Practicing ArchitecturePracticing Architecture
Construction Spending Projected to Turn Up in Second Half of the Year, but Won’t Surpass 2010 Levels
Institutional construction should remain steady this year and next; commercial upturn projected for 2012
By Kermit Baker, Hon. AIA
AIA Chief Economist
The nonresidential construction market is expected to recover this year, but late enough in the year that 2011 spending levels are unlikely to see any growth over 2010 levels. A consensus 2 percent construction spending decline in 2011 will hopefully indicate the bottom of the recession trough and set the stage for a recovery in 2012. After falling around 30% on an inflation-adjusted basis last year, commercial construction is expected to see a modest decline this year, while the downturn for manufacturing should be greater. Institutional building activity is projected to stay near 2010 levels.
As the nonresidential recovery strengthens, 2012 is expected to produce stronger gains. Overall building construction should rise around 5 percent, with growth twice that rate for the more cyclical commercial sector. Spending on institutional buildings is projected to increase a more modest 1.6 percent.
These are key results from the AIA’s most recent Consensus Construction Forecast Survey. Conducted semi-annually, the survey includes forecasts from the leading nonresidential construction forecasters in the country. These results are from a survey conducted in mid-December, 2010, covering the outlook for 2011 and 2012.
A recovering economy
Even though the national economic recovery is over 18 months old, it has yet to gain much traction. The gains from mid-2009, when the recovery began, through the spring of 2010 were partially eroded by a brief set-back over this past spring and summer triggered by the European debt crisis.
However, healthy growth returned this fall, with solid numbers coming from the manufacturing sector and consumer spending. After declining 9.3 percent last year, manufacturing activity increased close to 6 percent in 2010. Retail sales likewise increased an estimated 6 percent in 2010 – accelerating during the critical holiday shopping season – after falling 6.5 percent in 2009.
There are several factors that will help to ensure continued strong growth in the economy as the year progresses. At the top of the list is the tax package enacted in late 2010. By extending the Bush-era tax cuts and unemployment benefits, this package will provide close to $860 billion in fiscal stimulus to our economy, or close to the amount provided under the initial American Recovery and Reinvestment Act of 2009. While much of this total results from extending existing provisions, some new initiatives are also included, such as a temporary reduction of social security payroll taxes.
Additionally, bank lending restrictions are beginning to thaw. According to an October 2010 survey of senior bank lending officers by the Federal Reserve Board, over the prior three months banks eased standards and terms on some categories of loans to households and businesses. In spite of this positive movement, the same survey reported that standards for many categories of loans would not return to their longer-run averages anytime soon. However, the lending that is occurring is at historically low rates. Long-term interest rates have recently begun to drift upward, but actions taken by the Fed to stimulate the economy have allowed many households and businesses to restructure their debt at very favorable rates.
In spite of unmistakable signs of progress, there remain several economic headwinds. First is the housing market. Residential construction traditionally leads the economy into recovery, but years of overbuilding and weak levels of household formations in recent years have produced a larger inventory of empty homes. As more households go through the foreclosure process, there will be additional vacant homes, reducing the need for new home building.
Furthermore, the employment situation remains depressed. Steep levels of job reductions have been replaced by very modest job gains, but not enough to significantly lower the national unemployment rate. In addition to the high share of unemployed workers, there are many others who have not been able to find suitable full-time employment. Others have given up looking for work given the grim prospects, and are therefore not considered to be in the labor force and thus not counted as unemployed.
Federal debt levels are also very high. Actions taken to deal with the severe downturn in the economy, including the recent tax package, have increased annual federal budget deficits. A larger debt generates higher federal payments to service this borrowing, and ultimately drives up borrowing costs for private sector borrowing. Such borrowing to stimulate the economy could produce a bout of inflation sometime in the future.
Finally, rising energy costs are likely to be an issue in the coming years. Though they eased a bit during the downturn, even the modest upturn in the economy has doubled crude oil prices from their recent low in early 2009. As the economic recovery continues, further increases in energy costs seem inevitable.
Timing a construction recovery
In spite of significant improvement in the broader economy, an upturn in nonresidential construction spending is not yet imminent. The AIA’s Architecture Billings Index has been more positive recently, with national scores indicating an increase in design activity this past September and again in November. However, even if these two positive scores indicate a sustainable recovery in design billings, AIA research indicates that a construction spending recovery has traditionally followed a design recovery by nine to 12 months. That would indicate that we’re unlikely to see an upturn in construction spending until at least the second half of this year.
Architecture firms are not expecting such an upturn to be very strong. A December 2010 survey of architecture firms found that expected growth in billings for 2011 is quite low. Overall, firms are expecting revenue gains of just over 1 percent for the year, slightly higher for commercial/industrial and residential firms (3.1 and 2.4 percent, respectively), but lower for institutional firms (-0.6 percent).
The AIA Consensus Construction Forecast panel is also expecting rather modest gains in construction activity this cycle. They are projecting construction spending, when adjusted for inflation, to modestly decline 2 percent overall this year. Declines in the commercial sector specifically will be somewhat larger (-4.2 percent), and industrial sector declines will be larger still (-11.8 percent). The institutional sector is forecasted to only decline by 0.2 percent. Within the commercial category, retail construction is expected to fare the best, falling only 1% in comparison to high single digit declines in office and hotel construction. In the institutional category, healthcare construction spending is projected to see a modest gain this year, while education construction will fall.
By 2012, our forecast panel is projecting a more significant recovery. Overall spending is forecast to be up by 5 percent, with the more cyclical commercial and industrial sectors seeing higher growth levels. Retail and hotel construction are slated for double-digit gains, while office construction is expected to see levels increase by over 7 percent. Institutional construction will see much more modest gains of 1.6 percent, paced by solid growth in the healthcare sector and more modest gains in education construction.
Visit the AIA Navigating the Economy Web site.