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2012 Nonresidential Construction Outlook: A Modest Recovery

Although the national economic recovery is now two and a half years old, construction spending has continued to contract. A multitude of factors prevented a recovery for this beleaguered industry in 2011. Lenders that have been extremely reticent to finance construction projects, budget shortfalls at all levels of government, the ripple effect of overbuilding, depletion of Federal Stimulus funds, a depressed housing market and rising costs of key construction commodities all contributed to a decline in spending in 2011 for nonresidential construction projects.

In June 2011, the American Institute of Architects (AIA) semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters, projected a 5.6% decrease in nonresidential construction spending in 2011 from 2010, followed by a significant rebound with a projected 6.4% increase in spending in 2012.

A weaker than expected economy led to a revision of this forecast in January 2012, with the Consensus Construction Forecast projecting 2.1% growth in nonresidential construction spending in 2012 and 6.4% in 2013. In short, a modest recovery in 2012.

“This past recession, steeper than any other post-war downturn, also has produced one of the weakest recoveries in recent memory,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The consensus is that we’re not likely to see marked improvement in the growth of our economy during year three of this recovery.”

The Conference Board, the economic organization that produces the Consumer Confidence Index and other economic indices, forecast 1.8% growth for the U.S. economy in 2011, 1.8% in 2012, and 2.2% in 2013.

“Several segments of construction appear to be climbing out of a hole,” noted Associated General Contractors of America’s Chief Economist Ken Simonson, but cautioned that public construction segments faced stiff spending cuts in 2012.

Baker identified four major factors inhibiting demand in the nonresidential construction market:

1. Lingering financial crisis in key European economies, which could throw the U.S. economy back into recession
2. Homebuilding, typically an engine of growth during the early stages of an economic recovery, has remained as unusually low levels
3. Construction financing continues to be difficult to obtain
4. Energy costs are unusually high, threatening inflation

He also noted several upsides:

1. Corporate profits are strong, resulting in an increase in capital spending
2. Borrowing costs remain at record lows
3. U.S. manufacturing is recovering

Market Segment Consensus Growth Forecast Forecast % Change
2012 2013
Nonresidential Total +2.1% +6.4%
Commercial Total +5.6% +11.4%
Office +4.3% +9.6%
Retail/Other Commercial +5.0% +9.9%
Hotel +10.2% +19.7%
Industrial Total +6.0% +10.2%
Institutional Total -0.1% +3.6%
Healthcare +4.5% +5.3%
Education -1.7% +3.1%
Religious +5.1% +6.3%
Public Safety -3.8% +0.3%
Amusement/Recreation +0.2% +6.5%

Source: AIA Consensus Construction Forecast, calculated as an average of all forecasts provided by the panelists that submit forecasts for each of the above building categories: McGraw-Hill Construction, IHS-Global Insight, Moody’s, FMI, Reed’s Construction Data and Associated Builders and Contractors.

This construction outlook reviews the year’s top line construction numbers, shows where leading construction and electrical industry indicators are trending, and provides a summary of the latest AIA Consensus Construction Forecast for 2011.

Construction spending trends
As of November 2011, the Commercial Department estimated U.S. put-in-place construction spending (actual numbers, not seasonally adjusted), was about $725 billion. December numbers were not available as of the time of writing, so the author projected approximately $791 billion for the entire year using some simple math, a decline of 1.6% from 2010.

Source: Commerce Department data

Residential construction spending is projected at $247.5 billion for the year, about the same as 2010. Nonresidential construction spending is projected at $543.2 billion, a 2.1% decline from 2010. While public nonresidential construction spending is projected to decline 2.8% in 2011 to $285 billion as Federal Stimulus funds continue to dry up, private nonresidential construction spending is projected to remain about the same.

Source: Commerce Department data

Looking at the top five nonresidential building construction markets, all were projected to decline in 2011 with the exception for the commercial building market:

• Office spending: projected $34.5 billion, 8% below 2010’s $38 billion
• Commercial spending: projected $43.8 billion, 8.1% above 2010’s 40.5 billion
• Healthcare spending: projected $39.8 billion, about the same as 2010 ($39.9 billion)
• Education spending: projected $85.6 billion, 3% below 2010’s $88.2 billion
• Manufacturing spending: $35.7 billion, 6.3% below 2010’s $38.1 billion

Source: Commerce Department Data

AIA Architecture Billings Index
The American Institute of Architects’ (AIA) Architecture Billings Index (ABI) is a leading economic indicator that provides an approximate 9- to 12-month glimpse into the future of nonresidential construction spending activity.

The ABI is derived from a monthly “work on the boards” survey of hundreds of firms. A score above 50 indicates firms overall are reporting an increase in billing activity, which is suggestive of market expansion.

In December 2011, the ABI was 52, the same as November, again reflecting an overall increase in demand for design services. The monthly new projects inquiry index, meanwhile, was 64, down just one point from 65 the previous month.

“We saw nearly identical conditions in November and December of 2010 only to see momentum sputter and billings fall into negative territory as we moved through 2011, so it’s too early to be sure that we are in a full recovery mode,” said Baker. “Nevertheless, this is very good news for the design and construction industry, and it’s entirely possible conditions will slowly continue to improve as the year progresses.”

NAHB/Wells Fargo Housing Market Index
Builder confidence in the market for newly built, single-family homes has remained in contractionary territory for years, as reflected in the NAHB/Wells Fargo Housing Market Index (HMI)

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.”

Throughout 2011, the HMI remained well below the 50-point threshold suggesting business conditions favorable to positive sales growth. However, the HMI began to trend upward starting in October. The year ended with a score of 21, a much more optimistic finish to the year than 2010. Then in January 2012, builder confidence increased for a fourth consecutive month, rising four points to 25, the highest the index has achieved since June 2007.

“Builders are seeing greater interest among potential buyers as employment and consumer confidence slowly improve in a growing number of markets, and this has helped to move the confidence gauge up from near-historic lows in the first half of 2011,” said NAHB Chief Economist David Crowe. “That said, caution remains the word of the day as many builders continue to voice concerns about potential clients being unable to qualify for an affordable mortgage, appraisals coming through below construction cost, and the continuing flow of foreclosed properties hitting the market.”

NEMA Electroindustry Business Confidence Index
Another forward-looking index is the National Electrical Manufacturer Association (NEMA) Electroindustry Business Confidence Index (EBCI) for current North American conditions. This economic indicator gauges business confidence of the electrical industry in Asia, Europe, North America and Latin America, and is based on the results of a monthly survey of senior managers at NEMA member companies, which represent more than 80% of the electrical industry.

The EBCI for current North American conditions slipped to 52 in December 2011 from 56 in November, but nonetheless cleared the 50-point market above which more panelists than not saw an improved business environment.

Confidence in future conditions, meanwhile, climbed 10 points to a seven-month high of 70, its highest level since May 2011, affirming that expectations for the business environment six months from now remain positive.

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