The construction market has yet to see signs of recovery from the current recession, but the recovery may be coming next year if factors such as employment and bank lending fall into place, according to a forecast released by McGraw-Hill Construction.

If construction employment shows growth, banks loosen credit, and state and local governments get a handle on budget difficulties, next year could see an increase of 8% in new starts.
Photo: Bruce Buckley For ENR
If construction employment shows growth, banks loosen credit, and state and local governments get a handle on budget difficulties, next year could see an increase of 8% in new starts.

Robert Murray, MHC’s vice president of economic affairs, foresees an 8% increase in total construction starts to $445.5 billion in 2011. Much of that prediction is based on the single-family housing market, which finally is seeing substantial growth with starts rising 27% to $126.7 billion.

Similarly, multifamily housing starts are predicted to rise 24% to $23.6 billion, but that prediction comes with some caveats. Murray explains that, for the construction market to realize those gains, employment will need to show growth, banks will have to loosen lending, and state and local government will need to contain their budget difficulties.

“Assuming that takes place, an 8% gain for construction is realistic, but if things go wrong and we slide back into recession, then it will be another year of flat to declining activity for construction starts,” he adds.

The forecast was announced during McGraw-Hill Construction’s 2011 Construction Outlook conference in Washington, D.C., on Oct. 29. McGraw-Hill Construction is the parent of ENR.

Commercial Rebirth

Among non-residential building sectors, Murray predicts that, next year, commercial construction starts could pull out of a three-year decline, during which time contracting volume dropped 62%. His forecast calls for a 16% gain in starts up to $44.9 billion, which would counter the 17% decline realized in 2010. Office, hotel, warehouse and store activity all are expected to see an uptick in 2011.

Institutional building continued to suffer in 2010, dropping 7% to $103.6 billion. That sector includes health care, which remained flat, along with the educational and public building sectors, which both declined. McGraw-Hill Construction forecasts the institutional market will flatten out next year at $102.7 billion in total starts, as the health-care sector makes gains and the declines in the educational and public buildings sectors ease.

Among the transportation sectors, Murray predicts that construction starts on highways and bridges will retreat by 4% to $57.6 billion, as federal stimulus dollars run out and many state and local governments continue to struggle with their budgets. Mass transit, which has made tremendous gains in recent years, will see starts begin to level off, rising 3% to $7.5 billion. That level remains historically high—nearly double the $3.9 billion spent in 2008.

Decline Puts on the Brakes

The current year was notable for the slowing of the declines of prior years. McGraw-Hill Construction estimates total construction starts will drop 2% to $411 billion in 2010, marking the fourth year in a row of decline. This year’s slump in activity, however, is countering expectations that 2010 would mark a turnaround for the industry. Last year, McGraw-Hill Construction forecast that construction starts could climb 11% in 2010, up to $466.2 billion. However, Murray says that, despite a promising first quarter, the economy remained weaker than expected and produced limited job growth.

“That early stage of recovery has, in effect, been pushed back due to the stall that we had in the overall economy this year,” he says. Much of the softness was felt in the single-family-home sector. Although the sector was expected to see a 30% jump in starts this year, it will close with a modest growth of 6% to $100 billion.

While the stimulus did have an impact on the construction industry, Murray says many of those gains were offset by cuts to transportation projects made by revenue-strapped state and local governments.