Higher education was the one bright spot this year, and while there is hope that universities and hospitals will resume the multi-year campus plans they shelved last winter, these impacts are unlikely to translate into actual construction until the second half of 2010.

Nonresidential construction, especially building construction, had a rough year in 2009. Unfortunately, 2010 will provide modest relief, at best.

From October 2008 to October 2009, seasonally adjusted construction employment slumped 16 percent and spending dropped 14 percent, with nonresidential down 11 percent, and residential off 24 percent. Seasonal adjustment is a standard statistical technique to remove variations due to normal holiday and weather patterns.

The nonresidential numbers would have been much worse if not for increases in highway and power construction. Major building categories had particularly steep declines: -46 percent for warehouses; lodging (hotels and resorts), -45 percent; multi-family, -44 percent; retail, -41 percent; and office, -28 percent. By comparison, institutional categories looked strong: preK-12 education, -7 percent; health care, -6 percent; and higher education, +1 percent. Manufacturing construction, which had risen sharply early in the year on the strength of huge refinery, auto, steel, and cement projects, was down 6 percent as these jobs were completed, scaled back, or suspended.

These figures, from the U.S. Census Bureau, measure construction put in place, or spending on ongoing projects; see Figure 1. Some of the projects were started well before the economic and financial meltdown of late 2008. Measures of new starts, compiled privately by McGraw-Hill Construction and Reed Construction Data, show even more dismal trends in some cases.

Structural engineering and building construction
Several factors drove the numbers down. It’s worth briefly reviewing those drivers to get an insight on what the structural engineering and building construction industries can expect going forward.

Developer-financed construction — including office, retail, warehouse, lodging, and multi-family — has been plagued by rising vacancy and default rates. Those conditions make banks understandably leery of lending for new projects, particularly with bank examiners warning them to reduce exposure to commercial real estate loans.

Many hospitals and universities had ambitious multi-year expansion and modernization plans that they had to suspend when their endowments and capital campaigns were clobbered in the stock and bond market collapse of late 2008-early 2009. School districts are reeling from the drop in property and property transfer tax receipts resulting from falling home values, more delinquencies and abandonments, less new construction being added to tax rolls, and fewer transactions.

Mixed patterns of future residential construction — It is often said that nonresidential construction follows residential with a 12- to 18-month lag. In reality, there are separate drivers for each nonresidential segment. In this cycle, they are likely to behave differently from one another and from past relationships.

First, residential construction will display mixed patterns. New single-family homebuilding and improvements (a Census Bureau term for major additions and renovations to existing single- and multi-family buildings) appear headed for double-digit percentage increases in 2010. That sounds impressive, except that they are starting from such a low base that the totals will still be well below 2007 levels. Furthermore, multi-family construction will continue to shrivel. Therefore, residential construction will not be much of an engine for nonresidential.

The overall economy is showing signs of returning slowly to health. Real (that is, net of inflation) gross domestic product (GDP) — the sum of all purchases of goods and services by households, businesses, government, and net exports — rose 2.8 percent in the third quarter and is likely to keep rising through 2010, though more slowly than is usual after a recession. In particular, consumer spending, residential construction, and federal government purchases, fueled by the stimulus legislation, should boost real GDP. But business investment in equipment and structures, state and local government purchases, and perhaps net exports will remain weak for several more quarters.

A surge in home buying could spawn at least a modest uptick in retail construction, as demand rises for neighborhood shopping centers, and shuttered department and luxury stores are converted to home furnishing, appliance, and yard and garden stores. But other developer-financed construction — multi-family, office, warehouse, and hotel — will be dragged down by high vacancy rates, low rents, and reluctant lenders. Weak economic growth, lackluster consumer spending, and cautious investment by businesses mean that hiring will be very slow, there will be little retail expansion, and business travel will remain subdued. These indicators will keep demand depressed for office, warehouse, manufacturing, and lodging construction, while retail will grow, but only slightly.

Figure 1: Major building categories had particularly steep declines from october 2008 to october 2009; these figures measure construction put in place, or spending on ongoing projects. (Source: The Census Bureau)

Hope on the institutional side — There is hope that universities and hospitals will resume the multi-year campus plans they shelved last winter, now that the stock market has restored many portfolios and bond markets have re-opened to qualified borrowers. But these impacts are unlikely to translate into actual construction until the second half of 2010.

Government-funded projects are a mixed bag — State and local government-funded construction will have a rough year. The Center on Budget and Policy Priorities reported on Nov. 19 that the mid-fiscal year budget gap — the amount that must be closed by June 30, 2010, in most states — averaged 6 percent of the budget. Budget gaps that have already appeared for fiscal 2011 make further cuts inevitable. Construction is often an easier target than current employees or services. Local governments and school districts, which depend heavily on property taxes, will still be absorbing the reductions in assessments that occurred throughout 2009. Even if home sales and house prices both turn positive in 2010, the impact on local budgets will not show up until 2011 or, more likely, 2012.

Summary
Federal spending will help selectively. Base realignment activity will continue at a high level. And more stimulus funds will flow to building construction in 2010 than in 2009. But these amounts will not be enough to offset the continuing downturns in private or state and local government spending into the plus column.

In short, while the coming year may be far from a perfect 10, perhaps ’11 will be almost heaven by comparison.

Ken Simonson is the chief economist at Associated General Contractors of America.