"What a difference a year makes," said F.W. Dodge Vice President Robert Murray as he began his wrap-up of the current economic situation for the construction industry May 18 at the AIA national convention.

Last year we were looking at a Goldilocks economy—not too hot, not too cold; we were looking at an Energizer bunny economy—it just kept on going, he said. Now, despite downturns in consumer confidence and poor performance in the manufacturing sectors, the construction industry shows slowing growth, but no likelihood of a 1990-like plunge. "The construction industry stands as a pillar of support," to the economy, Murray said.

Still growing…
Introduced by AIA Chief Economist Kermit Baker, PhD, as the country's leading expert on construction forecasting, Murray identified national trends in the major construction sectors. He identified institutional construction as the strongest sector for architects in the short term, with school construction buoying the sector over the next five years. Secondary schools are at their peak now, and institutions of higher education should peak in 2010, he said. The other strongest institutional category, courthouse construction, should level off over the course of this year, he said.

The economy in general is still growing, albeit at 2 percent, consumer spending is still strong, and the high cost of energy is not yet fueling inflation, which, at 3 percent, is higher than in recent years but still not at recessionary levels of 4 percent or higher, Murray encouraged. Nonetheless, capital spending is slowing, indicating that businesses are pulling back somewhat.

In fact, it is the tendency of businesses and developers to watch the economic indicators closely and adjust accordingly that may be accounting for the slow softening now apparent, Murray said. As an example, he offered Seattle. Even with an encouragingly low vacancy rate of 3 percent, new construction is slowing. (Equilibrium is generally considered to be 10 percent, Murray said.)

In close cooperation with the developers, lenders, too, are already tightening loan standards, which indicates a slowing in commercial building toward the end of this year.

Renovation going strong
One promising market already is renovation, Murray said. The U.S. General Services Administration is shifting heavily toward renovation over new construction. And alteration work is particularly strong in the office and school sectors. Office managers compete by offering telecommunications connections and top-grade amenities. Schools are upgrading because so much of the Baby Boom school stock was built with a 40-year life cycle, which has now come due.

In highlighting the trends in building-type construction, Murray consistently warned that past performance is no indication of future performance. With certain markets, it's quite the opposite. Although sports complexes have shown strong growth in the past few years, Murray reminds that there are only so many city arenas that can be built. In some sectors, such as state-financed construction, the rosy financial picture of only a year ago is already losing its blush (although the federal surplus is likely to remain a strong positive influence on federal construction for at least the short term.)

Predictions
Some predictions Murray offers:
• Retail construction is doing okay despite the e-commerce scare of the last two years. The larger the mall, the more people it will draw.
• The rule applies also to hotels, the construction market for which is good for the big developments and not so good for projects of 100,000 or fewer. Watch for correction reversals here.
• Power-plant construction has been up and will stay that way for at least a few years.
• Multifamily housing will be riding a positive wave of demographics for the next 5 to 10 years (although the market won't hit 1980s levels.)
• Office-building construction may be slowing down, but certainly won't experience what the market did in 1990 because of the rapid response to vacancy rates on the part of lenders and developers.
• Religion-related construction has been strong and will continue to be at least through 2003.
• Manufacturing construction is the odd-building-type-out. Manufacturing-facility construction has been plummeting and will continue with little chance for rebound till 2003 or 2004.

Copyright 2001 The American Institute of Architects. All rights reserved.