Economist Predicts Non-Residential Construction to Remain Down in 2010; More Positive Outlook for Residential

"I wish I had better news," Ken Simonson, chief economist for the Associated General Contractors of America, told his audience last week during Reed Construction Data's 2010 construction forecast. "I think, though, we have seen some changes for the better in the economy in the last 12 months. A year ago there was the total collapse of the bond market and the banks lending. Currently there has been quite a revival of bond markets for state and private activity bonds 鈥?the problem is that state revenues keep dropping [and] states are still cutting construction." He continued, "They already have the bonding out there, then there should be some relief for contractors 鈥?but in general there is a decline in state-funded developer financed and manufacturing construction."

While there has been some improvement on the bonding side, Simonson said much help is coming from the Stimulus legislation.

"The stimulus is the largest piece of federal spending ever directed to construction in one bill," he said. Of the $787 billion package, $135 billion was attributed to construction-related spending and about $35 billion of that was for buildings.

However, he said he hears constantly that building contractors say they've yet to see business from the stimulus.

"It's there, but it's just scattered through a wide range of agencies, and many of them were not prepared 鈥?quot;

There have also been stimulus tax provisions that have been helpful to contractors. This includes increased expensing for those buying equipment this year; a five-year net-operating loss carry back in 2008; and new and extended bonds, such as the "Build America" bond.

"The next hurdle we're seeing is project labor agreements. These are not part of the stimulus per say, but President Obama is encouraging agencies to include them [in contracts]."

Stimulus aside, Simonson said putting money into non-residential construction should be a big job generator: 28,500 for every $1 billion.

"One-third of those jobs show up as direct on-site construction jobs," he said. "One-sixth are supplying the materials and equipment and one-half are spread through the rest of the economy as workers and owners in construction."

In spite of the stimulus money that has come out, he said that total construction spending is down 12 percent in the past 12 months. Of that private non-residential is down 10 percent; public construction is up 3 percent (party because of the stimulus).

"Private residential dropped very sharply until the spring and now it has leveled off and is beginning to pick up," he said.

And as far as the housing outlook itself, Simonson expects a big increase for next year in single-family starts and totals should begin to top year-ago figures late this year. As far as multi-family, though, he does not see any growth until 2011.

For developer-financed non-residential construction, all segments are down about 25-45 percent compared to last year. The only one he sees hope for next year is improvement in retail, though it will be very low. All others are suffering from huge vacancy rates.

Looking ahead to 2010, Simonson expects non-residential spending to be down 0 to -5 percent; residential spending to be up 5 to 10 percent; total construction spending to be anywhere from -4 percent to +2 percent; materials costs to increase 0 percent to +8 percent and labor costs to increase about 3 percent, perhaps a little less.