ABC forecasts downturn in 2009 construction activity

Associated Builders and Contractors (ABC) released its 2009 economic forecast for the commercial and industrial construction industry. "While the industry experienced a mixed bag in 2008, do not expect the same story in 2009," said ABC Chief Economist Anirban Basu.

"For more than a year, economists have been discussing how weak the overall economy has been. The ongoing credit crunch began in earnest in August 2007 and the U.S. economy shrank during last year’s fourth quarter," said Basu. "Because commercial construction typically lags the overall economy by one to two years, the weakness that has pummeled other segments of the nation’s economy has not been as apparent in commercial construction performance.

"However, that is about to change in 2009," added Basu. "One of the most telling signs that we will see a downturn in commercial and industrial construction activity is the dramatic fall of the Architecture Billings Index (ABI), produced by the American Institute of Architects. In October, the ABI rating reached a historic low not seen since the rating system was established in 1995.

"While nonresidential construction employment was down 4.7 percent on a year-over-year basis in October, this level of job loss pales in comparison to what is likely to emerge over the next twelve months," added Basu.

"ABC expects that the reversal in industry fortunes will be increasingly manifested in the 2009 and 2010 data. It is worth noting that producer prices also will begin to decline more forcefully in the months ahead due to the deflation in key commodities, including copper, steel and oil. However, this will help accelerate the sector’s eventual recovery."

The 2009 Outlook
Commercial building, such as retail and restaurants, will be off between 10 percent and 20 percent next year in dollar terms compared to 2008.

Lodging will be negatively impacted by both a general decline in new construction activity and a reduction in personal and professional travel. This segment has been one of the leading engines of construction starts, but value put in place may decline 20 percent or more next year.

Office construction will be off between 15 percent and 25 percent in 2009 due to ongoing difficulties in the financing environment, as well as waves of job losses in key office segments, such as financial services.

Manufacturing will see a sharp decline after registering massive gains during the past several years. With domestic and global demand for manufactured products now falling decisively, expenditures on manufacturing-related buildings will fall in the neighborhood of 25 percent to 35 percent next year, with declines likely to persist into 2010.

Institutional construction, such as hospitals, prisons and schools, will also soften due to a combination of state and local fiscal duress and the ongoing turbulence in the municipal bond and similarly situated financial markets. As a result, institutional building construction will slip more than 5 percent next year in terms of dollars expended.

Power construction investment, especially in the alternative energy-related segment, will continue to trend higher even as electricity utility construction declines (down 30 percent in 2009) in the face of financing difficulties and retreating energy prices. Alternative energy investment will receive a boost from the incoming administration, which has committed to supporting segments such as wind, solar and biofuels.

Conclusion: As 2009 looks to be a challenging year for the commercial and industrial construction industry, the next federal stimulus package being discussed in Washington, D.C., which will likely include a significant infrastructure component, may emerge as a countervailing force. While it will take some time to implement such a program, an infrastructure-based stimulus package may address both issues of short-term economic weakness and longer-term competitive needs. Moreover, investment in infrastructure represents a way for the federal government to take advantage of now declining construction input prices, allowing it to purchase more infrastructure for each dollar spent.