Southeast Construction is currently finalizing some of the 2010 Outlook stories that we'll publish in January, but we'd like to go ahead and share some of the key points. In short, McGraw-Hill Construction, publisher of Southeast Construction, is predicting a double-digit percentage increase for total construction in the four-state region of Florida, Georgia, North Carolina and South Carolina. However, the big picture is definitely a good news-bad news situation overall, and firms focused on the commercial and privately funded markets will definitely continue to feel pain.
McGraw-Hill expects the Southeast region to experience a 10% improvement in the overall value of new contracts in 2010, for a cumulative total construction figure of $66.4 billion in new project starts. That compares to the $60.2 billion the company estimates for 2009. The company also projects that its three broad construction categories—nonresidential, residential and nonbuilding—will all avoid further declines in 2010. Here's a quick market-by-market breakdown.
Residential: Most notably, this long-moribund market is forecast to reawaken somewhat and increase 16% to total $22.6 billion, up from 2009’s $19.5 billion.
Nonbuilding: The Southeast’s sector for roads, bridges and other infrastructure is forecast to increase upon its considerable 2009 gains and grow by 20%, for a roughly $19.3-billion total. That would be up from last year’s healthy $16.1-billion tally.
Nonresidential: The nonresidential market will remain problematic at best, however. Though McGraw-Hill expects this Southeast sector to remain flat overall, for a $24.6-billion total, the commercial and industrial subcategory will decline by 8% overall. Statistically, it's worse than that: next year's commercial and industrial market's projected total equates to roughly just one-third the amount this category generated in 2007.
Southeast Construction also asked readers to provide their opinion about the coming year, via a one-click poll. We asked: "How do you see construction opportunities in your local Southeast market during 2010?" Nearly 200 people responded, and here are the results:
* The highest percentage, 31%, predicted opportunities would "decline slightly" in 2010.
* 24% predicted opportunities would "increase slightly."
* 24% predicted a "steady" market.
* 18% see opportunities "declining significantly."
* Only 3% see a market that is "increasing significantly."
In short, 49% of voters predict a declining market, while 27% anticipate an increase. You can view the poll results here.
More details about the Southeast Construction regional forecast, including state-by-state analysis, will be available soon at www.southeast.construction.com. For now, since we were not able to include all of the analysis we collected into the final story, we'll share some of this material here, via a Q-and-A with Jennifer Coskren, analyst with McGraw-Hill Construction's Analytics Group.
What are your general comments about the Southeast market's 2009 performance?
Coskren: Positive markets are a bit hard to come by in 2009, but there are a few. Despite its difficult economic environment, Florida has provided the most growth markets among the four Southeast states. In Florida, health care, electric power, dredging, public and other nonbuilding are all expected to experience an increase in construction value during 2009. Declining markets unfortunately are the far more prevalent story. Commercial construction in particular has been in a freefall in 2009. Across Florida, Georgia and South Carolina, commercial construction, in current dollar terms, will be down by nearly half. Commercial sectors have been hit hard by the declines in employment and consumer confidence. The credit crisis and troubles in commercial mortgage-backed securities are simply adding to the volatility.
On a state-by-state and even regional basis, 2009 proved to be considerably worse than many experts predicted. Please explain.
Coskren: Yes, 2009 proved considerably worse than predicted, primarily due to the deeper-than-expected retrenchment in commercial and residential construction. On the residential side, we realized that the downside risks were strong, but believed that housing construction had reached a bottom and declines would be more modest than what was experienced in 2008. However, with such staggering employment losses and foreclosure mitigation programs only mildly successful, construction continued its freefall.
The risks were also weighted heavily on the negative side for commercial construction. But the feeling in late 2008 was that supply had been less steep in the years leading up to the recession in comparison to other cycles, particularly for office and warehouses. That limited supply growth would help cushion the blow of the recession. However, the severe declines in consumer confidence and employment overshadowed the historically weaker levels of supply, and the continuation of the credit crisis added another layer of risk.
Nationally, McGraw-Hill Construction is predicting a 2010 increase based on a housing recovery. Do you see that same scenario playing out down in the Southeast?
Coskren: We do anticipate a recovery in 2010 for the Southeast, but it is expected to be weaker than what is anticipated at the (national) level. Foreclosures remain a significant problem in Florida and lagging job improvement will keep a lid on housing sales. However, the extension of the tax credit, low mortgage rates, improving consumer confidence and diminishing inventory will buttress housing next year and allow for a gain. For the Southeast, we’re expecting about an 16% increase in residential construction, though levels will stay below 2008 and are only about one-quarter of 2005’s peak.
(In Florida), lofty foreclosure levels remain a threat ... and a weak employment market is adding to the risk. However, signs are emerging that the housing market to some degree is healing. Available homes for sale continue to diminish rapidly. For example, the Wall Street Journal reported that in September 2009 the number of homes listed in Miami dropped nearly 39% from year-ago levels. While the risks remain that housing construction could once again decline, the positives we believe will provide enough momentum going forward in 2010. However, the recovery in Florida is forecasted to lag the nation overall. For Florida residential construction (both single family and multifamily) we are calling for a 14% increase in contract value for 2010, significantly milder than the 30% we are expecting at the national level.
How long can public construction hold up as a relatively positive market?
Coskren: Our estimates are calling for another strong year for public in 2010 before a retrenchment begins in 2011. The pipeline is still relatively full and several projects in the planning stages are set for a 2010 start date.
What are the prospects for the private market in 2010?
Coskren: The private sector is likely to have another tough year in 2010, as private funding remains elusive and costly. The federal government’s attempts to shore up commercial real estate have been small relative to the efforts being exhausted on the residential side. Stress testing and greater equity requirements were forced on the larger financial institutions, but it has been the smaller, regional banks where a large share of the commercial funding took place and whose balance sheets are the most troubled.
Unfortunately, with commercial real estate loans performing so poorly, it is unlikely that the financing spigot will flow freely in 2010, via either large or small banks. Consequently, we are expecting the private sector to remain quiet until at least 2011.
What effect will the stimulus have on Southeast construction in 2010?
Coskren: We’re looking for the stimulus funds to continue to have a positive impact on street and bridge work, environmental public works and public buildings. Water and sewer construction are both expected to have a strong year in 2010, as healthy funding for the State Revolving Funds finally make their way to the project site. On the transportation side, it’s expected that the peak of the stimulus spending will occur in mid-2010.
Again, we'll publish more details soon. For now, what do you think about these 2010 numbers? Let us hear from you!