Construction market to grow 3% in 2005

AFTER decreased activity this year and a flat year in 2004, the construction market will experience an estimated 3% growth rate in 2005, said Edward Sullivan, chief economist of the Portland Cement Association.

“What we're seeing is that 2004 is going to represent a year of transition, where, as the economy strengthens and interest rates rise, you're going to get a modest cooling of the residential sector,” he said. “At the same time, as the economy improves, you're going to get a marginal increase on the non-residential side, leaving it basically flat. But in 2005, we'll get a much stronger performance on both sides.”

Sullivan said that although the market may be flat in 2004, it nevertheless remains in the $700 billion range — a far cry from 1992, when it hovered around $500 billion.

In the past two years, residential construction (up 4.2%) has been leading the way, followed by public (up 3.8%) and nonresidential (down 17.7%). Sullivan said as the market improves, nonresidential will be the growth leader.

He said the residential market has been growing because low interest rates have lowered the threshold for first-time buyers. That extremely favorable interest-rate environment has been viewed as fleeting, therefore spurring immediate action. But that growth is borrowing from future demand, implying that a “correction” in single-family construction may lie ahead.

Multi-family starts, which are expected to decline by 4% this year and 1.5% next year, account for about 10% of residential construction. Vacancy rates have increased from about 8% in 2001 to 9.4% this year, and rental prices have fallen, creating a scenario that is heavily weighted against improvement in multi-family activity.

Nonresidential construction in 2002 featured a 10% decline in retail, 28% decline in office, and 45% decline in industrial. Sullivan said conditions are changing, and 2004 is expected to be “very strong.”

In industrial construction, he said there is a 20-month gap between an upswing in capacity utilization and corresponding upswing in construction, and then there is a 19-month gap between the construction trough and the period when construction completes its recovery.

“I'm telling you that even after the economy starts to recover, there are long lapses you must endure before you see an increase in industrial construction activity,” he said.

Sullivan also displayed a graph that showed there is a strong correlation between what consumers think about the economy and what shopping mall builders, for example, think about the economy.

He said public construction, which accounts for 25% of overall construction activity, is mostly state and local government (92% in 2002). As of earlier this year, 45 states had a high risk of deficit and 17 had a high risk of cutbacks.

He said a small decline in public construction is expected: 0.5% in 2003 and 1% in 2004.

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