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The Economic Recovery: Construction Forecast
By Edward M. Kopp, AIA, CCC, CCM
McDonough Bolyard Peck, Inc.
The US economy and the construction industry are closely aligned, almost to the point of prognostic analysis that may cause a form of tunnel vision. After all, the bright light in the tunnel is the eventual economic recovery. What we’re unsure of is how long the tunnel is and how fast the recovery may be moving.
The US Census Bureau recently reported that residential spending declined 28% in the last 12 months. Residential construction and improvements normally encompass more than 50% of the construction dollars expended, but with the decline in sales and housing prices it’s expected to be significantly less in 2008. In some areas of the country, housing sales have begun to stabilize. However, in many areas housing prices may continue to fall for another 12 months due to the high inventory of homes resulting from foreclosures and relocations. In addition, the present financial market turmoil and tight credit standards have squeezed out most new home purchasers, speculators, and eliminated high risk loans. This downturn is really more of a financial institution and credit issue than a housing issue. After our financial institutions stabilize and the credit crunch subsides, a recovery in the housing market will also depend on how quickly buyer confidence returns to a positive outlook.
The recovery in the residential sector may take a year or two. This forecast is based on past housing market cycles. According to the US Census Bureau, the housing industry experienced downturns around 1961, 1967, 1975, 1982, 1991, 2001, and 2007 - about every six to ten years. Most of these housing downturns took one to two years to recover and approximately two to four years to regain their level prior to the decline. Most recoveries have been led by an increased investment in construction projects by the public sector.
Therefore, based on past construction economic recoveries, we can anticipate a similar recovery led by public sector construction projects. It is likely, because of the present condition of our infrastructure, that construction projects will be transportation and infrastructure related. Infrastructure projects in need of repair are roads, bridges, dams, locks, dikes, sewage treatment plants, water works, public transportation, and schools. In 2005, the American Society of Civil Engineers reported that 25% of our bridges are structurally weak, 50% of our inland locks are obsolete, and over 3,300 dams are not safe. Even with the increase in gasoline prices, traffic is gridlocked on our major road systems. It has been reported that traffic delays have increased over 525% between 1992 and 2003. This traffic congestion wastes over $70 billion in fuel, results in over 4.2 billion hours of lost time, and reduces productivity by $80 billion. Therefore, we are likely to see infrastructure projects that fund improved mass transit, transportation alternatives, and other ways to ease our commute.
If rebuilding our infrastructure is an integral part of construction economic recovery, then we can anticipate an increased demand for steel, concrete, asphalt, PVC piping, copper, and other materials related to these projects. The increased demand will cause the price for these materials to increase and delivery times to lengthen. Therefore, it is likely that future construction prices will include steep increases in material costs as the recovery gets underway.
Significant increases in the price of construction materials is not new. Since 2003 we have experienced considerable price increases in construction materials, with many materials continuing to increase, but at a reduced rate during this downturn. Steel, concrete, and petroleum based goods such as asphalt, PVC piping, and roofing have been escalating at greater than normal rates. However, the prices for other materials typically associated with home building like wood, wood products, and gypsum wall board have declined.
In the past, the US economic recovery could be stimulated by changes in our economy alone. Today there is a greater influence on material prices and material availability due to foreign competition. In addition, as prices increase globally, the cost of maintaining our existing infrastructure takes a greater portion of available funds and leaves less funds for new construction projects.
Right now, at or near the bottom of the downturn, is actually the best time to be bidding construction projects. Within the last year, the industry has experienced a significant decline in construction bid prices. General contractors, subcontractors, and suppliers have reduced their mark-ups in order to stay busy, pay their bills, and stay in business. Contractors have retained their better, more experienced, trade personnel which is resulting in a higher quality construction product. For the 12th straight month, construction employment has declined with the residential market leading the way at a decline of approximately 27% in the past year.
Public agencies and private owners should be pushing their projects out for bid as quickly as possible to take advantage of the present economic condition in the construction market. Even though many public agencies are experiencing revenue shortfalls, bond rates are relatively low and some public agencies are not carrying large amounts of debt.
In conclusion, the last two decades of under-investment in our infrastructure has created a backlog of improvements that is costing us billions in efficiencies and slow economic growth. The American Society of Civil Engineers estimates that the US needs to invest $1.6 trillion over the next five years to bring our infrastructure up to world standards. This investment in our infrastructure will create jobs and increase the demand for materials and services throughout our economy. It also has the greatest multiplier effect of any stimulus because it provides the foundation to energize our economy, improve productive capacity, and will also lead to an increase in private capital expenditures. Given the current market situation in the construction industry, savvy owners are pushing to get their projects designed and out for bid as quickly as possible. Those who do will be taking advantage of the competitive pricing situation, be in the forefront of material price increases, and be involved in strengthening our economy.
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