Building Construction in 2011: Changing--for Better and Worse

There are modest signs of improvement for building construction entering 2011. But the gains will be spotty and partly offset by declines in previously active segments and rising materials costs.  Nonresidential public and private construction spending in November was down 6% compared with November 2009. But many building categories did much worse: lodging (mostly hotels), -48%; warehouse, -37%; manufacturing, -35%; office, -19%; retail (other than automotive), -14%; preK-12 education, -13%; and public safety, -12%. In addition, multifamily construction tumbled 30%. Positive news was limited to non-building categories (highway, water and wastewater, water conservation and development) and two hybrid categories: amusement and recreation, up 11% and power, up 1%. Nevertheless, it appears several private nonresidential categories will finally turn positive in 2011. An increase in business and leisure travel has enabled hoteliers to boost their revenue per available room enough to start investing in renovations and, later in the year, a few new properties. Rising imports, exports, and domestic sales will encourage more investment in warehouses, truck terminals, and eventually factories. Power construction—retooling existing plants to cut emissions, renewable power and transmission lines—will match or exceed already high 2010 levels. Hospitals have resumed some of the modernization and expansion projects they shelved after the market collapse of late 2008. Private colleges and universities are also likely to break more new ground in 2011. But the overhang of retail and office space will keep these large categories depressed until 2012. Meanwhile, state and local budgets are in no shape to expand their construction spending. As spending authorized under past bond issues is used up, there will be far fewer state and local starts. The expiration of Build America Bonds, just when tax-exempt rates began rising late last year, will only add to the squeeze. Multifamily rental housing may be the strongest category in 2011. As employment expands, more people will be in a position to move into their own apartments. In addition, the expected end of the military base realignment process will bring tens of thousands of new renters to some bases, many of which do not have a large overhang of vacant property. Single-family homebuilding should also pick up, though the timing remains uncertain. Putting all the pieces together, it appears total construction should rise about 3 to 7% in 2011 from the meager level of 2010. Private nonresidential spending will climb about 5%, residential 5 to 10%, but public spending on building construction will be flat at best and possibly down 5%. (Public works spending will begin to drop much more steeply at the end of 2011.) Even this modest gain will not flow entirely to contractors, however. The price of several key materials has spiked recently, especially copper, steel and diesel fuel. Other items, such as gypsum wallboard, lumber, concrete and asphalt, have remained dormant. But it is likely contractors will have to cope with spells of 6 to 8% increases in materials costs and a December-to-December increase of 4 to 6%. That may not be as drastic as in some past years but it is far more than the likely 1-to-2% rise in consumer prices. Ken Simonson (simonsonk@agc.org) is chief economist for AGC of America and author of The Data DIGest, a one-page weekly summary of economic news relevant to construction. Subscribe at www.agc.org/datadigest.