from 240 million square feet to 223 million square feet, in the long range educational construction will do well, he said. Despite the budget issues challenging many local, county and state governments, the need for the construction or expansion of schools will remain strong because of the steady flow of new students into the educational system.
The children of the baby boomer generation, the largest single age demographic, are still enrolling in schools in near-record numbers. This population bulge is already passing through colleges and universities, as the offspring of the oldest Boomers are starting to graduate. The age demographics point to even more college students in the very near future, guaranteeing the need for more educational facilities at this level.
Most construction economists agree capital spending by businesses will be one of the most important drivers of any recovery. David Wyss sees some increase in capital spending by businesses as they replace the now fully depreciated computer equipment they installed to protect themselves for the Y2K scare. But it’s not a pretty picture on the industrial side, he said, with capacity of utilization rates of over 70 percent.
“When 27 percent of your equipment is sitting idle, why do you need to buy any new equipment?,” he asked.
Wyss also doesn’t see the global economy improving drastically in the short term, and said the United States is looking for a partner to help pull the world out of recession. None of the major U.S. trading partners in Europe are up to it right now. “Europe is looking a lot like Japan did 15 years ago, with very little growth,” he said.
China cannot be underestimated as a competitor — or as a potential customer — because of its low labor rates and the need for infrastructure improvements and building expertise across a broad range of construction projects. Wyss said with its labor rates of approximately $2 per hour, China will continue to offer significant cost savings in manufacturing over the United States, where labor rates are closer to $20 per hour.
However, construction opportunities do exist in China. For instance, Wyss said half the power plants built in the world over the next decade will be in China.
He warned conference attendees not to expect a return anytime soon to the go-go years of the late 1990s, and instead prepare for a steady return to economic health. He sees a good news/bad news scenario.
“It wasn’t much of a recession, but it’s not much of a recovery,” he said.