2010 ASSOCIATION FOR PROJECT MANAGERS CONSTRUCTION INDUSTRY OUTLOOK

NEWS FOR PROJECT MANAGERS: 2010 Construction Industry Outlook

In 2007, the housing bubble burst; however, the impact on the construction industry was not immediately felt.   The fall of 2007 saw the U.S. economy ‘officially’ enter recession.   Much of the construction industry had sufficient backlog to carry through the following year.   As a result, many firms still had a strong year in 2008.   The real crunch began with the credit crisis in September of the year.   Backlogs shriveled during 2009, leaving many design and construction firms with little new work on their books.  

Optimists would say there is now some positive news.  Some design and construction firms have already succumbed which is good news for the survivors as there is less competition for available jobs.   In addition, cost cutting has reduced operating expenses for many firms making breakeven points lower.    Construction materials costs have declined significantly, making projects more affordable for owners/clients.    In general, the U.S. economy is no longer in a tailspin, but improvement is elusive.    The status quo will not produce the kind of recovery the construction industry needs.  

Despite some positive news, 2010 generally looks bleak.   Engineering News-Record (ENR) magazine, other construction industry publications and associations and U.S. government agencies have released their 2010 forecasts.    Highlights from these include:

The U.S. Bureau of Labor Statistics (BLS) noted in its November 6 report that the “industry shed 62,000 (more) jobs in October, hiking its unemployment rate to 18.7%.”   The national jobless rate in October (for the economy as a whole) was10.2%     Another important measure is the unemployment/underemployment rate which stood at 17.2% in November.   This includes: individuals formerly employed fulltime who have ceased looking for work; or those who are working only part-time but formerly worked fulltime.   By any comparative measure, the construction industry is bearing a heavy burden for the recession.

Statistically, 2010 may show an improvement in construction over the prior year, but this will be an illusion.  According to ENR (November 16, p. 26), “The decline in construction activity this year was broader, steeper and faster than many economists anticipated as private non-residential building markets succumbed to the credit crunch and many public markets waited for stimulus funding to be delivered.    The consensus of this year’s batch of forecasts for construction in 2010 says the worst is over, but most gains will be the result of percentage comparisons with dismal 2009 numbers…”

The credit markets are still not lending for construction.   It’s difficult to blame them when “according to the Federal Deposit Insurance Corporation (FDIC), about one-sixth of all construction loans were in default this summer (2009).”   As noted in ENR (November 9, p. 28), “Construction loans are the epicenter of bank loan problems, and delinquency rates will likely rise dramatically within the coming year, with losses likely to exceed 25%.  (Richard Parkus, Deutsche Bank Securities, Inc.)  This would represent losses of at least $140 billion, disproportionately borne by regional and local banks.”   One notable example was Chicago-based Corus Bank.  The U.S. federal Office of the Comptroller of the Currency closed Corus in early September after more than half of the bank’s $3.9 billon of construction loans were in non-accrual or foreclosure. 

Not everyone believes we have reached the bottom of the construction decline.   Susan Persin, construction industry analyst at Oakland, CA-based Foresight Analytics notes: “We are not at the bottom yet, but we are close.”  The U.S. Department of Commerce forecasts: “overall construction will decline another 2% next year (2010), following a 10% decline this year (2009) in construction put-in-place.”   Robert Murray, McGraw-Hill Construction vice president for economic affairs, says “construction activity will continue to lag behind the results for the overall economy.”

Specific Building Type Forecasts

Murray, as quoted in ENR (November 16, p. 11) notes: “The first stage of the industry’s decline came in housing.  In 2008 and 2009, “We’ve seen the second wave of the downturn, meaning nonresidential building, take hold…This year (2009), commercial building starts, in dollars, are estimated to fall 43%, compared with a 22% drop for single-family housing.”    He also observes: “Both office building and commercial work will fall another 3% next year after tumbling more than 30% in 2009.   Hotel and motel work will be hit even harder, with 2010’s expected 9% decline following this year’s 61%.”   Residential construction will show a slight improvement.   Bernie Markstein, director of forecasting at the National Association of Home Builders (NAHB), predicts an increase in annual housing starts of about 27% for 2010.   “It looks like the market has hit bottom, and now it is going to be a long, slow dig out of this.”   ENR predicts a 30% increase in residential construction. 

The Associated General Contractor (AGC) as reported in ENR observes, “Investment in construction this year will drop by as much as $193 billion from last year (2008), an 18% decline.”    ENR also notes: “Office construction under way at the end of the second quarter (of 2009) was 30% below what is was last fall (2008), with delayed projects proliferating in cities across the nation.”    Health-care construction is expected to increase by 5%, while educational construction is predicted to decline another 3% after falling 18% in 2009.      The U.S. Department of Commerce notes that commercial building construction spending fell at an annualized rate of 18.4% in the third quarter of 2009 with little improvement expected in the fourth quarter or in the first quarter of 2010.