1999 Construction Outlook
But make no mistake, this is not 1997. The world is interrelated more tightly than ever, and we cannot progress too far ahead of the rest of our fellow passengers. Our factories are turning more slowly because major parts of the world are in very difficult economic times, and are buying less of our potential output. Our producers are being squeezed as desperate overseas producers try to stimulate sales with bargain-sale prices. The underlying strength of our economy, however, will prevent this spiral from progressing too far. A recession will not develop and within 12 to 18 months the pace of growth will begin to pick up again.
As usual, construction activity will parallel economic activity, lagging somewhat behind.
- Residential construction, which grew 9 percent in 1998, will drop 1 percent in 1999.
- Nonresidential construction, up 2 percent in '98 will decline I percent in '99.
- Nonbuilding structures, flat in 1998, will grow 3 percent in 1999. Overall, construction activity was up 5 percent in 1998 but will show no growth in the new year.
Residential ConstructionSingle-family construction has far outpaced its demographic drivers, which puts a very high likelihood on a "payback" period of below-trend construction. Single-family housing starts will decline 3 percent in 1999. The value per start will increase, however, because the low end of the market will drop off more than the high end. The net result will be a drop of 1 percent in the value of new single-family housing.
Multifamily construction was up 6 percent in 1998. Many rental units were vacated as first-timers bought their own homes, thus
reducing the demand for multifamily housing. Investors still remember the lessons of the late '80s and early '90s and are, in
general, avoiding the temptation to overbuild. Construction in this category will be down 1 percent in 1999.
Nonresidential ConstructionConstruction of public safety, administration and other buildings will be the star (in terms of growth rates) of 1999 nonresidential construction, growing 8 percent from the 1998 level, which was, in turn, 7 percent above 1997. Public safety represents a large part of this category and includes prisons, courthouses and law enforcement buildings. Growth in this area reflects our concerns with effectively combating crime, adequately housing prisoners and efficiently administering justice. Other growing publicly-owned building types that are included in this catch-all category are transportation terminals (air and rail) and roofed sports stadiums.
Privately-owned office and professional building construction rose 14 percent in 1998. Vacancy rates continued the decline that began in 1992 and now stand at 9.2 percent nationwide. In the most recent quarter surveyed, 51 percent of the new space brought to market was already leased. This is about 15 points above the no-tomorrow days of the late '80s, but already 10 points down from a year ago. Investors must exert prudence and restraint to avoid a replay of the 1980s.
The only other major category of nonresidential building construction to show positive growth in 1999 will be schools and other educational facilities. It grew only 3 percent in 1998. A slight further softening will be seen in 1999, to a growth of only 2 percent.
Construction of stores and other mercantile facilities declined 6 percent in 1998, the first decline in this category since 1991. Construction of new stores will decline 5 percent in 1999.
Industrial building construction dropped 6 percent in 1998 an improvement over the 12 percent drop in 1997. The industrial vacancy rate rose to 8.6 percent in the latest quarter, from 8.1 percent a year previously. As the economy slows and markets contract both domestically and overseas, investments will decline, leaving even less capital for new construction. Industrial building construction will decline 8 percent in 1999.
Nearly all warehouses are used in moving goods to manufacturers, retailers or consumers. With both store and industrial construction declining, it is no surprise that warehouse construction declines, too. Warehouse construction was down 6 percent in 1998 and will be down another 9 percent in 1999.
Hotel construction, which grew 3 percent in 1998, will show the largest decline of the major construction categories. It will drop
11 percent in 1999, the first drop since 1992. Over the seven-year span from 1992 through 1998, this category averaged growth of
22 percent per year, to four times its 1992 level. No wonder that investors and owners have finally begun to see declining
occupancy rates and declining returns.
Practice Self-DefenseRemember the cliché about the generals that prepare to fight the previous war? That's what comes to mind when some pundit says that a really severe economic shakeup can't happen now, because we've fixed all the problems that wreaked havoc in the '20s, or the '60s, or the '80s. A little voice then says, yes, but what new traps have we built since then?
Consider the near-failure of Long-Term Capital Management, or the fact that, at the urging of The Federal Reserve itself, major financial institutions were willing to risk $3.6 billion to slow its demise, fearing world-wide financial carnage. The scary thing was that another financial institution also required a multi-billion-dollar bailout a few weeks later. How many of those, for how many different reasons, are just over the horizon; and how many can we rescue before we're out of life preservers?
The only point here is that there are some really serious things that could go wrong. They are not likely to happen. The U.S. economy will probably downshift again but keep right on moving ahead. But we don't really know what's out there in the darkness. Plan with extra care, and stick to your plans. The economic climate will be chilly, but, like your mother told you, take along extra protection and avoid exposure.