FIRST QUARTER CONSTRUCTION OUTLOOK 2010

While there are signs that the broader economy appears to be emerging from the depths of recession, there is little sign that there is any momentum towards a recovery for the construction industry.  The U.S. Department of Commerce in November estimated an overall construction “put-in-place” decline of 10% for 2009 and forecasted a further decline of 2% for 2010.

The federal figures indicate a somewhat more positive outlook for residential construction with a forecasted 7% increase in 2010 after a 25% drop in 2009.  On the opposite side of the spectrum, commercial construction shows a forecasted 25% decrease in 2010 after a 32% decrease in 2009.  Office construction is forecasted to decrease 22% in 2010 after a 20% decrease in 2009.

Over 1.7 million construction jobs have been lost since the peak monthly employment in the summer of 2006.

In public funded construction there is a 6.1 percent increase over the past year.  Given the depth of the recession in the construction industry, stimulus funds may only be sufficient to reduce the depth of the cuts in employment rather than creating an increase.

The demands for “private sector, small firms” in qualifying for federal, state or city projects is extremely onerous and subsequently stimulus funds will tend to feed the larger companies with previous public sector experience.

Demand for new construction in the commercial sector is very low – many areas remain overbuilt, and it will be some time before the excess is absorbed.

New commercial development is further hampered by non availability of financing for new developments.  In a survey conducted by ENR involving 941 construction firms, the single biggest complaint is the lack of bank financing for projects no matter how investment-worthy the projects.

Construction Cost

The cost of construction materials has seen significant fluctuation over the past two years. The major indexes all show a peak in 2008 followed by a 5.6% decline in 2009.  ENR is projecting a further 1.9% decline in 2010.

Looking at individual materials, however, there are a wide variety of profiles.  Steel has shown a sharp decline of some 30% from its peak and ENR expects it to decline another 4.8% in 2010.  Lumber has fallen steadily from a peak in 2004 and will get an initial boost in the first half of 2010 as the housing market improves and is forecasted to end 2010 at 5.2% higher.  Cement prices have fallen steadily in 2008 and 2009 and is likely to fall further as consumption is forecasted by the Portland Cement Association to slip another 0.7% after plunging 50.3% in 2009.

Labor costs are showing no significant reductions but rather the rate of increase are much lower than in the past.  The Construction Labor Research Council, Washington, DC reports that the average negotiated increase for 2010 is 3.6% which is well below the average of 4.6% in 2008.

From an overall construction cost viewpoint, greatly increased competition between suppliers, sub-contractors and contractors have resulted in each party reducing overhead and profit margins thus reducing bid prices and leading to moderate to strong construction price deflation. Overall construction cost indexes reflect that selling cost of construction on year to year basis declined between 7% and 10% and are at 2006 levels.

The most cost efficient procurement method would be to introduce some form of competitive bidding.  However, this comes with risks in terms of quality and increased change orders and the possibility of contractor/subcontractor insolvency.

Overall Construction Escalation Outlook

The large reduction in overall construction activity is leading to greatly increased competition between bidders and putting downward pricing pressure on projects.  In most areas cost trends continue to be sharply negative, leading to moderate to strong construction price deflation.

In the short term, bid prices are likely to remain low due to the very weak demand and lower input costs.  In the longer term, the outlook is less clear.  It is likely the construction market will have a slow recovery over many years as it will take time for investment to return to the construction sector.

The most likely escalation scenario is an uneven slow recovery over the next three or four years.  We see 1% – 1.5% de-escalation in 2010, a static 2011, a 1% – 1.5% escalation in 2012 and a return to a manageable 2% – 3% per annum thereafter.

SECOND QUARTER CONSTRUCTION OUTLOOK 2009

A QUANTITY SURVEYOR’S PERSPECTIVE – NEWSLETTER
SECOND QUARTER CONSTRUCTION OUTLOOK 2009
September 10, 2009

The second quarter of 2009 has seen some signs of the recession slowing in a few non-construction sectors. Construction still remains in a downturn as funding for projects is still very difficult obtain, keeping construction growth and employment in decline. It is forecasted that the construction market will continue on a downward trend through the end of 2009, but the intensity of the downward spiral is easing and should level off by December 2009.

Nonresidential construction projects are currently limited to State and Federal projects financed with the Federal stimulus packages. These contracts are beginning to start work, which has allowed civil construction to remain at or near levels reported in the first quarter of 2009. It is projected that costs for this sector of the construction industry will remain stable with the only changes coming from the unions in contract increases and with minimal increases in materials beginning the first quarter of 2010.

Material pricing has fallen to levels seen in December 2007, prior to the wild climbs in 2008, and are projected to show a slight increase in the first quarter of 2010. Steel prices are still in decline for the second quarter of 2009 despite steel mills pushing for a 22% increase to take the pricing back to where it was in the first quarter of 2009. The overall demand remains low as nonresidential construction starts are down, and construction spending has dropped 6% since the start of 2009 and by the end of the year is projected to drop a total of 11%.

First time buyer incentives have created a slight increase in residential construction, but with foreclosures and homes rolling off the Real Estate rolls there is still an abundance of properties keeping the market prices lower than what was seen in 2008. The slight increase in residential construction has had no impact on nonresidential construction or materials pricing.

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 drop in commodity prices will assist in reducing material costs nationwide. Further, lower material costs and overhead may make previously uneconomic projects more attractive if funding becomes more readily available.

In summary, the effects of the financial downturn are continuing to shift 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 and are projected to remain flat until the second half of 2010.