2012 Construction Outlook
Pervasive Uncertainty, Fear and Unemployment
Leading
construction experts and economists are certain about one thing in
construction right now: The future is mostly uncertain because consumers are scared, and too many Americans are unemployed. Economists see 2012 as a big question mark because of the risk of a double-dip recession.
The projections from previous years are out the window, as unemployment continues to hover around 9 percent and the economy has “been bouncing along the bottom in 2011,” said Keith Fox, president of McGraw-Hill
Construction during his opening remarks at the Outlook 2012 Executive Conference, held in Washington, D.C., on Oct. 19, 2011.
This article analyzes the construction data and economic forecasts from industry leaders to help
ELECTRICAL CONTRACTOR readers better understand why most
construction markets are mired in a slump and what hope, if any, lies ahead. Perhaps the heavy bleeding is over, but the economy is still limping along a path of uncertainty and volatility. Right now, there isn’t a lot of confidence to go around. Current economic data showcases the not-so-enjoyable trends.
Economy still in crisis
First, let’s examine the macroeconomic trends that steer what happens on America’s job sites. According to Beth Ann Bovino, deputy chief economist at Standard & Poor’s, the recession has been over since 2009, but recovery is at “half speed.” During her presentation at McGraw-Hill Construction’s Outlook 2012 Executive Conference, Bovino said the U.S. economy grew by a modest 3 percent in 2010, by 1.7 percent in 2011 (estimated), and is projected to grow by a mere 1.5 percent in 2012. One of the main detractors from growth is that 9 percent unemployment rate.
In addition, Bovino said government bickering and debt issues, coupled with fear and uncertainty among consumers, put the economy at about a 40 percent risk of another recession. The Federal Reserve’s lowering of interest rates to near zero didn’t do much to boost the economy's growth.
“Investors saw that risk was a four-letter word and ran for the door,” she said.
Robert Murray, vice president, eco-nomic affairs at McGraw-Hill Construction and
electrical , agreed, saying during the Outlook 2012 conference that the chances of a double-dip recession were at about 20 percent in January 2011, but have since risen to more than 40 percent. In other words, the economy is teetering on the edge of another recession, and the slightest nudge can send it off that cliff again.
With 25 million Americans unemployed or underemployed, “people are scared,” Bovino said, adding that wealth is down, home prices are down, spending is down, and savings are up. In its most simplistic terms, “a weak jobs market means less
construction,” Bovino said.
Consumer spending is another obstacle for
construction markets. Consumers are focusing on debt reduction. Household debt, as a percentage of after-tax income, was 140 percent in 2007. In 2011, it was 120 percent. Much of that debt reduction has to do with foreclosures, as well.
“If you turn in the keys, you don’t have the debt,” Bovino said.
The latest Federal Deposit Insurance Corp. (FDIC) data supports that assertion. Total deposits in FDIC-insured banks eclipsed $10 trillion on Sept. 30, 2011. Total deposits increased by $235 billion in the third quarter of 2011, marking a $577 billion increase since the beginning of the year. The FDIC data also shows that about $8.5 trillion of total deposits is sitting in domestic branches of insured banks while the remaining $1.5 trillion is in overseas branches of U.S. banks.
“People are putting a little more in the bank and spending a little less at the mall,” said Standard & Poor’s Bovino, simplifying the trend.
What is more interesting about the consumer saving is that they are putting their assets in “liquid” accounts, such as savings, checking and money market accounts. Perhaps fears from stock market volatility and the questionable situation in Europe pushed them to find safer, more conservative places for their assets. According to the FDIC report, checking, savings and money market accounts increased $316 billion in the third quarter and $762 billion since the beginning of the year. Conversely, certificates of deposit—which require a time commitment and penalties for early withdrawal—decreased by $36 billion in the third quarter and $130 billion since the beginning of the year. Consumers and small business owners remain conservative with investments. The housing market is included.
Most economists agree that, until the housing situation changes for the better, the economy will be mired in this economic crisis, with only slight, incremental growth. The housing bubble that burst a few years ago precipitated this mess. Recovering from it will take much more time. Let’s take a closer look at the construction markets, paying particularly close attention to the residential market—a leading indicator for overall construction.
