Bad News For Construction Forecasts

As the nonresidential sector has experienced cutbacks in demand for new space, the projections for construction activity for new nonresidential facilities are in for a mild decline in 2008, with a more significant downturn in 2009. The forecasts are more negative for commercial and industrial buildings, with an especially large drop-off in the office and retail sectors.

The two largest institutional categories, healthcare and education facilities, should see a slight increase this year and could help offset some of the losses in the other project categories. The continued increase in building material costs in recent years could also adversely affect the construction industry.

These are highlights from the American Institute of Architects (AIA) semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters. The report is also calling for a 1.9% decline in inflation-adjusted activity in 2008, followed by a projected 6.7% decline in 2009.

“The more pessimistic forecasts this round stems from the lack of growth in the overall economy, the ripple effect from the faltering housing market, and the anxiety in the credit markets leading to a restriction in lending for all types of construction projects,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “The one bit of good news is that this contraction in activity is likely to be considerably milder than the construction recessions of the early 1990s and earlier this decade.”

Market Segment Consensus Growth Forecasts:
Commercial/Industrial
Retail: -8.3% (2008) -9.9% (2009)
Office buildings: -3.7% (2008) -12.3% (2009)
Hotels: 6.6% (2008) -9.9% (2009)
Industrial facilities: 4.6% (2008) -5.5% (2009)

Institutional
Healthcare: 0.2% (2008) 1.1% (2009)
Education: 2.7% (2008) -1.1% (2009)
Amusement/Recreation: 3.6% (2008) -8.5% (2009)
Public Safety: 5.9% (2008) -1.9% (2009)
Religious: -11.7% (2008) -1.2% (2009)

Baker added, “Another key concern for the industry is that the cost of construction materials has increased more than twice that of consumer products and services – up 37% versus 18% since 2004. Petroleum-based materials and other key construction commodities such as steel, concrete and stone have experienced very sharp price increases in recent years.”

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Not Such A Bright Outlook

"Troubling" is how the National Lighting Bureau (NLB) describes first-quarter-2008 National Electrical Manufacturers Association (NEMA) Lighting Systems Index data. The Index, established in 1998, is a composite measure of lamps, luminaires, ballasts, emergency lighting, exit signs, and other lighting products shipped nationally and internationally from the United States by the 430 companies that comprise NEMA.

NEMA members manufacture a wide range of products used in the generation, transmission, distribution, and control of electricity, as well as innumerable end-use products in addition to those used in lighting. The value of NEMA members' annual shipments totals $100 billion.

According to NLB Communications Director John P. Bachner, "The latest Index results exceeded fourth-quarter-2007 results by 1.1%, due principally to increased shipments of emergency lighting equipment and miniature lamps. Overall, however, the U.S. lighting market remained depressed for the second quarter in a row. The index was down more than five percent from its year-ago level."

The near-term future does not seem to promise a rebound, Bachner commented. Particularly troubling is the slowdown in nonresidential construction, which, for the past year, has buoyed overall construction activity despite severe erosion in the residential sector. According to NEMA Economic Analysis Director Brian Lego, "Data from the first quarter of 2008 show overall spending on commercial, industrial and other related nonresidential buildings sank by its largest annualized rate in nearly three years."

Even more trouble could lie ahead, Lego said. He noted that the American Institute of Architects' billings index, a forward-looking indicator, slid to an all-time low, "with readings for firms specializing in commercial and industrial work especially weak. Overall, tighter lending standards, slower profit growth, rising energy costs, and a multitude of other financial and economic concerns pose significant headwinds to nonresidential construction activity."

Report From Germany: Upward Trend In Office Furniture Continues

The German office furniture industry maintained its growth course in the first quarter of 2008. The manufacturers, who are members of the BSO (Association of Office, Seating and Object Furniture/Verband Büro-, Sitz- und Objektmöbel), increased their turnover in the months January to March 2008 by 10.2% compared to the same period the previous year.

