National economy recovers
The upturn in nonresidential construction has been built on solid fundamentals
in the broader economy. Economic growth, which was disappointing through
the middle of 2003, is seeing marked improvement. After a lackluster
3.0 percent growth in our economy in 2003 (inflation adjusted), 2004
growth is estimated to have been around 4.5 percent, which would make
it one of the best performances for our economy over the past decade.
Economic growth this year is expected to slow a bit, to around 3.5
percent.
The general improvement in the economy has generated
new demand for nonresidential facilities. First, businesses are reinvesting
in their operations. While the economy has been growing by 4–5
percent in recent quarters, business investment has been increasing by
10–15 percent. With stock prices rising, businesses have been more willing
to invest in their operations. Also, a rising stock market boosts
the endowments of nonprofit institutions, encouraging them to expand
their operations.
Secondly, business payrolls have begun to see
stronger gains. Payrolls declined nationally by over 2.5 million between
the end of 2000 and the middle of 2003. However, most of these losses
have been recouped since then, as businesses have added more than 2
million payroll positions since mid-2003.
These positive economic trends
have generated growing confidence among leaders in the construction
industry. The 2005 CIT Construction Industry Forecast found that construction
industry leaders are predicting a strong year ahead as their confidence
rose to the highest-ever rating since the survey was developed in 1995.
Concerns
remain on the economic outlook
Still, 2005 is shaping up as a year that will have its share of economic
challenges, several of which will affect the nonresidential construction
sector. Soaring prices, often coupled with availability problems, that
hit several construction commodities in 2004 (e.g., steel, concrete,
lumber, and wallboard) are likely to continue to linger into 2005.
Coupled with high oil prices, we’re likely to see continued inflation
in construction costs this coming year. Higher inflation is likely
to drive up interest rates, which also will add to construction costs.
Inflation
is likely to be particularly high for imported construction products.
A falling dollar—mostly as a result of our large trade
deficit—makes U.S. products less expensive abroad, but foreign
products more expensive in U.S. markets. The decline in the dollar has
averaged about 10 percent per year over the past two years relative to
the currencies of our major trading partners and is likely to decline
a comparable amount in 2005.
International economic slowdown likely
The U.S. economy is not the only one that is expected to see somewhat
slower growth in 2005. According to the International Monetary Fund,
world economic growth averaged about 5 percent in 2004 and will slow
to just over 4 percent in 2005. Economic growth in Japan is expected
to slow from 4.4 percent to 2.3 percent, remain flat in the Euro
area at 2.2 percent, fall in China from 9.0 percent to 7.5 percent,
fall in Russia from 7.3 percent to 6.6 percent, and rise slightly
in India from 6.4 percent to 6.7 percent.
All of these estimates predate
the earthquake and ensuing tsunami damage in the Indian Ocean region.
While it is much too early to factor in the impact of this destruction
on world economies, it certainly will mean more construction activity
in the affected areas, as rebuilding efforts get under way, and more
pressure on international capacity to produce and distribute construction
products.
Commercial/industrial sector leads nonresidential
rebound
Our consensus construction panel is most optimistic on its commercial/industrial
outlook for 2005. Construction of commercial facilities increased
less than 2 percent in 2004, and industrial construction declined by
4 percent, according to our panel. Both sectors are expected to see
a much stronger performance this coming year. Hotel construction is
projected to be the strongest commercial market in 2005, as all members
of our forecast panel predict solid gains in this sector.
With declining
office vacancy rates nationally, according to reports from CB Richard
Ellis, office construction is also expected to see healthy gains. As
of the third quarter of 2004, the national office vacancy rate was
16.3 percent, down a half point from a year earlier. Vacancy rates in
downtown locations were down to 14.4 percent nationally, with several
major markets (midtown Manhattan; Washington, D.C.; San Diego; Orlando;
and Charlotte) reporting downtown vacancy rates below 10 percent.
The
institutional construction sectors, which didn’t fall off
as much as commercial/industrial buildings earlier this decade, are expected
to see more modest growth in 2005. Construction of education facilities,
in the midst of a three-year drop-off, is projected to recover nicely
in 2005. Health-care facilities, which haven’t seen much in the
way of gains over the past two years, likewise are projected to see stronger
growth this coming year.
Copyright 2004 The American Institute of Architects.
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