Construction overview
According to McGraw-Hill’s Murray, the $412 billion
construction market breaks down to $133 billion in residential construction, $152 billion in nonresidential construction and $127 billion in nonbuilding construction. Right now, residential and nonresidential are hurting, while nonbuilding could emerge as a nice opportunity for electrical contractors—at least in the short term.
“It continues to be a turbulent time,” Murray said during his annual presentation at the Outlook 2012 Conference. “There is a sense of uncertainty.”
In 2010, Murray predicted a leveling off that suggested growth for 2011. Murray, one of the industry’s leading and most respected economists, was among the masses in missing the mark on that call. Most experts and economists were in the same boat, as they expected the jobs picture to improve in 2011. When that did not happen, in addition to many other variables, the market remained flat or declined. And while government stimulus funding appeared to boost the economy, it was an artificial jolt, Murray said.
Residential: trouble at home
The housing bubble collapse continues to ripple through the entire construction arena. Things are turning around, but economists are erring on the side of caution with expectations—an evident theme throughout the forecasts.
“We believe the turnaround is in progress, but it’s so slow and so painful we can’t get too excited about it,” said Bernard Markstein, chief economist at Reed Construction Data (RCD) during the Oct. 13, 2011, “Economic Forecast Webcast: Flat, Down or Up? Where is Construction Heading?” Markstein also cautioned that large percentage increases in various construction sectors in 2011 look nice on paper but are easy to reach when coming from such a low point. Again, tame your excitement until we see sustained growth over a longer time frame.
“We’re not really getting back to where we were [prerecession],” he said during the RCD webcast.
Single-family
According to Standard & Poor’s Bovino, housing was affordable, interest rates were at record lows and demand increased sharply in 2005. Consumers bought bigger houses, rates went up and some signed up for adjustable-rate mortgages. When those monthly payments increased on the adjustable-rate mortgages, affordability went down, housing dried up and demand fell, thus leaving a huge overstock of available housing in the single-family market.
Bovino said there is an eight-and-a-half month excess supply of available homes, which has led builders to pull back on new construction plans. Housing starts, which peaked at 2 million in 2005, dipped below 500,000 in 2011. When you add in the “shadow inventory” of distressed homes—those in foreclosure or on the verge—you can add a couple more months to the inventory-depletion timeline.
Other leading economists agree. According to Kermit Baker, the American Institute of Architects’ chief economist, the 2 million units built in 2005 slumped dramatically to 500,000 in 2009 and rose to about 510,000 in 2010. Housing starts were projected to reach 600,000 units for 2011 and should reach 800,000 units in 2012. The number of housing starts is not expected to reach more than 1 million units until sometime in 2013, he suggested, but even that is considered subpar. The 2011–2013 projects are consensus projects, according to Baker.
During his presentation at the Outlook 2012 Conference, Baker said there is a dramatic scaling back of new home construction because, “potential homebuyers are nervous about getting back in.” He added that, “we are still sitting on a huge amount of vacant units.”
Despite a few years of growth, the industry is not back to normal yet in terms of household formations.
“What started out as a problem of oversupply has become a problem of low demand,” Baker said. He added that the under-30 population is doubling up, tripling up or living with their parents, instead of jumping into the housing market. The focus in recent years has been on inventory reduction. That has now shifted toward household formations.
According to CoreLogic, Baker said during the McGraw-Hill conference, 20 percent of homeowners with mortgages are “under water.” He said during his webcast presentation that there are a lot of homeowners sitting on the sidelines who want to move but can’t until the housing market improves. If they are sitting on the sidelines and cannot sell or upgrade, what are they doing? Are they improving their existing properties?
Remodeling and alterations
Despite home-improvement spending dropping by 20 percent during the economic downturn, the remodeling market still accounted for $300 billion in construction, Baker said. The remodeling market peaked in 2007, as growth came from homeowner improvement projects. It hit its trough in mid-2010 with a 15 to 20 percent drop from that 2007 peak. That slump, he said, pales in comparison to the one endured in the home-building arena.
