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The great thing about forecasts is that if you stick to your guns long enough, they come true. And that is what is happening. After years of defying economic predictions of its demise, the housing market has finally succumbed to its cyclical fate and headed south. Because single-family housing accounts for 54% of the dollar volume of all construction, according to U.S. Dept. of Commerce data, when housing heads down, its gravitational pull on construction statistics is significant. Unfortunately, the housing statistics are distorting stellar performances in virtually every other construction market.

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This dichotomy between housing and all other construction is the theme that connects this year’s industry forecasts. In a rare state of unanimity among economists, all construction forecasts surveyed by ENR agree that if housing were subtracted from the equation, the industry would be looking at a big plus. As it is, most forecasts are calling for the dollar volume of construction next year to range from no growth to modest declines of 1 to 2%. The difference between optimists and pessimists hinges on their take of what the housing market will do in 2007.

This year, the collapse in housing was primarily responsible for reeling in total industry annual growth from the 11 and 12% of 2004 and 2005 to just 1%, according to McGraw-Hill Construction (MHC), of which ENR is a part. MHC’s forecast calls for the dollar volume of total construction to decline 1% in 2007.

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“It really boils down to the extent of how much more single-family housing retreats,” says Robert A. Murray, MHC’s chief economist. “The decline this year has been substantial and for [market] imbalances to be worked off it looks like there will be another year of reduced [housing] activity,” he says. If single-family housing were removed from MHC’s forecast, total construction would increase 3% next year, Murray adds.

The decline in total industry growth rates in 2006 and 2007 is not as precipitous as it appears. “There was a tremendous surge in inflation, which pumped up the market in 2004 and 2005,” says Murray. MHC estimates that more than half of the 2004 and 2005 growth was purely inflationary.

Murray also notes that strong “investor demand” pushed the housing market to unsustainable levels in 2004 and 2005. “With slower price appreciation, we have lost a large part of the investor demand,” he says. Murray believes that both speculation and inflation will play a reduced role in 2007.

“Speculators are still there but they will be completely gone by the end of the year,” says Ed Sullivan, the chief economist for the Portland Cement Association, Skokie, Ill. “Market fundamentals are better as a result of these speculators leaving the markets,” he adds.

This will help soften the negative impact of housing on the 2007 market. PCA predicts that overall construction, after adjustments for inflation, will decline 1.8% next year, after seeing real growth slow to 1.1% in 2006.

The National Association of Home Builders, Washington, D.C., agrees that housing fundamentals are strong but that the market will need another year to shake off the excesses of 2004 and 2005. NAHB predicts that housing starts will decline 12.1% in 2007 after falling 11.1% this year. By 2008, housing starts should rebound 6.6% to 1.726 million units, NAHB predicts. However, this would still be well below the record highs of 2004 and 2005.

Once you get past housing, the outlook for 2007 brightens considerably. “It’s really a changing of the guard,” says Murray. In 2007, he is expecting 7 to 10% increases in the dollar value of the office, commercial, school and institutional building markets. All four also posted strong gains in 2006.

MHC sees the hotel market flattening out after this year’s astonishing 83% increase. Manufacturing buildings will continue to rebound and next year’s projected 14% increase would be this market’s fifth consecutive year of double-digit growth. In addition, MHC predicts that the highway work will increase another 9% in 2007, following this year’s 13% increase.

The American Road and Transportation Builders Association, Washington, D.C., believes the highway construction market will level off at $76 billion in 2007, after jumping 17% this year. “We don’t see much growth on top of this year’s record level,” says Allison Black, an economist with ARTBA. Longer term, the ARTBA forecast calls for the highway market to increase to $80 billion in 2008 and $83.9 billion by 2009. “Federal funding will maintain the status quo and further growth will come from the state and local governments,” says Black.

Some of 2007’s leveling off will be the result of easing inflation, says Black. She estimates that half of this year’s increase was due to increases in materials prices.

The negative impact of housing will spill over into a few markets. “The downturn in housing guarantees a downturn in retail work,” says Murray. Retail traditionally follows housing’s lead, but the case for a downturn is strengthened by announcements from several large owners, such as WalMart, that they are slowing expansion plans, Murray adds. He predicts that the value of store and shopping center work will decline 3% in 2007.

This year’s strong nonresidential building and public works markets will carry over into 2007, offsetting most of the downturn in housing, says Patrick MacAuley, chief construction economist with the U.S. Dept. of Commerce. Total construction this year will increase 2.1% to $1.166 trillion, as a 14% increase in nonresidential work overcomes a 7% decline in residential construction, according to Commerce estimates. Commerce’s forecast for 2007 sees the nonresidential and residential markets canceling out each other, holding overall growth for construction to just 0.3%. (See enr.com for the complete Commerce forecast).

Despite recent gains, the manufacturing market is still rebounding from extremely depressed levels. “The numbers are still pretty low and we still spend about half of what we do for education on industrial work,” says MacAuley.

 “Manufacturing includes 400 different industries and there is a different story for each. But in general, for the bulk of the manufacturing sector, we are talking base-line replacement,” says MacAuley. “Times are good and many industries have the cash flow, but the trend to outsourcing puts a huge drag on the decision to invest in the U.S. market, he adds.

One of the most optimistic forecasts is by FMI Corp., Denver, which predicts a 3.4% increase in overall construction in 2006 and an other 2.2% increase in 2007. “In the short term, lodging will be one of construction’s strongest sectors,” says Jones. But in the long term, she says health care and education are the markets to watch.

Commerce also believes that health care offers some of the best long-term growth opportunities. “Health care will blow right through this year’s 13% increase with another 13% gain in 2007 and then keep going strong for the next five years,” says MacAuley.

Office building construction also is poised for continued growth in 2007. MHC predicts that office building work will increase another 9% next year, after climbing 33% during 2006. Office employment, the key measure of the demand for office space, grew 1.4% in 2004, 2.0% in 2005 and an estimated 2.1% in 2006, pushing vacancy rates down, says Murray. “The office building market fundamentals are good,” he adds.

Strong corporate profits also are pushing the office building market, but there has not yet been a rebound in speculative commercial projects.

“One cautionary note is that we are now seeing banks tightening lending standard for commercial real estate loans,” says Murray. “That could dampen commercial construction in the second half of 2007 and going into 2008.”

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