Construction Market
by Jim Haughey, director of economics for Reed Business Information -- Industrial Distribution, 10/10/2005
Construction activity on nonresidential building projects has increased 2 percent so far this year (after inflation) after declining for more than three years. This exceeds the growth in manufacturing production, if the large share due to design improvements in semiconductor parts is excluded. But it slightly trails the growth in factory equipment investments.
Ahead, nonresidential building construction spending will expand, discounting inflation, about 10 percent by the end of 2006, slightly faster than manufacturing production or factory equipment investment. Construction market growth is expected to continue at the same pace or faster in 2007 while growth slows in the manufacturing market.
Accelerated growth in the construction market created more square feet of buildings that need continuing maintenance, as well as opportunities for distributors to service contractors on the job site during construction. The stock of nonresidential buildings increased less than 1 percent annually in the last few years, as very few new buildings were started and some existing buildings were demolished or converted to residential use.
The starts trend reversed earlier this year. A small rise in building starts has already occurred, but a much larger rise in building starts is soon ahead based on the recent surge in the number of projects in the pre-planning stage in the Reed Construction Data project database. The stock of building increased by as much as 2.5 percent a year at the peak of the previous building cycle, but will probably grow at a peak annual rate of about 2 percent in 2007-8.
| Construction Spending ($US, annual % change) | |||||
| Total
Non- Residential |
Lodging
|
Office
|
Commercial (retail & warehouse) |
Health Care | |
| 2002 | 1.0 | -24.2 | -22.0 | 17.8 | 8.9 |
| 2003 | 0.6 | -0.3 | -9.7 | -2.1 | 15.1 |
| 2004 | 5.5 | 11.6 | 7.6 | 6.9 | 10.4 |
| 2005 | 5.9 | -2.5 | 2.6 | 6.1 | 8.5 |
| 2006 | 11.9 | 15.6 | 18.9 | 3.4 | 13.1 |
| Education | Religious | Public Safety | Amusement Recreation |
Manufacturing | |
| 2002 | 5.9 | -0.3 | 2.9 | -22.2 | -22.6 |
| 2003 | 1.2 | 2.5 | -1.8 | 26.3 | -6.9 |
| 2004 | 3.0 | -5.6 | -3.9 | -1.4 | 10.0 |
| 2005 | 7.0 | -4.7 | 5.6 | -3.6 | 20.1 |
| 2006 | 14.8 | 8.2 | 11.0 | 11.9 | 11.7 |
The most rapid growth will be for factory renovation and construction, especially in the motor vehicle (Mid-South), chemical (Gulf Coast) and electronics (West Coast) industries. This is being spurred by the recent rise of manufacturing capacity utilization to almost 80 percent, the usual threshold for a jump in capacity investment.
The large increase forecast for educational facilities is primarily for colleges, where enrollment growth is the fastest. Higher education had to take a much bigger cut in the last recession than K-12. Both lost funding from the drop in tax receipts, but colleges also lost resources from the steep drop in the value of their investment funds.
Hospitals will be the rapid-growth sector within health care, although spending for nursing home and medical office construction will also increase. Hospitals will fund the projects from the sharp rise in receipts from medical insurers, including Medicare and Medicaid, which they received in 2003-2004 due to both more people insured and a steep rise in premiums after the recession.
Both office and hotel construction are expected to advance quickly in 2006 after sagging this year under the pressure from last year’s 11 percent jump in construction materials cost. It is now cheaper for investors to build rather than buy offices and hotels in an increasing number of large metro areas. Vacancy rates have declined enough, and rents have increased enough, that commercial properties now have positive net operating income. There will be very pronounced regional differences in commercial construction growth. It will be highly concentrated in a few cities. This includes New York and Los Angeles, where vacancy rates are very low, and Washington, San Diego, Phoenix and Las Vegas, where economic growth is unusually high. Nonresidential construction may not increase at all in many parts of the country—especially areas that have both above-average rates of building vacancy and unemployment.
View All Blogs
