Engineering Inc. - January/February 2010 - 4

MARkET WATCH Nowhere to Go but Up Construction market bottoms, but there is light ahead M By Joe Salimando cGraw-Hill Construction (MHC) is predicting an 11 percent bounce in the dollar value of 2010 construction starts compared with last year. Most of that gain is attributable to single-family housing (up 32 percent) and public works projects (up 14 percent), the company says. When I mentioned these figures recently to one industry veteran based in Southern California, he was incredulous; from where he stood, it just didn’t seem possible. The national housing picture simply couldn’t rebound that fast, could it? It depends on your vantage point. Expectations of a continued boom, or a moderate decline, were the rule in 2008. MHC originally predicted that 2009’s construction start volume would exceed $500 billion; forecasters have since scaled those projections back. The latest year-end estimates come in at around $418 billion. The news is not all bad, however. Infrastructure— roads and bridges, in particular—is one bright spot. According to MHC forecasts, in 1998 and 1999 combined, $68 billion worth of new highway and street construction projects broke ground in the United States. The estimate for 2009 alone eclipsed $57.3 billion. The forecast for 2010 is higher still at $64.7 billion. Cement Optimism U.S. Construction Spending Annual % change 2009 Nonresidential Residential Heavy Total Source: Reed Construction Data -5.7% -27.9% 11.3% 1.2% -5.0% 7.0% -1.7% 0.4% 6.3% 15.9% 1.9% 4.8% If the amount of construction materials—cement, for example—used in major road and highway projects is an indicator, recent projections from the Portland Cement Association (www.cement. org) are another cause for optimism. • 2010: 29.6 million metric tons • 2011: 33.1 million metric tons • 2012: 36.4 million metric tons • 2013: 38.5 million metric tons FMI’s Heavy Forecast tially exceeding $1 trillion again by 2013. What will be important for U.S. engineering firms— assuming FMI’s forecast is correct—is the makeup of these opportunities. Will the focus be on residential construction, power construction, or highways and roads? Consider these FMI comparisons: Residential—2005: $627 billion (56 percent of total put-in-place spending); 2013: $351 billion (33 percent). Power Construction— 2005: $35.5 billion (3.2 percent); 2013: $122 billion (11.6 percent). Highways and Streets— 2005: $64.1 billion (5.8 percent); 2013: $104 billion (9.9 percent). Inflation Concerns? Highways and Streets Historical comparisons of nonresidential construction starts show a significant decline during the past 12 years. Between 1998 and 1999, for example, MHC recorded 298 million square feet of construction starts on new manufacturing buildings. If the company’s latest estimates for 2009–2010 are accurate, construction starts on new manufacturing buildings will total just 79 million square feet.ENGINEERING INC. Construction industry consultant FMI Corp. provided detailed current-dollar forecasts through 2013 in its Q3 2009 construction outlook. According to the report, construction put in place (a term used by the Commerce Department to describe construction spending) exceeded $1 trillion each year from 2005 through 2008 before falling back in 2009. Put-inplace figures are expected to climb in coming years, poten- An October webinar sponsored by Reed Construction Data (RCD) featured information from three leading economists: Jim Haughey of RCD, Kermit Baker of the American Institute of Architects and Ken Simonson of the Associated General Contractors of America. RCD’s forecast for three categories of U.S. construction spending is shown in the chart above. Given these changes and the realities of inflation, Simonson said, one could expect a 6 percent to 8 percent increase in the cost of materials used in construction. His back-of-the-envelope summary of the 2010 construction outlook was as follows: Nonresidential construction spending: flat to down 5 percent; residential construction: up 5 percent to 10 percent; total construction spending: up 2 percent to down 4 percent; labor costs: up no more than 3 percent; materials cost: flat to up 8 percent. In addition to watching niche markets, U.S. engineering firms looking to satisfy existing clients will have to keep an eye on worsening materials shortages and potential price spikes (which, according to Simonson, could exceed 8 percent for some items). Still, as the latest projections show, there is opportunity on the horizon. Joe Salimando writes on the construction industry at www.electricalcontractor.com. He can be reached at ecdotcom@gmail.com. JANUARY / FEBRUARY 2010

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Engineering Inc. - January/February 2010

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