The following information is provided Kermit Baker Chief Economist for the AIA. The complete article is available here.
The prospects for the nonresidential construction industry have taken a definite turn south since the beginning of the year. In December the AIA Consensus Construction Panel was calling for modest growth in inflation-adjusted nonresidential construction spending in 2008 balanced by a modest decline in 2009. However now halfway through a year that has seen the broader economy weaken their mood has grown more pessimistic. They are now calling for a modest decline in 2008 (-1.2 percent) followed by a more dramatic decline in 2009 (-6.7 percent).
Although the outlook for virtually every major nonresidential sector has deteriorated forecasts have dropped more dramatically for commercial and industrial buildings. Hotels and manufacturing facilities are projected to show gains in 2008 but the office and retail sectors are expected to fall off considerably. For 2009 a double-digit decline in real construction levels is the consensus for the overall commercial and industrial building group with significant declines in each of the categories in these major sectors.
Even though the overall consensus forecast for nonresidential activity has been lowered the institutional building sector is still expected to fare considerably better than the commercial sector next year. The overall institutional outlook is now for a modest gain in construction levels this year with almost no change for 2009. The two largest institutional categories-health and education-are both projected to see a modest increase this year. While growth should continue for health-care facilities in 2009 a small falloff in education facilities is anticipated.
Commercial activity to bear the brunt of a weak economy; institutional activity expected to stabilize
As the economy slows the more cyclical commercial construction sector can be expected to see the greatest changes. With consumer sentiment scores dropping gas prices rising stock market averages slipping and the unemployment rate moving up consumer spending is likely to see a significant slowdown putting pressure on the retail sector. In fact growth in retail sales in our economy slowed from 5.5 percent in 2006 to 4.1 percent last year and is increasing at only about a 3.5 percent pace through the first half of this year. This slowdown in retail activity already is affecting demand for retail space. The International Council of Shopping Centers predicts more than 6000 retail store closings this year the most since the 2001 national economic recession. As a result forecast panelists are expecting an 8 percent decline in retail construction activity this year and another 10 percent drop in 2009.
Office construction activity also is expected to suffer from a weak economic environment and payroll declines. However office construction has been very measured during this past nonresidential construction expansion and as a result national office vacancy rates are at favorable levels. CB Richard Ellis reported first quarter 2008 vacancies at 13.2 percent nationally. Although up 0.4 percent from the end of 2007 they still are about four percentage points below their early 2004 peak for this cycle. Even without much in the way of excess office space in most markets our forecast panel is projecting a 4 percent decline this year and another 12 percent drop next year as a result of falling demand for office space in a weakening economy.
The hotel market is benefiting from a strong tailwind having seen very strong double digit growth last year. Our forecast panel expects activity in the pipeline to produce reasonably strong results this year before dipping by almost 10 percent in 2009. Manufacturing construction is benefiting from a resurgence in U.S. export activity. A weak dollar has made U.S. goods more attractive in international markets thereby propping up our manufacturing sector. The consensus is for almost 5 percent growth in manufacturing activity this year matched by a slightly higher decline next year.
The volatility on the commercial side of the market is expected to be moderated by relative stability in construction levels in the institutional sector. Overall construction of these facilities is forecast to grow very modestly this year before essentially leveling off next year. The health-care sector is projected to see very stable construction levels this year and next which belies the turbulence surrounding this sector of the economy in the national political discussion. As health-care priorities and policies continue to develop we may see more volatility in this sector in the coming years.
The other major institutional sector education is also expected to see relative stability over the next 18 months. However these sector totals gloss over differences in some of the key segments in the educational category. Education construction is largely driven by expected enrollment levels and the U.S. Census Bureau is projecting very strong growth in college and university enrollments (up 10 percent over the next seven years) moderately strong growth in elementary and secondary enrollments (up 8 percent over this time period) while much weaker growth in high-school enrollments (up less than 4 percent overall and below current levels for the next five years). The demographic patterns are already reflected in the construction figures. McGraw-Hill Construction reports that secondary and high-school construction activity declined at a mid-single digit pace last year while college and university construction increased by about 10 percent.