2003 Construction Market to Drop 1%

A solid housing market, educational construction and continued growth in the public works sector will continue to offset the soft office and industrial markets, said Bob Murray, vice president of economic affairs for McGraw-Hill's Construction Group, at McGraw-Hill's Outlook 2003 meeting, held Oct. 23 in Washington, D.C.

Murray expects total construction to decline 1 percent in 2003, after registering a 1-percent increase in 2002. Murray said the U.S. economy is experiencing a “fragile recovery,” and that the declines in some segments of the construction market in 2002 were worst than expected. He said office construction, already down double digits from its peak in the mid-1990s, “is extremely weak” and will slide 3 percent in 2003.

Construction of industrial facilities will actually increase 3 percent next year, he said, but that's after a 26 percent decline in 2002.

“Every year we think plant construction can't get any worse,” he said. “This year it did. Manufacturers are moving production overseas.”

While Murray forecasts that educational construction will decline 4 percent in 2003, it's a moderate decline to a level that's at a near-record pace. Growth in school enrollments will keep school construction strong. Retrofit work at schools and construction at colleges and universities are two particularly strong segments of the educational market.

The school market will continue to benefit from positive demographic trends, as the children of baby boomers reach school age. As more of these children get older and enter college, the higher education market will grow even more.

The housing market is also benefiting from some positive demographic trends, said Murray and Kermit Baker, chief economist, American Institute of Architects. One of the biggest factors is the number of immigrants buying homes for the first time. Baker expects to see the housing market provide some more record-breaking numbers in the coming decade. He was encouraged by the September housing starts statistics, which he said were the strongest in 15 years.

One of the key differences in this recovery, said Baker, is that housing starts have remained so strong, maintaining a rate of at least 1.5 million starts per year. In past recessions, he said housing starts have dipped below the 1 million annual start rate.

The 2003 economic forecast offered by David Wyss, chief economist, Standard and Poors, at the Outlook 2003 conference had a good news/bad news spin this year.

The good news is that by most economic indicators, the recession is over; the bad news is that the recovery will be long and sluggish, and it won't lead to another period of unprecedented growth like the 1990s.

“I do expect it to come back, but it's not going to be like the 1990s. It's going to be sluggish, normal growth. It's going to be more like the recession in 1990-1991 — a jobless expansion. We have got to see businesses spending more money. Businesses seem more scared than consumers. It's hard to see capital spending going forward with any great speed.”

Wyss said that with the capacity of utilization rate hovering around 76 percent, over one-quarter of manufacturing equipment is sitting idle on the factory floor. In 2003, he doesn't expect that figure to improve much, although business may see some activity in replacing manufacturing equipment that wears out.

He also expects consumer spending and the housing market to continue supporting the recovery, and doesn't believe that there's a housing bubble. In a true bubble situation, Wyss said consumers are faced with more expensive mortgages, but their monthly mortgage payments are now less expensive because of cheaper interest rates. Consumers will keep spending, he said, and will be able to handle the debt loads because of less-expensive credit.

However, Wyss doesn't expect the stock market to recover anytime soon. Stocks enjoyed five years of 20 percent annual growth during the end of the last decade. Over the next few years, Wyss said stocks may climb at a much more moderate rate.

Ed Friedrichs, president and CEO of Gensler, San Francisco, one of the largest architectural design firms in the world, said that while the design business is suffering from a slump in the construction market, too, some developing trends will actually help architects, engineers, contractors, distributors, reps, manufacturers and others in the industry's supply chain.

Because relatively few of his clients for owner-occupied office buildings and other commercial and retail structures stay in them for longer than five years or keep the building's original configuration, there will be more work than ever in changes and modifications to buildings as new tenants move in.

It's part of a trend toward what he called “low-road buildings,” which are buildings that adapt over the years to the tenants needs. In contrast, Friedrichs said “high-road buildings” are “temples” of architecture, and are often corporate headquarters that do not change much.

His customers are also looking for help in completing projects faster than ever.

“Everyone is looking to streamline,” he said. “This is good news for the construction industry.”

Thomas Leppert, chairman and CEO of Turner Corp., the largest builder in the United States, told the audience at the Outlook 2003 conference that he is concerned about the next several quarters in the construction market. He agreed with Friedrichs that massive change is underway in the construction industry. His company grew 45 percent from 1996-2001, and he expects sales to climb 7 percent annually for the next five years. But to maintain this growth rate, he said Turner will have to “change the ways we do things.”

He is looking closely at the supply chain and said that there's too much cost and too many people in the equation between the time a manufacturer ships construction products and it gets to the job sites. Leppert said that of the “$20 billion in lighting supplies checks cut to manufacturers,” half the cost is in what he called “intermediaries,” like distributors and reps.

A related change that he saw for the construction market is the need for more-efficient online collaboration tools for all companies involved on a construction project. Turner is now developing such a tool called the “Turner Knowledge Network” that it will release to the general industry.