Traditionally, remodeling and alterations account for about 40 to 45 percent of the residential construction market. However, remodeling is now growing to more than 70 percent of the residential market—clearly a sign of the times.
In the last five years, Baker said, there has been an uptick in discretionary spending on additions, kitchens and bathrooms due to a lack of mobility. Instead of moving to larger residences, homeowners are improving the ones in which they reside, waiting for market prices to improve.
Distressed properties also are contributing to the remodeling and alterations category, Baker said. About a third of remodeling construction, he said, is done on distressed properties—those in foreclosure or on the verge of it. These projects account for 20 percent of the remodeling revenue, which is a very significant amount, compared to previous years. This distressed property market will fuel remodeling work for years to come, Baker said.
It is perhaps sad that one of the few bright spots in the residential
construction market is that distressed properties are contributing to the overall construction market because banks and homeowners are getting properties ready for foreclosure sales or short sales.
In addition to distressed properties, energy-efficiency upgrades have also emerged as a leading sector for the residential remodeling market—one that electrical contractors, in particular, can take advantage of. In the third quarter of 2009, green projects made up 25.5 percent of the remodeling market share; a year later, during the height of the stimulus program, that percentage grew to 29 percent. In the third quarter of 2011, in a post-stimulus environment, the percentage fell back to 24.9 percent.
Multifamily
According to the AIA’s Baker, the single-family home market directly impacts the multifamily market.
“Renters went up 1.5 million per year, and home ownership went down as a result,” he said. “One affects the other.”
McGraw-Hill’s Murray said multifamily housing is one of the few bright spots in construction that could deliver growth in the near future.
“Perhaps the best bet right now is multifamily,” he said.
The sector enjoyed 15 percent growth in 2011 and is projected to grow by another 17 percent in 2012.
As foreclosures and distressed properties increase, the opportunities for multifamily housing increase. People forced to leave their homes—whether due to affordability issues or unemployment—tend to roll into apartments as a result.
In his presentation, Harvey M. Bernstein, McGraw-Hill vice president, Industry Insights & Alliances, said there would be a greater demand for apartments due to downsizing, foreclosures, job switches and unemployment. According to the Engineering News-Record’s Construction Industry Confidence Index (CICI), multiunit residential was the only category that showed increased confidence in recent quarters. Healthcare, higher education, K–12 and office (commercial), showed declines over the same time period.
Again, these figures show a growing multifamily sector at the expense of the single-family market. In this tumultuous housing market, home ownership is risky for many Americans. Renting has become the necessary fall-back plan that many of the unemployed or underemployed have embraced—at least until they get above water again. It will be a long, slow process, just like this economic recovery.
In his final analysis of the residential market, Baker said the industry would see slightly more demand for housing, as we “climb back on this ladder, gradually.” He added that there is still too much housing inventory that needs to be sold off before we can start a recovery with new home construction. Standard & Poor’s Bovino is in complete agreement on that point. The distressed home market has been, and will continue to be, the wild card in that equation.
Now that we have examined the residential market, let’s take a closer look at nonresidential construction. For many electrical contractors, the commercial/industrial/institutional (CII) market is the bulk of their business, and it is vital to keep abreast of the growth opportunities.
Nonresidential (CII): flat or down?
According to McGraw-Hill’s Murray, the U.S. nonresidential building market, which free-fell in 2009 by more than 30 percent, was down a mere 6 percent in 2011 and is projected for a modest 2 percent increase in 2012. The total nonresidential market includes the $92 billion institutional market, the $47 billion commercial market and $13 billion in manufacturing. Let’s dissect each market to uncover obstacles and opportunities.
Commercial
Construction in the U.S. commercial buildings sector (stores and shopping centers) peaked in 2007 with 314 million square feet. Over the next four years, the amount of square footage plummeted by an alarming 75 percent to 81 million square feet in both 2010 and 2011. McGraw-Hill projects a slight 2 percent up-tick for 2012. When you consider the 75 percent drop, a 2 percent increase seems insignificant, but at least it is not falling further.
