Cloud over construction breaking, but slowly
Good and bad signs are forecast for the construction sector in 2011, but industry watchers agreed that it appears the ugly business conditions seen in recent years may be over.
At a conference for North American steel industry executives, customers and suppliers in Chicago last month, presenters gave outlooks for the construction sector that ranged from gloomy to slightly less gloomy. CRU, a London-based research and consulting firm, sponsored the three-day conference.
After showing its first positive reading since January 2008, the Architecture Billings Index, an economic indicator of construction activity, fell nearly two points to 48.7 in October. However, hope is still on the horizon even if a significant increase in construction isn’t expected to happen until near the end of 2011, said Gary Heasley, executive vice president of business development at Fort Wayne, Ind.-based Steel Dynamics Inc.
“There are good signs out there,” Heasley said. “Construction spending went . . . unsustainably high, dropped a lot, then has rebounded off the low.”
Heasley said commercial activity is expected to increase 4.4 percent in 2011, but that’s after an estimated decline between 20 percent and 25 percent this year.
One sign of improving conditions in the commercial real estate market are that vacancy rates for office, commercial and industrial space appear to be stabilizing or falling, he said.
But gross domestic product, which construction activity contributes to, isn’t rising fast enough to help reduce the elevated levels of construction unemployment, Heasley said. In September, unemployment in the sector was 17.2 percent, while the nation’s jobless rate not adjusted for seasonal employment changes was 9.2 percent.
One challenge that Heasley said will impact the market is payment obligations coming due on existing commercial real estate. He said about $1.6 trillion of commercial real estate financing will have to be paid between next year and 2014 and cash may need to be poured into existing properties instead of being diverted to other projects.
“We cannot wait for a ‘recovery’ to improve industry prospects,” Heasley said. “We must learn to succeed in our markets as they are and be prepared for slow growth over the next couple of years.”
The residential market also is expected to improve in the next couple years, despite significant challenges with foreclosures, home prices and sales activity, said Anika Khan, an economist with Wells Fargo Securities LLC.
“It’s going to be an agonizingly slow recovery,” Khan said.
Showing a Wells Fargo Securities forecast, Khan said that housing starts aren’t expected to rise above the 2008 level until 2012 even with year-over-year improvements. Among the issues holding down the demand for new housing is the level of inventory available as a result of foreclosure activity. Areas with high numbers of borrowers who are underwater on their mortgages are at risk of addition price declines, which will also work to mitigate recovery in the housing market.
Other forecasts, including one from McGraw-Hill Construction earlier this year, said overall U.S. construction starts in 2011 would increase 8 percent to $445.5 billion, following the 2 percent decline expected for this year.