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History buffs reviewing this years batch of industry forecasts for 2006 may experience Yogi Berras feeling of "deja vu all over again." The scenario of strong and steady public works and rebounding nonresidential building markets offsetting a downturn in a record-breaking homebuilding market is strikingly similar to last years predictions. While last years forecasts for public works and nonresidential buildings pretty much came true, the housing market once again defied predictions of its demise.
Instead of slowing, the value of new residential construction put-in-place increased 14% this year, according to estimates by the U.S. Dept. of Commerce. New housing will account for 57% of this years $1.136-trillion construction market, according to Commerce data. McGraw-Hill Construction (MHC), of which ENR is part, estimates that the value of new single-family housing starts will increase 8% this year after posting cumulative gains of 45% during the previous three years.
再保险lated Links:The consensus among economists is that the residential building market is very near its peak and that the Federal Reserve Boards constant ratcheting up of interest rates eventually will impact housing. The dividing line between most forecasts is the timing of the downturn in housing starts, with some looking for it to happen as early as the first quarter of next year. Others expect the markets momentum to carry housing deep into the 2006 building season.
MHCs forecast is for the total value of construction starts to increase another 3% next year to $654 billion. This will follow annual increases of 8% in 2005 and 11% in 2004. "Its a positive picture for 2006 although Im a little more concerned about 2007," says Robert Murray, MHCs chief economist. "Construction is proving to be very stable and resilient."
Shifting Drivers
But, this stability is masking some fundamental shifts in what will be driving construction growth in 2006. Single family housing will retreat from its record 2005 amount due to moderately higher mortgage rates and reduced demand from first-time homebuyers in some overpriced markets, says Murray. He forecasts the dollar volume to be down 1%, corresponding to a 5% drop in the number of new units to 1.525 million. The modest decline still leaves the 2006 housing market as the second-largest on record.
While the volume of the single-family housing market will remain historically high, industry growth will be shifting to other markets that will continue to build on this years strength. The fastest growing market tracked by MHC this year was multifamily housing, which jumped 24% above 2004s level to $64 billion. "Its condo-mania out there," says Murray. He predicts that the market will top this years performance by another 4% in 2006. On a physical level, multifamily housing plateaued at around 400,000 units in 1998, but the market is being driven by the proliferation of high-end condos, Murray adds.
MHC也is calling for significant growth in 2006 for several other nonresidential building markets. Overall, the value of new nonresidential building starts is forecasted to increase 8% in 2006, about double this years growth rate.
The hotel and motel market is forecasted to surpass this years 17% increase with another 18% in new starts in 2006. "Hotel construction is looking very promising. The projects slated to begin next year are massive in size, including one 3,000-room and another 1,000-room project in Las Vegas as well as convention center hotels in Baltimore, Phoenix, New York and Los Angeles," says Murray.
The biggest market turnaround forecasted by MHC is for office buildings, which suffered a disappointing 2005 with the value of new starts slipping nearly 10% from 2004s level. The market is expected to rebound 12% to $22 billion.
Office building fundamentals are stronger than this years decline would indicate, says Murray. Downtown office vacancy rates tracked by CB Richard Ellis continued to fall throughout 2005, hitting 13.4% by the second quarter of this year compared to the most recent peak of 14.7% in the first quarter of 2004. Likewise, suburban vacancy rates settled back to 15.7% from a peak of 18.2% in the third quarter of 2003.
"With the gains in office building employment holding at historically healthy levels, corporations will find that they must expand their office space to make room for growing ranks," says Murray. Still, the recovery will be more modest than in prior years and office construction starts in 2006 of 167 million sq ft will fall far short of the last pinnacle of 300 million sq ft set in 2000, he adds.
Indeed, many nonresidential building markets appear to have substantial room for more growth with square footage totals well below peaks set between 1998 and 2001
"Private nonresidential work is nicely poised for for a long upswing," says Patrick MacAuley, a construction economist who puts together the U.S. Dept. of Commerce forecast. MacAuley does not see double-digit growth for construction put-in-place for most nonresidential building market because of the lag between put-in-place and start data. On average, Commerce sees growth rates between 2 and 8% for most nonresidential markets.
商务部预测更看好驻留ntial construction holding on for another year. "Im assuming that the peak in the housing market will be later in the construction season, allowing housing put-in-place to manage another 6.1% increase in 2006," says MacAuley. He also is forecasting a 5% increase in home improvements, following this years 10% gain.
"One of the biggest turnarounds in our forecast is for the conservation market, which is primarily flood control," says MacAuley. Before the hurricanes hit the Gulf Coast this year, Commerce had been anticipating a 10% decline in this market. Now it is forecasting a 15% increase to $6 billion and that "is entirely due to the rebuilding effort," he adds.
MHC也thinks the rebuilding effort along the Gulf Coast will be a boost to construction in the area. While it forecasts starts to increase between 1 and 3% in most regions, it is projecting a 9% increase for the South Central region, which stretches from Texas to Alabama.