Commenting on this positive development, BSO Chairman Hendrik Hund, pointed out: “The investment restraint of previous years has led to strong backlog demand at many companies. We are now benefiting from this. For some time now, the quality of office furnishings and furniture has increasingly become the focus of customers’ attention. In particular, high ergonomic value furniture in high quality, attractive design is enjoying strong demand.”

In the past two years, the manufacturers of office furniture were already clearly able to increase their turnover. In 2007, the BSO members reported sales growth of 14.7%. This led to a rise in the office furniture production volume to 2.12 (1.85) billion Euro.

In 2007 the office furniture manufacturers benefited from the increased interest in connection with both the domestic market as well as exports. In contrast, foreign suppliers did not contribute to the growth of the domestic market.

While the BSO members in Germany reached sales growth of 14.5% (according to figures released by the Federal Statistical Office), imports were in decline. Imports of wooden and steel framed furniture fell by 2.6% compared to the previous year, while imports of swivel chairs declined by 0.2%.

The most important export markets for German office furniture were the other neighboring countries of Holland, France, Switzerland, and Austria. In terms of exports beyond the borders of the European Union, business and trade particularly with Russia and the Gulf states developed at a positive level.

According to observations by the BSO, in both regions the high quality associated with “Made in Germany” continues to apply as a powerful sales argument. In the area of office chairs, the export quota of total turnover achieved by the BSO member companies in 2007 was 41.7%. Nevertheless, 23.1% of framed furniture, which is more difficult to transport due to its bulky volume, was exported abroad.

The productivity factors for the German office furniture manufacturers also developed at positive rates last year. In this connection, the BSO member companies increased sales per employee by 9.0% and sales per rendered working hour improved by 8.4%. In 2007, for the first time in many years, additional staff and employees were taken on once again. Compared to the previous year, the number of employees increased by 4.9% to around 12,600.

Due to the turbulence on the financial markets and slight decline in worldwide economic activity, the BSO expects lower growth compared to last year. Currently the association assumes an average growth rate of 4% to 6%.

As Chairman Hund also explained, the trend in raw materials prices is a cause of concern for the German office furniture producers. In order to compensate for the rising costs of metals, wood, and plastics, which in some cases have reached double figure percentage increases, as well as the increases in energy and logistics costs, the beginning of the year already saw office furniture prices rise by an average of 5%.

According to the BSO, the fact that the prices have not increased further is in particular due to the increased efficiency of company procedures and processes. Further increases in material costs will however necessitate a renewed price adjustment by the end of the current year at the latest.

Architecture Billings Index Drops to Lowest Level Ever

Emblematic of the various struggling sectors in the overall economy, the Architecture Billings Index (ABI) dropped two points in March and fell to its lowest level since the survey’s inception in 1995. As a leading economic indicator of construction activity, the ABI shows an approximate nine to 12 month lag time between architecture billings and construction spending.

The American Institute of Architects (AIA) reported the March ABI rating dropped to 39.7, following its steep nine point decline in February (any score above 50 indicates an increase in billings). The inquiries for new projects score was 48.0, also the lowest mark for the survey.

“We’ve seen an 11-point fall-off in the first quarter of the year, and the prognosis for commercial construction later this year is not favorable at this point,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “Aside from historically low project demand, all regions are showing very poor business conditions. This is not likely to reverse itself anytime soon.”

Key March ABI highlights:
Regional averages: South (45.3), Northeast (38.7), West (38.7), Midwest (36.9)
Sector index breakdown: institutional (50.8), commercial/industrial (38.3), multi-family residential (31.7)
Project inquiries index: 48.0

The Architecture Billings Index is derived from a monthly “Work-on-the-Boards” survey and produced by the AIA Economics Market Research Group. Based on a comparison of data compiled since the survey’s inception in 1995 with figures from the Department of Commerce on Construction Put in Place, the findings amount to a leading economic indicator that provides an approximately nine to 12 month glimpse into the future of nonresidential construction activity.

The diffusion indexes contained in the full report are derived from a monthly survey sent to a panel of AIA member-owned firms. Participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended. According to the proportion of respondents choosing each option, a score is generated, which represents an index value for each month.