McGraw-Hill’s Murray said the commercial market suffered from slow retail sales that led to reduced store openings and more store closings. He cited the Borders book chain as a major example. The only retailers expanding right now are “extreme discounters,” such as Family Dollar and Dollar General.
A look at who is building stores in this economic downturn shows that Walmart outpaces every other competitor. All other major retailers paled in comparison to the number of projects Walmart started between January 2009 and January 2011.
In terms of warehouses, construction fell sharply from 2008 to 2010 but is now experiencing some modest growth. Some of that growth is coming from Amazon.com, which is constructing several large distribution facilities. Warehouse construction fell from 254 million square feet at its peak in 2007 to 48 million at the trough in 2010. Since then, there has been an 18 percent increase in 2011 and a projected 17 percent increase on top of that in 2012. However, reaching 67 million square feet in 2012, while growing, is still far away from that 2007 peak. Growth will be slow and steady, experts concede.
A sluggish economy, reduced business travel and hotel/casino overbuilding led to substantial losses in the hospitality sector in 2009 and 2010, according to Murray. Just as in other commercial areas, hotel construction endured a major collapse during the recession and is now creeping back up again. Murray projected 34 percent growth in 2011 and another 17 percent growth in 2012 in hotel construction. In 2011, business travel improved, industry financials strengthened and occupancy rates improved. In addition, a look at major hotel/casino projects indicates that casino construction is still a good bet for contractors. Of the largest 12 hospitality projects underway, four of them involve casinos. Incidentally, among the largest amusement and recreation projects in the institutional sector, six of them involve casinos.
Following all the other sectors of the U.S. commercial market, office construction endured the same precipitous drop following a 2007 peak, from 218 million square feet to a 2011 low of 55 million square feet. Murray predicts a modest 4 percent increase in office construction in 2012. Tight credit conditions, he said, contributed to project deferrals in 2008 and 2009. Those deferrals are now easing.
Industrial/manufacturing
After peaking at 91 million square feet in 2007, manufacturing buildings slumped to 37 million square feet in 2009 before beginning to climb again. Increases in 2010 (25 percent), 2011 (5 percent) and a projected increase in 2012 (6 percent) should get this sector back to about 51 million square feet—still far short of the 2007 peak. In terms of dollars, the industrial/-manufacturing market fell from $31 billion in 2008 to $9.2 billion in 2010. It is now creeping up to between $12 billion and $13 billion (projected for 2012).
The sharp decline in recent years was caused mostly by closings of automotive plants across the country, particularly in Detroit. The modest growth coming now is a result of large-scale projects in both the automotive and energy sectors—ethanol, biofuel and solar manufacturing plants.
Institutional
The institutional market comprises education buildings, healthcare facilities, public buildings, amusement and recreation projects and airports. Let’s examine each area briefly.
School construction continues to lose momentum, down from 224 million square feet at its 2008 peak to 127 million square feet in 2011. That number is expected to drop further in 2012 to 115 million square feet, a 9 percent decline. Leading this trend is a tightening of state budgets, a scaling back on capital expenditures by universities and colleges and shrinking endowments.
In 2010, K–12 construction was 3.6 times the size of colleges, universities and community colleges in terms of square footage; however, in dollar terms, K–12 school construction was 2.3 times the size of higher education construction.
Despite an ongoing need to replace aging facilities and a growing elderly population, healthcare facilities construction has been flat since 2009. After a 2008 peak at 109 million square feet, the sector dropped to 67 million square feet in 2009 and grew only to 71 million square feet in 2011. McGraw-Hill projects a 1 percent decline in 2012. There is a long-term need for healthcare construction because of an aging population and Veterans Administration future needs, but time will tell how that plays out.
Public buildings (detention centers, armories/military, courthouses, police and fire stations and post offices) have also fallen on hard times, particularly post offices. Overall, public building construction fell by about 50 percent from 51 million square feet in 2007 to 24 million in 2011. Murray expects a further decline in 2012 by 9 percent. Wearing off of Stimulus Act support and diminished federal spending will continue to erode public building construction. Post office construction—one of the hardest hit areas—was up by 76 percent in 2010 but collapsed by almost 100 percent in 2011.
