The decline in construction activity this year was broader, steeper and faster than many economists anticipated as private non-residential building markets succumbed to the credit crunch and many public markets waited for stimulus funding to be delivered. The consensus of this year’s batch of forecasts for construction in 2010 says the worst is over, but most gains will be the result of percentage comparisons with dismal 2009 numbers, while market fundamentals will be unable to sustain much forward momentum. Wall Street analyst sometimes call this activity a “dead-cat bounce.”

Stimulus Funds Kick Off A Slow Comeback After Market Bottoms
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Source: McGraw-Hill Construction.
Annual percent change for dollar volume of total construction starts.

McGraw-Hill Construction is forecasting the dollar value of total U.S. construction starts in 2010 will climb 11% to $466.2 billion, following an estimated 25% decline in 2009. “This is not a booming market; it is just inching upward,” says Robert Murray, chief economist for McGraw-Hill Construction (MHC), of which ENR is part. “At the very least, we are stabilizing after years of steep declines,” he says.

Single- and multifamily housing will help buoy total construction spending. Single-family housing is expected to hit bottom in 2009 with an estimated 430,000 units started. Murray predicts housing will bounce back from this low with a 30% increase next year to 560,000 starts, which would return the market to 2008’s level. But even with that seemingly robust rebound, housing will remain 65% below its mid-decade peak. In addition, the MHC forecast for housing hinges on continued low mortgage rates and an extension of first-time home-buyer tax credits, Murray adds.

The MHC forecast also expects public works, including institutional building, to give next year’s overall market a boost. “We have seen an uptick in stimulus-related public-works projects last summer, but it has yet to take place in terms of construction starts for buildings,” Murray says. “The hope is that the stimulus bill will provide a lift to institutional buildings and speed up the timing of what would have been a more delayed upturn,” says Murray. He predicts this market will increase 3% next year to $43.6 billion.

Health-care projects took a big hit in 2009 due to the tight credit market. The sector dropped 31% in 2009 to $21 billion. Murray expects the health-care market to bounce back 5% next year to nearly $22 billion. “Aside from money supplied to bolster Medicaid funds, the federal stimulus act carries direct support for health-care construction,” he adds.

The educational building market has been vulnerable to state and municipal budget woes, and Murray expects that market to decline another 3% next year, following an 18% drop in 2009. In terms of square footage, the school market in 2009 dropped 23% to 172 million sq ft as state and local governments pulled back projects and private institutions saw big drops in endowments. The sector is expected to continue its downward path in 2010 with 158 million sq ft of new starts.

Private non-residential building markets have yet to bottom out, according to MHC forecasts. “The commercial market is facing the dual problem of very tight credit and deteriorating market fundamentals,” says Murray. Rents, occupancy and employment trends will continue to depress these markets. Murray predicts both office building and commercial work will fall another 3% next year after tumbling more than 30% in 2009. Hotel and motel work will be hit even harder, with 2010’s expected 9% decline following this year’s 61% decrease.

FORECAST 2010 - McGraw-Hill Construction Starts
(Current $ millions)
Actual Estimate Forecast Percent Change
TYPE OF CONSTRUCTION 2008 2009 2010 08-09 09-10
TOTAL CONSTRUCTION 554,882 418,925 466,175 -24.5 +11.0
RESIDENTIAL 162,052 113,525 147,275 -30.0 +30.0
Single-Family Housing 122,402 95,300 126,225 -22.1 +32.0
Multifamily Housing 39,650 18,225 21,050 -54.0 +16.0
NON-RESIDENTIAL 242,614 169,200 166,600 -30.3 -2.0
Office Buildings 30,621 20,350 19,675 -33.5 -3.0
Hotels and Motels 12,775 4,950 4,500 -61.3 -9.0
Stores and Shopping Centers 21,787 13,325 12,625 -38.8 -5.0
Other Commercial 19,300 9,550 9,300 -50.5 -3.0
Manufacturing 28,854 10,850 9,375 -62.4 -14.0
Educational Buildings 57,860 47,200 45,800 -18.4 -3.0
Health-Care Facilities 30,086 20,775 21,750 -31.0 +5.0
Other Institutional Buildings 41,331 42,200 43,575 +2.1 +3.0
NON-BUILDING CONSTRUCTION 150,216 136,200 152,300 -9.3 +12.0
Highways and Bridges 52,915 57,300 64,700 +8.3 +13.0
Environmental Public Works 38,230 34,000 40,200 -11.1 +18.0
Other Public Works 28,836 28,400 31,400 -1.5 +11.0
Electric Utilities 30,235 16.500 16,000 -45.4 -3.0
Source: McGraw-Hill Construction. Figures for 2010 are estimated.

FORECAST 2010 - U.S. Dept. of Commerce Construction Put-in-Place
(Current $ millions)
Actual Estimate Forecast Percent Change
TYPE OF CONSTRUCTION 2008 2009 2010 08-09 09-10
TOTAL CONSTRUCTION 1,072.1 962.0 944.6 -10.0 -2.0
Residential 357.4 268.3 287.1 -25.0 +7.0
Lodging 35.8 25.8 19.1 -28.0 -26.0
Office 70.3 56.2 43.9 -20.0 -22.0
Commercial 84.9 57.7 43.3 -32.0 -25.0
Health Care 47.7 49.1 50.6 +3.0 +3.0
Educational 104.1 106.2 106.2 +2.0 0.0
Religious 7.1 6.5 6.2 -8.0 -5.0
Public Safety 12.9 15.0 14.7 +16.0 -2.0
Amusement and Recreation 21.5 18.7 17.2 -13.0 -8.0
Transportation 34.0 35.0 32.6 +3.0 -7.0
Communication 25.6 18.9 18.0 -26.0 -5.0
Power 80.2 90.6 95.2 +13.0 +5.0
Highway and Street 81.8 84.3 84.3 +3.0 0.0
Sewerage and Waste Disposal 25.1 24.8 25.3 -1.0 +2.0
Water Supply 17.0 16.2 16.5 -5.0 +2.0
Conservation and Development 5.4 5.8 6.0 +7.0 +4.0
Manufacturing 61.3 82.8 78.6 +35.0 -5.0
Source: U.S. Dept. of Commerce. Figures for 2009 are estimated.

Manufacturing is expected to have an even tougher time, dropping 14% to $9.4 billion in 2010, after plunging 62% this year as refinery and ethanol plant work dried up. Those two sectors drove the market in 2008. Economists say there is not much hope of the manufacturing market picking up while capacity utilization in the sector remains below 70%.

Pessimist’s Club

The MHC forecast is based on project starts, which tend to be a leading indicator of where construction markets are going. Other industry forecasts focus on construction put-in-place, and these forecasts are calling for further overall declines in 2010, as this year’s 25% collapse in project starts spills over into next year’s put-in-place numbers.

The U.S. Dept. of Commerce in its forecast, released on Nov. 6, is predicting overall construction will decline...