In a broad sense, total construction has stabilized at the current dollar amount achieved in 2001, although next year's drop may be greater should the economy falter, according to Robert Murray, chief economist of McGraw-Hill Construction, part of the McGraw-Hill Companies.
"Interest rates are currently very low, yet some upward movement may take place in 2003 as a result of strengthening business conditions, or possibly a spike in oil prices related to events in Iraq. And, the current economy is beginning to look similar to the jobless recovery of the early 1990s, with firms continuing to cut costs and postpone additions to staff. Assuming employment growth remains tepid through 2003, there will be little growth in the demand for commercial space, and little incentive to pick up the pace for commercial construction," Murray said.
The construction industry would derive some benefit from an improving economy in 2003, but it will also have to deal with several constraints. The states and the federal government are now under considerable fiscal stress, due to diminished tax revenues arising from the 2001 recession. Public works and institutional building have yet to see a negative impact, but some dampening will become discernible in 2003.
Several constraints on the construction industry, specifically low demand for commercial space, potential rising interest rates and reduced tax revenues eventually impacting public works and institutional buildings, will contribute to a 1% decrease in overall construction growth in 2003.
Murray also noted that the downturn for commercial building has turned out to be more severe than first expected, but mainly in the office and warehouse space sectors. It was generally believed that lenders and developers had been careful to avoid the excesses of the 1980s, but the surging high-tech sector in the late 1990s lifted demand for office and warehouse space in a number of major markets. With the bursting of the tech bubble, that demand has dried up, and a substantial amount of sublease space has been put back on the market. In addition, commercial building has been hampered by tighter bank lending standards, rising insurance costs, and a "wait-and-see" approach towards investment decisions by the real estate community.
But, as a result of this varied behavior by structure type, the value of new construction starts for 2002 is projected to be steady, holding in the range of $495 billion to $500 billion. This follows total construction gains of 5% in 2001 and 6% in 2000, as well as 10% average annual growth during the 1996-99 period.
The following are the main points for the 2003 construction market:
- Institutional building will edge up 1% in dollar volume, although square footage will be down 2%. School construction will continue to settle back from its record high reached in 2001,while healthcare facilities should at least equal this year's heightened contracting.
- Single-family housing will ease back from this year's exceptionally strong level. The number of starts will be down 3% to 1.215 million units (Dodge basis), which translates into no change in dollar terms. Housing starts in 2003 will still be high by recent standards, 6% above the average reported for the second half of the 1990s.
- Income properties will post a slight 2% gain in dollar volume, due to an expected increase for multifamily housing. Excluding multifamily housing, the commercial categories in 2003 will drop an additional 1%, following the 16% plunge reported in 2002. On a positive note, the rate of decline for commercial building will be much less severe in 2003, setting the stage for renewed growth in 2004.
- Public works construction will drop 3%, after rising 5% in 2002. Fiscal 2003 federal spending for highways is likely to be lower than the previous year, leading to a 4% decline for highway and bridge construction.
- Electric utilities will continue to retreat from the record high reported two years ago, with the value of construction starts down 24% in 2003.
- Manufacturing building is expected to rise 6% from its dismal 2002 level, helped by modest improvement in capacity utilization. Next year's dollar amount will still be 22% below 2001, and more than 50% below the most recent peak in 1997.