Practicing ArchitecturePracticing Architecture
2012 Construction Recovery Projected to be Modest
A rebound in commercial activity will lead to stronger growth in 2013
By Kermit Baker, Hon. AIA
A weaker than expected economy has taken its toll on the U.S. construction forecast. As of June 2011, when the economy was in an upswing, the AIA’s Consensus Construction Forecast panel was projecting growth in the construction of nonresidential buildings in excess of 6 percent for 2012. Since the economy hit a soft spot during the second half of the year, they have scaled back their projections and now are calling for a mere 2 percent growth rate for 2012. However, this temporary setback has not dampened their optimism for the future, as the consensus growth for 2013 now stands 6.4 percent over 2012 levels.
This past year was volatile for nonresidential construction activity. Between November 2010 and November 2011, spending on nonresidential construction projects (buildings as well as public works projects) declined by almost 3 percent. However, private projects saw modest gains, while spending on public projects declined almost 7 percent. For buildings, the strongest growth has come from retail and other commercial facilities (up almost 7 percent), private educational facilities (up 1 percent), and public healthcare facilities (up nearly 12 percent). The weakest sectors over the past year have been hotels (down 26 percent), religious facilities (down 20 percent), and public safety (12 percent less).
Economy still stuck in the mud
The domestic economy typically rebounds sharply after a deep recession. When the mid-1970s recession ended, the economy grew by 6.2 percent in the first year of the recovery, and by an additional 3.2 percent in year two. After the early 1980s recession, year one growth was 7.8 percent, followed by 5.6 percent in year two. The past two recessions have seen more modest recoveries: 2.6 percent and 3.8 percent in the early 1990s, and 2.0 percent and 3.9 percent in the early 2000s.
This past recession, steeper than any other post-war downturn, also has produced one of the weakest recoveries in recent memory. There was a bit of a spurt in late 2009 and early 2010 that produced growth in excess of 3 percent during the first year of the recovery. Year two saw a substantial slowing of growth, as the GDP grew less than 2 percent. The consensus is that we’re not likely to see marked improvement in the growth of our economy during year three of this recovery. There still are several serious headwinds stymieing more robust progress.
At the top of the list are lingering problems with key European economies. Even if Italy, Portugal, Ireland, and Spain do not default on their public debt (Greece very likely will), even if the European Union doesn’t fall apart, and even if these debt issues don’t jeopardize the health of U.S. financial institutions, Europe is likely to experience subpar economic growth for several years. This region is a major customer for U.S. exports, and weak European economies will certainly slow economic growth at home.
Secondly, homebuilding is typically an engine of growth in the early stages of a recovery. This time, years of overbuilding have kept housing at unusually depressed levels. The estimated 600,000 or so housing starts in 2011 are only about a third of the average level produced annually over the past several decades. Until house prices stabilize, “underwater” mortgages get resolved, and mortgage delinquencies and foreclosures work their way through the system, the housing market probably can’t fully recover.
Third, construction financing remains a big problem for the industry. Financial institutions still stung by the fallout of the housing collapse are hesitant to increase their exposure to the real estate market. Research conducted in November by the AIA in conjunction with McGraw-Hill Construction and Reed Construction Data determined that difficulty in obtaining financing was the most common reason for stalled construction projects, and that the share of stalled projects due to financing problems had almost doubled between 2008 and 2011. Some of the project sectors with the strongest demand at present—multifamily housing and secondary education facilities—are the ones having the most difficult time obtaining financing. (See the AIA’s Stalled Projects Database.)
Finally, given the general weakness in the overall economy and the disappointing state of the job market, energy costs are unusually high. As the economy recovers, the likely rise of energy costs could trigger a broader wave of inflation and further depress this recovery.
In spite of all the serious problems in the economic outlook, there is still some upside. Corporate profits at U.S. businesses are very strong, and have returned to pre-recessionary levels, which in turn has generated a recovery in stock prices. While businesses have been reluctant to hire back workers, they have been willing to increase their capital spending, with purchases of equipment and software currently above pre-recessionary levels.
Secondly, borrowing costs are at record lows, which allow businesses and consumers to unwind some of their excessive debt from the past decade. As a result, consumer debt has been reduced from the record levels seen prior to the downturn. Debt payments—like mortgages—also have gone down, as many have refinanced their mortgages to lower rates. Consumer sentiment has turned up over the past few months, and many people are now comfortable enough to begin spending again, with retail sales growing close to 8 percent in 2011.
Finally, U.S. manufacturing activity has recovered from recessionary levels. Many manufacturers are beginning to realize that domestic production can effectively compete with offshore locations. As a result, producers are now developing plans to bring production back to U.S. soil.
Rust Belt continues to pace growth
The economic recovery has not been strong enough to lift activity in all areas of the country. Some of the most overbuilt areas during the mid-2000s boom were left with a construction overhang that has not yet been worked off. That has left traditionally slow growing Rust Belt markets in a relatively better economic position, at least for the time being. As of October, the metropolitan areas with populations of at least a million with the lowest unemployment rates (from lowest to highest) were: Minneapolis/St. Paul; Washington, D.C.; Oklahoma City; Boston; Pittsburgh; Rochester, N.Y.; Richmond, Va.; Buffalo; and Virginia Beach, Va.—all areas that haven’t had high levels of job growth in general.
However, a very different pattern emerges from areas that have seen the most improvement in the unemployment rate over the past year. Metro areas that have seen the greatest declines in the unemployment rate (between October 2010 and October 2011, from most to least) are: Miami; Las Vegas; Tampa/St. Petersburg; Orlando; Detroit; Jacksonville, Fla.; Portland, Ore.; San Jose; and Cleveland—all areas that have seen rapid employment growth over the past few decades, as well as some recovering Midwest markets.
As the national economy continues to improve, and growth begins to accelerate, most of the progress is likely to take place in traditionally rapidly growing Sun Belt areas. In the meantime, slow growth and low levels of mobility are concentrating these gains in less overbuilt Rust Belt regions. Historically, a disproportionate share of construction spending in these areas goes to rehabilitating existing buildings.
Construction outlook improving
The AIA’s Architecture Billings Index (ABI) has been unusually volatile over the past 12 months. The first quarter readings were generally positive, before turning down in the spring. The ABI popped up again briefly during the summer, and then turned down again before recovering toward the end of the year. Given the normal nine to 12 month lead time of design billings over construction spending, this points to a fairly volatile year for construction activity.
The AIA Consensus Construction Forecast Panel is projecting very modest growth overall for 2012. Total nonresidential activity is forecast to increase just 2 percent in 2012 over 2011 levels, with somewhat stronger growth in the commercial and industrial sectors, but no growth in institutional activity. The hotel market is expected to see the most growth in the commercial arena, bouncing back from a steep slide in 2011. The healthcare market is expected to be one of the strongest institutional construction sectors.
A modest recovery in 2012 is projected to turn into a stronger upturn by 2013. Overall, nonresidential construction spending is forecast to increase by more than 6 percent next year, again with stronger numbers on the commercial and industrial side. Again, hotel construction is expected to pace the commercial/industrial upturn. The institutional sector is also poised for a significant upturn in 2013. Overall growth for institutional facilities is forecast at almost 4 percent, with healthcare again expected to be one of its strongest sectors.
Visit the AIA’s Stalled Projects website.