...time the economy is slowing. As a result, Murray sees the value of new starts in that market slipping 9% in 2008 from very high current levels. During the first nine months of this year, the U.S. Dept. of Commerce tracked a 66% increase in new hotel and motel work put-in-place compared to the same period a year ago. Commerce will not be releasing its annual construction forecast this year.
In the office building market, marginal projects will have a difficult time obtaining credit with the tighter lending practices but viable projects will go ahead. “The key to offices is that vacancy rates are still low and we are still seeing growth in office employment. So even though absorption rates are slowing, you are not going to see a repeat of the early part of this decade,” says Murray. He expects the value of new starts in the office building market to slip 3% in 2008, following a 10% increase this year.
MHC also expects the industrial market to fall back 11% in 2008 after jumping 40% this year. The main reason will be a slowdown in the ethanol plant construction boom as owners wait for distribution networks to catch up with expanded production, says Murray.
“Retail, restaurants and infrastructure of housing development will be most vulnerable in 2008,” says Steven Hughes, director of industrial investment banking for KeyBanc Capital markets Inc., Cleveland. But big public and industrial markets will be immune. “Highways, bridge work, oil and gas, petrochemical, energy distribution and transmission are all going to see considerable growth in the foreseeable future,” he says.
The American Road & Transportation Builders Association, Washington, D.C., is forecasting that the highway and bridge construction market will increase 4% next year to $78 billion, after increasing 5% this year and 12% in 2006. “State and local governments have been stretched to keep up with inflation and there is not much left in their coffers,” says William Buechner, ARTBA’s chief economist. “However, construction costs seem to be moderating so projected funding may support more projects next year.”
PCA Offers Split Decision on 2008
The Portland Cement Association, Skokie, Ill., is predicting that total construction, after adjustments for inflation, will decline another 3.7% next year, after falling 3.9% in 2007. PCA’s pessimism on residential construction has deepened and it does not expect a rebound in housing until the second half of 2009. In addition, PCA no longer expects nonresidential construction to offset the declining housing market as it did this year.In 2008, PCA predicts that nonresidential construction will decline 3%, following this year’s 13% increase. The nonresidential market will still be strong but the only real growth opportunities will be in education and health care, says PCA Chief Economist Ed Sullivan. That all assumes no recession. PCA’s alternate recession scenario, which it gives a 35% to 40% probability of happening, would result in total construction declining 10% in 2008
The picture for other federal construction funding is unclear. As of mid-November, none of the 12 appropriations bills for fiscal year 2008 had been signed into law because of a battle between the White House and Democratic leaders. Bush administration officials had issued veto warnings on most of the 2008 spending measures making their way through Congress.
In the meantime, federal agencies continued to operate through the first several weeks of fiscal 2008 at 2007 spending levels, under a continuing resolution. With that stopgap measure set to lapse Nov. 16 and congressional Democrats and the White House at loggerheads, Congress was considering an extension that would run through Dec. 14.
A slower economy could cut into state and federal budgets by 2009, says Ed Sullivan, chief economist for the Portland Cement Association, Skokie, Ill. If that happens, it will take away another growth engine.
“There may not be a recession but there is talk of one and risk premiums are increasing. Throw in tighter lending standards and lower returns and it is not hard to get a mild retrenchment in nonresidential building next year,” Sullivan says . “If a recession does happen, that retrenchment could turn into double-digit declines.”
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