Non-Residential Construction May Have Bottomed

Raleigh, NC, Aug. 28, 2009---Construction management and consulting firm FMI reported last week that its third-quarter Nonresidential Construction Index is essentially unchanged from second quarter's 45, leading FMI to conclude that although the bottom of the recession is at hand, recession-like conditions aren't likely to end soon for beleaguered nonresidential contractors.

"Most see the short-term outlook as slightly less bad than last quarter, and we will take that as a good sign, even if a small one," FMI said, according to a report by the CoStar Group, a commercial real estate information company.

"A more important and telling sign is seen in this quarter’s results for the one- to three-year outlooks for major construction markets. Panelists have reigned in their longer-term optimism, which seems to signal they are expecting a protracted recovery."

The construction labor market recovery "is not yet smooth and obvious," agreed Associated Builders and Contractors (ABC) Chief Economist Anirban Basu.

"Many nonresidential construction activities tend to lag behind broader economic cycles, including commercial and office construction.

Basu said the impacts of the $787 billion stimulus package passed in February should become significantly clearer during the next six to 12 months, helping stabilize nonresidential construction employment.

The nonresidential sector's 13% increase in the value of new construction starts received much of its lift in July from the institutional structures such as healthcare facilities, which soared 172%, reflecting the July groundbreaking of seven massive hospital and medical center projects, according to McGraw-Hill.

Commercial building construction, as a component of the larger nonresidential market, turned in a mixed performance in July, however.

Retail, warehouse and hotel construction rose modestly from a weak performance in June, while construction of offices and manufacturing plants continued to drop in July from the previous month.

Reed Construction Data reported that construction spending rose 2.5% in June. However, Reed Economist Jim Haughey described the numbers as a blip and predicts another 4% decline in spending by the end of the year, on top of the 10% decline over the last year, and the 20% drop since March 2006.

There's some good news in that the commercial building free-fall has ended with a 23% decline over the last year.

But spending at institutional building sites such as schools and hospitals is headed downward, and Haughey expects monthly declines in the overall nonresidential sector to continue for the rest of 2009.

That said, the long-term outlook for nonresidential growth in 2011 through 2013 is quite promising because unlike previous cycles, developers did not overbuild in the market, Haughey said during a recent presentation.