2005 Construction Expected To Thrive

With the construction market gathering speed, higher attendance figures than in recent years and the economy moving in the right direction, McGraw-Hill Construction’s Outlook 2005 Conference had a decidedly optimistic tone.

Opening speaker David Wyss, chief economist, Standard & Poor’s, New York, set the mood for the conference, held Oct. 28 in Washington, D.C., with his positive assessment on the U.S. economy.

“It’s pretty nice, with 4.5 percent GDP growth this year,” he said. “Inflation is low at 3.5 percent. The Fed doesn’t want to hit the brakes on the economy. They just want to take their foot off the accelerator.”

Wyss wasn’t comfortable with $55-a-barrel oil, but he expects the price to drop back down to $35 within two years. He said another point in the U.S. economy’s favor regarding oil prices is that because the U.S. economy has evolved into a service economy, actual oil usage hasn’t increased much over the past 30 years. However, he said energy companies were not making big investments to ramp up production and were being very cautious.

Dismal industrial capacity-of-utilization statistics are still a problem, he said. “If you are a manufacturer and 27 percent of your equipment isn’t being used, why would you buy any new equipment?” he asked the audience of building industry executives. Wyss’ evaluation of the industrial market did offer at least one reason to cheer. He expects demand for replacement equipment to start kicking in.

While spots of the economy like the industrial market remain soft, the overall construction market is primed for solid in unspectacular growth, said Robert Murray, vice president of economic affairs, McGraw-Hill Construction, New York. He expects total construction to increase 2 percent to $585.5 billion in 2004. According to the 2005 McGraw-Hill Construction Outlook, that’s the biggest gain in its total construction figures since the late 1990s. The report said new construction of offices and warehouses will see their first gains in four years.

Although the long-term demographics are in place for growth in construction of schools, universities and hospitals in the institutional market segment, local financing issues have actually held down construction in 2004 and will have a negative impact in 2005. Although schools and universities have near-record numbers of students and the aging of the U.S. population points toward greater demand for health-care facilities, the report said, “While tight fiscal conditions continue to restrain both institutional and public works, the impact is not as severe as what occurred during 2003.”

The electrical business may reap the benefits of a much-improved office construction market. The 2005 McGraw-Hill Construction Outlook calls for a 10-percent increase in square-footage from 2004 to 170-million square-feet, and a 12-percent increase from 2004 in contract value to $22.9 billion. Office construction peaked in 2000 at 298 million-square-feet, according to the report.

“The fundamentals are starting to improve gradually. This year we have been seeing increases in office employment, and office vacancy rates are starting to pull back,” said Murray.

Murray also said CB Richard Ellis pegged the average national office vacancy rates for third-quarter 2005 at 17.4 percent in the suburbs and 14.5 percent downtown. That’s still high historically.

The regional differences in office vacancy rates are striking. According to Grubb & Ellis, Northbrook, Ill., in the third quarter, Washington, D.C., San Diego and Charlotte, N.C., are now enjoying single-digit vacancy rates. However, that same report said 19 cities/metropolitan office markets are suffering from downtown vacancy rates of at least 20 percent. Those cities included Cleveland, Dallas, Denver, Detroit, Cleveland, Houston, Kansas City, Phoenix, St. Louis and San Francisco.

One economist at the conference presented an interested leading economic indicator for the construction market. Kermit Baker, chief economist, American Institute of Architects (AIA), Washington, D.C., manages the AIA Work-on-the-Boards survey, which tracks billings and inquiries at architectural firms on a monthly basis. Baker said these billings lead all private nonresidential construction starts as measured by U.S. Census by at least six months, and lead commercial/industrial construction projects by nine months. Baker said there was a “strong recovery in 2004 at U.S. architectural firms after years of weakness.”

Architects participating in the AIA Work-on-the-Boards survey are optimistic about 2005; 42 percent expected their billing to be increased by 5 percent to 10 percent; 30 percent expected billings to remain the same as in 2004; 8 percent expected billings to increase 10 percent or more. On the flip side, 8 percent expected 2005 billings to be down 10 percent or more, and 12 percent expected billings to be down 5 percent to 10 percent.

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