According to McGraw-Hill’s data, airport terminal work jumped in 2009 by 49 percent to 4.4 million square feet, only to retreat by 45 percent in 2010 to 2.4 million square feet. The 2012 projection is another 5 percent decline to 1.8 million square feet.
Nonbuilding: stimulus dried up
Nonbuilding construction accounts for $127 billion of the $412 billion construction industry, or about 30 percent. With the impact of stimulus funding now waning, though, many of the federal public works projects that stimulus funds assisted in 2009 and 2010 are no longer feeling the lift. What peaked in 2010 with $58.8 billion in highway and bridge construction, slipped in 2011 to $54 billion. McGraw-Hill predicts another 7 percent decline in highways and bridges in 2012.
Likewise, budget cuts affected rail and mass transit projects. From a $7.1 billion peak in 2010, the sector plummeted by 55 percent to $3.2 billion in 2011 and is expected to dip further in 2012.
There was a 48 percent surge in electric utility construction in 2011, which followed a 34 percent jump in 2010. After peaking at $42 billion in construction, experts predict a 24 percent decline for 2012 to $32 billion simply because the amount of growth couldn’t be sustained much longer. Either way, this utility work is great news for electrical contractors. Let’s dissect this category a bit more for the electrical industry.
Energy bills provided tax incentives for electric utility and transmission line construction. The stimulus act delivered another boost for alternative sources of electricity generation. Alternative-energy power plants now appear to be very strong, according to Murray. In 2010, alternative-energy power plant construction jumped by 111 percent and was up 85 percent (as of October 2011, year to date). Power line construction also remains strong with a 52 percent increase in 2010 and a 100 percent increase (as of October 2011, year to date). Of the top 12 large projects in the electric utilities category, five are major solar plants, one is a new wind farm, and nuclear and gas plants round out the top group.
Other trends: opportunities and concerns
LEED specification rate
It is interesting to note that the nonresidential LEED specification rate has increased steadily since 2004. Since then, when the LEED spec rate was about 17 percent, it has grown to about 58 percent in terms of dollars in 2010. In terms of the percentage of projects, the LEED spec rate grew from about 7 percent in 2004 to about 28 percent in 2010. This trend is expected to continue to grow. Institutional construction, particularly in the education construction sector, is driving this trend.
Labor concerns still loom
In 2010, retirees made up 25 percent of the labor force, said Standard & Poor’s Bovino. By the year 2030, retirees will make up 50 percent (half) of the entire labor force. This indicates a serious labor issue for the next couple decades, as aging baby boomers head into retirement.
In addition, as construction jobs dried up and employees were laid off, a sizable chunk left the industry altogether out of necessity. They might not return when the economy turns again.
A shortage of younger, trained
electrical workers and an aging baby boomer population spell problems for the labor force in the future. This issue will only get bigger in time.
Conclusion
Now that we have examined the
construction markets and looked at economic and other trends, what’s the bottom line?
The housing demand, Baker said, will follow the jobs. RCD’s Markstein summed up what has to come first for construction to creep out of this valley: “Jobs. Jobs. Jobs.” McGraw-Hill’s Murray concurs as well, saying, “The key is what is going to happen with jobs.”
Between February 2008 and February 2010, 8.8 million Americans lost their jobs. Some of those unemployed Americans are back to work, but far too many are still on the shelf. Until the unemployment rate drops, don’t expect strong construction activity.
Standard & Poor’s Bovino predicts that the unemployment rate won’t dip to 8 percent until 2013. That’s bad news when you consider that most economists point to jobs as the catalyst for just about everything in construction.
With continued volatility in the labor force and unprecedented levels of unemployment, 2012 is not only uncertain, but growth will be modest if it exists at all.
“It’s a long process, and I don’t think anyone is calling for a lot of improvement in 2012,” said the AIA’s Baker during his RCD webcast presentation. “And I think it will be touch-and-go in 2013.”
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