2010 Projected as Another Weak Year for Nonresidential Construction
Improvement later in the year in the institutional
sector will lead an overall nonresidential recovery in 2011
long-awaited economic recovery seems to be well-underway, and even
the residential construction sector looks like it has hit bottom
and is moving back up after almost four years of deep declines. Nonresidential
construction, unfortunately, is still mired in a steep downturn.
Overall nonresidential construction spending declined over 10% between
October 2008 and October 2009. The buildings portion of the nonresidential
sector has performed even worse, given the federal stimulus program’s
focus on infrastructure investment, which pushed up spending on streets
and highways by 5% over this period, and conservation and development
projects (such as dams, levees, and breakwaters) by 23%.
As such, private nonresidential construction spending declined by
over 20% over the past year, with key categories such as retail and
office facilities off by more than 30%. These steep declines have
been somewhat balanced by much more moderate declines in many institutional
building categories, such as educational facilities (down 5.6%),
religious structures (down 2.8%), public safety facilities (up 5.0%),
and transportation facilities (up 7.7%).
The coming year is likely to see further declines in the nonresidential
sector. According to the AIA Consensus Construction Forecast Panel,
nonresidential construction activity will decline another 13.4% in
inflation-adjusted dollars (akin to a square footage concept) in
2010, before finally posting a modest advance of 1.8% in 2011. The
commercial and industrial sectors are expected to be uniformly weak
in 2010, with declines close to 20% in most major categories. Institutional
construction will fare better, with a modest decline of just under
2% projected for 2010 before reversing for a 3% gain in 2011.
The nonresidential construction downturn didn’t begin for
this cycle until the latter part of 2008, though design firms were
reporting deteriorating conditions since the beginning of that year.
The AIA’s Architectural Billings Index (ABI), which measures
design activity at U.S. architecture firms, declined sharply into
negative territory in February of 2008, and has remained negative
every month since. Research by the AIA has concluded that design
activity leads construction spending activity by 9 to 12 months,
so the construction downturn in late 2008 was anticipated by the
ABI. The steepest part of the design downturn was during the fourth
quarter of 2008 and the first quarter of 2009. Given the timing relationship
between design and construction, the steepest part of the construction
downturn should be occurring in late 2009.
The commercial/industrial portion of the ABI has been much weaker
than the institutional portion. In the 22 months since the national
ABI fell below 50 (indicating a decline in architectural billings),
the commercial/industrial index has been below for eight months (indicating
a very steep decline in billings for that month), and above 45 for
only two months (indicating a more modest decline). In contrast,
the institutional index had been below 40 for only five months, and
above 45 for 11 months. At present, the institutional index is signaling
that this sector is closer to recovery than is the commercial/industrial
Economic recovery finally underway, but construction
The downturn in the economy moderated significantly in the second
quarter of 2009, with an annualized decline of 0.7%, before turning
positive with a growth rate of 2.8% in the third quarter. While this
emerging recovery appears that it can be sustained–particularly
because there is plenty more federal stimulus finding to come–it
hasn’t done much to date to improve the employment picture.
U.S. businesses have reduced payrolls by almost 1.5 million since
the slowdown moderated at the beginning of the second quarter, and
by over 400,000 since the economy began growing at the beginning
of the third quarter.
However, the construction sector has seen less of a moderation in
job losses. In the second quarter of 2009, construction sector payroll
losses accounted for less than 20% of total losses in the economy.
By the third quarter, they had increased to almost 25%. So far in
the fourth quarter (through November figures), construction payroll
losses have accounted for two-thirds of all losses in the economy.
As a result, the unemployment rate in the construction sector is
much higher than national averages. While the national unemployment
rate climbed from 4.5% in early 2007 to 10% in late 2009, the unemployment
rate for construction firms was hovering close to 20% in late 2009.
Most expect that the current economic recovery will be moderate
by historical standards because the recovery in consumer spending
is likely to be restrained. High levels of unemployment have restricted
the income that households have available, but even these stratospheric
unemployment rates do not capture those employees that have been
cut back to part-time, those with salary freezes or reductions, or
those with furloughs or other involuntary unpaid leave. Even households
not facing the prospects of unemployment may cut back their spending
fearing other forms of salary reductions.
Additionally, even households that are not concerned with disruptions
to their income are generally much less wealthy than they were a
few years ago. Declines in stock values and house prices mean that
households are feeling less comfortable with their financial situation,
and as a result are saving more and spending less. Generally, economists
have found that a one dollar decline in wealth produces a three to
five cent decline in spending each year. This “wealth effect” had
just the opposite effect during boom times; as household wealth increased,
they were spending more and saving less. Until stock values and house
prices fully recover, household spending will remain at depressed
Outlook calls for 2010 construction spending
to remain depressed
The construction sector remains an important factor in the timing
and strength of the national economic recovery. During typical years,
homebuilding, the construction of nonresidential buildings, and improvements
to these structures account for 9% to 10% of activity in our economy.
In 2009, these sectors probably accounted for only just over 5% of
our economy, and in 2010 they likely will fall even lower as housing
remains at depressed levels and nonresidential construction spending
levels remain weak. So, while weakness in the economy is hindering
a more robust construction recovery, a depressed construction sector
is slowing the broader economic rebound.
Construction Consensus Forecast