FIRST QUARTER CONSTRUCTION OUTLOOK 2009

A QUANTITY SURVEYOR’S PERSPECTIVE – NEWSLETTER
FIRST QUARTER CONSTRUCTION OUTLOOK 2009
January 16, 2009

The speed and scope of the events in September and October 2008 were startling. The national economy and indeed the whole world are now feeling the full force of the financial crisis that is now causing collateral damage in virtually every industry and resulted in the U.S. economy being in a recession. Moreover the problem is worldwide as Asia, Europe, the Middle East, and Latin America all struggle.

The 2008 mid-year peaks in base metal prices, oil, and other construction related commodities coincided with the drying up of capital availability due to the spreading financial crisis, threatening what had been strong demand in the non-residential construction markets. Investors have been running scared from any debt backed by loans to apartment buildings, office space or warehouses, freezing financing for new projects.

Inflation peaked during the first half of 2008 with both steel and oil prices soaring to record levels despite a subprime mortgage crisis that was destroying the housing industry. But with the financial crisis during the last quarter of 2008 when the full extent of the financial crisis started to reveal itself and with banks, insurance companies, Wall Street investment firms and the automotive industry all lining up for bailouts, commodity prices started to tumble. Oil prices fell from over $140 per barrel to less than $70. Steel prices also started to head down and are expected to keep falling through in the foreseeable future especially as demand for scrap metal from China has declined dramatically. Structural-steel prices fell 15% in the last quarter of 2008 and prices are expected to decline another 20% by the second quarter of 2009 before firming.

During 2008 when the housing market was particularly hard hit, workers turned to “non-residential building” for construction jobs. New commercial construction that continued at a steady pace helped cushion job losses that would have been more severe. With the abrupt halt in commercial projects in September, unemployment started to soar, and will undermine wage negotiations in 2009. In November 2008, the U.S. Dept. of Labor reported construction’s unemployment rate was 12.7%, more than double what it was a year ago. For all of 2008, 632,000 jobs, or 8.5 percent, were lost in total construction
For single-family housing, declines are continuing and showing no sign of an upturn. Home prices are continuing to drop—a 20 percent drop in 2008 with an expected further 10 percent decline through the first half of 2009. Thereafter, things should level off. Store construction has taken the biggest hit with an estimated 30 percent decline in retail square footage starts this year.”

In the near term, we are likely to experience a continued downward spiral with job losses, reduced construction volume, investor and lender fright and as the employment data and other statistics continue to reflect the ongoing, seemingly limitless retrenchment in economic activity, the chances for a major stimulus package emerging from the incoming Obama administration and the new Congress improves. However, the increased competition between contractors will help dampen previous strong upward pressure from sub-contractor pricing, a major escalation driver in some markets, while the continuing sharp drop in commodity prices will assist in reducing material costs nationwide. Further, significantly lower labor and materials costs may make previously uneconomic projects more attractive.

In summary, the effects of the global financial downturn are shifting the construction industry from an abundance of activity with insufficient capacity to a reduction in activity with over capacity. The resulting increase in competition, in conjunction with declining costs of materials, will see no escalation increases in 2009. In fact there could be a 2% to 3 % drop in the first half of 2009 followed by a corresponding increase in the latter half of the year resulting in a net zero for the year.