Industry May Have
a Rocky Ride in 2002,
Economists Say the
Industry will Begin
to Recover in 2003
by Tara Taffera
In the wake of the September 11 terrorist attacks all eyes are on the economy. Will consumers put a lock on their bank accounts and not buy new homes? What will consumer confidence, or a lack thereof, mean for the future of the building industry? These questions and many more were the topic of discussion at the CMD Group’s annual North American Construction Forecast (NACF) conference held October 16 in Washington, D.C. The conference gathered the leading economists and analysts from all facets of the construction industry who gave their forecasts for the coming years. Three-hundred attendees representing building product manufactures, architectural firms, general contractors and other industry leaders attended to hear forecasts of what the future holds in terms of construction.
Bill Toal, chief economist of the Portland Cement Association, revised his expectations for next year based on the events of September 11. Toal said overall construction activity will decline 6.3 percent in 2002. This is a major change from last spring when he predicted a 0.1 percent growth. Still, Toal said 2001 will end with an overall increase of about 1 percent in construction activity, and by 2003, he said construction activity will rebound to achieve an increase of 3.8 percent.
According to Toal, the hardest-hit segment of the construction industry will be the nonresidential sector which will see an overall decrease of 5.4 percent this year. Next year, the sector will decline by 10 percent but it should begin recovering by the end of 2002 and experience a 3.5 percent increase in 2003. While Toal said office vacancies had been predicted to rise to about 10 percent by the end of this year, he said we may see a greater increase in office vacancies going into next year.
Although Toal referred to public construction as the “silver lining of the construction industry,” even this segment shows signs of
weakening. While the public sector experienced 10.3-percent growth, states are beginning to see tax revenues significantly lower than expected for the year and are beginning to cut back on programs such as highway construction, according to Toal.
Toal was one of the many conference speakers who talked about the importance of consumer confidence. He said that the weakening in consumer confidence and increase in unemployment have contributed to declines in residential building. “Along with expected drops in consumer spending, home sales will most likely fall,” Toal said.
As a result, he predicts that residential construction will decline by 8.5 percent next year after finishing the year with a 1.2-percent in-crease. The sector should recover sufficiently by 2003 to see a 5.8 percent growth rate. Housing starts will be at about 1.6 million for 2001 following 1.93 million starts in 2000. Next year, the residential market will have about 1.485 million housing starts, according to Toal.
“The falls in consumer and business confidence are more significant factors in what will happen in the near term,” he said.
“Confidence levels will take a year to recover so we’ll have a hole in the overall economy [for 2002] but by the latter part of next year we’ll be out of the hole,” he added.
David Seiders, chief economist for the National Association of Home Builders (NAHB), reported that home sales were down due to the loss of consumer confidence in the weeks following the attacks. The NAHB conducted a mail survey several weeks after the attack and the numbers weren’t as positive as immediately after September 11. A telephone poll conducted the weekend immediately following the events “revealed that the industry was holding up amazingly well; people were going ahead with signings,” Seiders said.
However, a mail survey conducted several weeks later revealed that 35 percent of builders said sales were off by 10 percent, while 22 percent of respondents said sales were off 5 to 10 percent. Two-thirds of respondents also said traffic through potential properties had decreased and 20 percent said contract cancellations were up to some degree.
By early October, the numbers weren’t improving. The NAHB monthly Housing Market Index survey revealed a drop of eight points from 56 to 48. An accompanying supplement showed that 56 percent of builders polled said new home sales had declined in the wake of the terrorist attacks.
While on the surface it may seem like the housing market is in bad shape, Seiders called the state of the home-building industry, “not that bad.” He said the index number puts the home building industry where it was in the mid 1990s.
SOURCE: Bill Toal, as presented at the NACF Conference.
“If it pans out the way we have mapped, we’ll see a brief and mild setback, running into the end of this year, followed by a slow recovery that will begin as early as next year,” Seiders said.
He encourages building professionals that all is not bleak for the building industry—there are positive trends occurring in the housing market. The upward trend in house sizes and numbers of amenities continues to rise so housing values are on an upward trend, rising at about 5 percent per year, he said, which is well above inflation levels. Also, the stock market woes mean “the perception of housing as an investment has strengthened in the last year,” he added.
Bill Toal (left) and David Seiders (right) offered their economic forecasts.
Real Estate Market
Ray Owens, research officer and senior economist for the Federal Reserve Bank in Richmond, Va., said the commercial real estate market is weak in most areas of the country. He reported that net absorption of office space in the United States has fallen dramatically since early 2000. Conversely, office space available for sublease has taken a leap forward in 2001 in most metropolitan areas.
Regarding the events of September 11, Owens said the Washington, D.C.-Northern Virginia corridor has seen the strongest rebound as the Pentagon, and other federal agencies aggressively lease space available due to the dot-com meltdown.
Beyond U.S. Borders
Alex Carrick, chief economist for CanaData and Mario Rodarte, chief economist for the Center for Economic Studies of the Private Sector, spoke about the construction industries in Canada and Mexico respectively.
Carrick said the Canadian economy was in a downturn as was the United States before September 11 and this has been made worse in the wake of these events. Carrick said that Canada, like the United States, is feeling the effects of “decreased consumer and business confidence that was exacerbated by the terrorist attacks.”
In Mexico, Rodarte pointed out that consumption is the “real driver of the Mexican economy.” “Consumption has fallen over the year,” he said. He added that Mexican exports and U.S. production levels have dropped as well. Add to that a $9 billion dollar deficit, and Rodarte said, “this is not good for the construction sector.”
While economic forecasting was the main topic at the conference, other subjects were discussed as well. Edward Feiner, chief architect of the U.S. General Services Administration, talked about construction of federal buildings. He stressed that despite the September 11 attacks, “We will not be frightened out of downtowns.” He added that many federal buildings are integrating new security enhancements and border stations will be a major part of that effort.
He also talked about the federal government’s mandate to make buildings greener. Green buildings are those that have a variety of features incorporated into their design such as the use of recyclable materials and energy-efficient products and those that control the waste management stream as well as maintaining good air quality, just to name a few. (For more info on green buildings, see article ""It's Not Easy Being Green").
Speed of delivery was discussed by the panelists as well. “Clients are delaying the decision to build until the very last hour, then expecting rapid development of the design and delivery stages,” said Friedrichs.
Pat Priest, managing director/ chief financial officer of the Beck Group, spoke of the importance of teamwork. “Instead of operating in different silos, the members of the construction team, such as the designer and the estimators are working together, sometimes in the same facility, to create efficiencies, as well as better design, quicker turnaround, better prices and fewer surprises,” she said.
In this uncertain time, the fewer surprises the better.
Tara Taffera is editor and publisher of Door & Window Maker magazine.
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