Commerce also sees strong growth in the industrial and highway markets next year. After years of depressed levels, the manufacturing market has finally bottomed out, says MacAuley. "Its not so much a boom as much as reaching the point where industry has to invest the minimum amount to maintain its base." He predicts the value of construction put-in-place for manufacturing work will increase 10% next year after climbing 20% during 2005.
Highway construction also will be a big winner in 2006, with Commerce forecasting a 12% increase on top of this years 11% gain. MHC is forecasting highway starts to increase 12% in 2006 after finishing this year with an 8% gain.
Improved state and local government finances are giving the biggest boost to highway construction, with the new federal financing bill coming too late in the year to have much of an impact, says William Buechner, vice president of economics and research for the American Road & Transportation Builders Association, Washington, D.C.
Higher Inflation
Inflation also is driving the highway market higher. "Material costs related to highway work are on track to increase 13% this year, after a 9% increase in 2004," says Buechner. "Materials make up about half a [typical] projects costs so anywhere from a third to one-half of this years gain could just be higher costs."
The forecast by the Portland Cement Association, Skokie, Ill., also suggests that inflation is sapping real industry growth. PCAs forecast of construction put-in-place adjusted for inflation is for total construction to increase 3.9% this year and 1.8% in 2006.
"We have a higher oil-price scenario, there are some shortages for materials and labor costs are starting to tighten," says Ed Sullivan, PCAs chief economist. Higher inflation eventually will be re-flected in long-term interest rates, which could translate into slower economic growth in 2007 and beyond, he says. PCA predicts that constructions annual growth rate will slow to just 0.9% by 2009.
The impact of higher material prices will lead to some deferrals in projects but not to any derailment, says Murray. "Projects will eventually go forward."
Although Oct. 1 marked the start of the 2006 federal fiscal year, design and contractors were still waiting in mid-November for Congress to settle on final spending numbers for many key construction programs.
Besides the work to be funded in the regular 2006 appropriations bills, an additional infusion of federal money is likely to be heading to hurricane-stricken Gulf Coast states. President Bush asked Congress on Oct. 28 to approve a transfer of $17.1 billion in money already approved for the Federal Emergency Management Agency, but not yet spent, to rebuild storm-damaged infrastructure and for other recovery needs. Industry officials believed Congress would agree to the proposed shift, which would include at least $7.9 billion for highways, levees and other infrastructure. But lawmakers had not cleared the reprogramming as of Nov. 14.
Along with the transfer, Bush proposed rescinding $2.3 billion from programs he deemed "lower priority." Construction officials were particularly concerned that $166 million of those cuts would come from Clean Water State Revolving Funds.
Senate Appropriations Committee Chairman Thad Cochran (R-Miss.) told ENR on Nov. 10 that lawmakers would have to act soon on the White House transfer plan. "Were running out of time," he said. He believed it was likely that the reprogramming would be attached to one of the eight remaining 2006 spending bills.
A continuing resolution that has kept most federal agencies operating since Oct. 1 was set to expire on Nov. 18. Another stopgap was expected by then.
Firming Up
Although regular 2006 appropriations for many construction programs were not yet final, some of the figures are becoming clearer as the Thanksgiving break draws near. For example, the bill covering energy and water programs, including the Corps of Engineers, Bureau of Reclamation and the Dept. Of Energys defense environmental cleanup effort, was on the verge of final congressional approval.
That measure would provide $5.4 billion for the Corps civil works budget, up $6 million from 2005. The increase is more noteworthy because 2005s total includes $709 million in emergency funding, much of it for work related to Hurricane Katrina. Within the 2006 civil works total, the Corps construction account would rise 6%, to $2.4 billion.
The Associated General Contractors is "definitely pleased with the Corps of Engineers numbers," says Karen Bachman, AGC government affairs director for environment, federal markets and procurement. She notes that the $5.4 billion for civil works is more than $1 billion higher than Bushs request. "That reflects the needs that were identified during the hurricane," and a recognition that the Corps budget had been "shortchanged for a number of years," says Bachman.
"We are thrilled that the conferees recognized the need to address our long-neglected infrastructure with a budget that is quite close to the $5.6 billion we had estimated the Corps needs to begin the ramping-up process to address the most critical concerns," says Worth Hager, president of the National Waterways Conference.
The 2006 energy and water measure also allocates $1 billion to the Bureau of Reclamation, up 6% from 2005. But it slices DOEs defense environmental restoration account by 9%, to $6.2 billion.
Bachman says AGC also is monitoring what happens to a House proposal to make an across-the-board cut in 2006 domestic discretionary spending. "Theres still some talk of trying to get that in maybe the last appropriations bill" for 2006. If that cut is approved, it would mean a significant reduction in infrastructure programs, she says.
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