The North American construction industry will see slow but steady growth next year, fueling an economic recovery that will continue and strengthen through 2007. That's the consensus from experts who spoke at the North American Construction Forecast, held at the National Press Club in Washington in mid-October. The conference was sponsored by Reed Construction Data, a division of Reed Business Information, publisher of INDUSTRIAL DISTRIBUTION. Five experts and a panel of industry leaders presented a message of careful optimism to construction professionals during the one-day conference, according to RCD. Their outlook is for growth through 2007 despite increasing interest rates and sluggish job growth this year. They said the next two years will not only provide an increasingly stronger economy, but also a positive upswing for several sectors of the building industry, including industrial, public and other non-residential construction markets.

Speakers at the event included Jim Cramer, president/CEO of Greenway Group, Inc.; Rich Karlgaard, publisher of Forbes Magazine; Glenn Mueller, Ph.D., professor at Johns Hopkins University Real Estate Institute and a real estate investment strategist for Legg Mason, Inc.; Edward Sullivan, chief economist of the Portland Cement Assn.; David Seiders, chief economist for the National Assn. of Home Builders; and James Smith, senior fellow and director at the Center for Business Forecasting, The Kenan Institute of Private Enterprise, University of North Carolina–Chapel Hill.

After assessing the overall economy and stock market, Karlgaard addressed the residential real estate market, noting that the gap of residential costs between the urban coast and the heartland is the widest it has ever been. However, he said he does not expect the gap to continue to grow at the current pace, due to the sophistication and accessibility of technology in the workplace. Cell phones, broadband Internet connections, cable television and overnight deliveries are allowing people to trade in over-crowded, expensive suburbs for a variety of small towns, new-growth cities, and exurban areas beyond the suburbs.

Similarly, Seiders said he expects residential housing volume to stabilize over the next year, compared to the remarkable growth in that sector in the past two years. He indicated a positive outlook for single-family housing starts and a sustained rate of growth for multi-family housing, especially condominiums—with the exception of market-rate rentals, which are experiencing construction growth despite the current high vacancy rate, he said.

Those assessments ring true for many in the construction industry. Marshall Jones, president of Marco Supply, a construction supplies distributor covering the Southeast and Mid-Atlantic, said that while he doesn't expect an explosion of growth in residential construction next year, he doesn't expect the sector to be hurt, either. All in all, he said residential construction may level off in his region and that commercial construction is poised to pick up.

'I don't think anybody wants to jinx it by getting out there and saying things are going to be great. I'm probably a little bit more carefully optimistic—especially when it comes to the commercial side,' said Jones, who is also president of the Specialty Tools & Fasteners Distributors Assn., which represents construction and industrial supplies distributors, manufacturers and manufacturers' representatives. 'I think that next year, things are poised to continue to move forward.'

During his presentation on the retail, industrial and office sectors, Mueller, of Johns Hopkins, said he expects the commercial sector to pick up.

'We bottomed out in 1990, then peaked in 2000. But it only took three years to go back to the bottom. We'll now start climbing back up. This is a typical cycle,' he said, adding that rental growth is slow in most markets, but should potentially move back to a growth phase by 2006.

Sullivan, of the Portland Cement Assn., agreed, noting that his outlook for 2005 through 2007 is for strong growth in non-residential construction, moderate growth in public construction, and slowing growth in residential construction.

Sullivan said a strong economy will fuel non-residential construction while increasing interest rates will begin to slow residential construction. Industrial construction, he added, will experience a strong increase by the summer of 2005. And despite higher office vacancy rates across the country, office construction will remain on a steady upswing starting in 2005 through 2007. He said state tax revenues will help to accelerate public construction, which suffered from 2001 through 2003 due to a weak overall economy.

The positive outlook comes on the heels of a good 2004 for Marco Supply, which is headquartered in Roanoke, Va. Jones said 2004 has been a record year for his company, due to price increases, growth in the commercial sector, and improved operational performance.

Despite the good news and rosy outlook, there are challenges ahead for the construction industry. Jones noted that price increases have also put a strain on inventories, impacting cash flow for many distributors. He also said that finding talent, almost always an issue for distributors, may become a more significant problem in the next year or so as the economy improves and companies begin hiring again.

'We've started to notice people leaving [jobs] a little more frequently, [and] things getting tighter in certain markets,' he said. 'There's a sense that in about a year or so, we'll have some more challenges in that regard again.'