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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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.