Construction activity is falling fast and will head down again next year. The rate of decline could slow, but only if the government bank rescue and planned economic stimulus work.

That’s the discomforting scenario described by McGraw-Hill Construction, the parent of ENR and Architectural Record, during the Outlook09 Executive Conference in Washington, D.C. on Oct. 23.

Robert Murray, vice president of economic affairs at McGraw-Hill Construction.

Image courtesy McGraw-Hill Construction
The construction industry is in 'retrenchment,' says Robert Murray of McGraw-Hill Construction.

Construction starts are on pace to tumble to $555.5 billion in 2008—a 12% drop from the previous year. Steady declines will continue through 2009, dropping another 7% to $514.6 billion, says Robert Murray, vice president of economic affairs at McGraw-Hill Construction.

The forecast assumes that the bank rescue and anticipated additional stimulus packages aimed at jump-starting the economy and unfreezing the credit markets will be successful. Still, considerable drops are expected even if government intervention succeeds. “By whatever broad measure of the industry that you look at, it’s clearly in retrenchment,” Murray says.

Housing, the center of the financial hurricane, suffered the biggest decline this year, with single-family housing falling 36% to $128.8 billion and multi-family falling 30% to $44 billion.

The worst may be over. Although single-family housing starts have been in consistent free-fall since 2005, declines could ease considerably in the coming year. Dropping from a peak of 1.626 million units in 2005 to 937,000 units in 2007, starts fell an additional 38% in 2008 to 582,000 units. McGraw-Hill Construction is forecasting a relatively modest decline of 4% in 2009 to 560,000 units.

A souring market for condos prompted the multi-family housing sector to take a dive in 2008, dropping 30% to $44 billion. Although many developers are shifting interest toward apartment projects, Murray says that sector is forecast to see another 6% decline to $41.4 billion.

On the positive side, manufacturers built 69% more this year than last, $29.6 billion worth, with most of the upsurge coming from the oil industry. And electric utilities upped their construction of all kinds 55% to a near record level of $24 billion.

But even the bright spots, such as manufacturing and utilities, may fade next year, as the sour economic environment drags down all parts of the construction market.

The tight credit markets will continue to erode commercial sector starts, which will fall 10% in 2008 to $89.8 billion—levels seen at the beginning of the decade. Retail projects are seeing some of the biggest declines, echoing the decline of the housing sector. Additionally, Murray says that bankruptcies by major retailers, such as Linen’s N Things, Sharper Image and CompUSA, will add to the decline in the coming year. Murray forecasts another 12% decline in 2009 to $79 billion. Next year, the office market could take the biggest hit in the commercial sector with an 18% drop in new start square footage predicted. The booming hotel market will finally pull back as well, Murray says.

After four years of steady increases, institutional building starts could flatten. The sector increased by 7% in 2008 to $124.4 billion, but could drop slightly to $121 billion in 2009 as financial pressures force public agencies to defer projects in the near term, Murray says.

Government restraint is also expected to hamper public works activity. The sector dipped 5% in 2008 to $114.8 billion and could fall another 5% in 2009, Murray says. Next year, Murray forecasts that even with the potential for government stimulus that would boost infrastructure, highways and bridges starts could slide 4% in 2009 to $50 billion. Even with increasing ridership reported by many mass transit systems nationwide, that sector could also decline by 5% in 2009 to $3.8 billion.

The electric utility market has seen wild swings in activity in recent years, but continues at a high level from a historical perspective, Murray says. The sector surged 55% to a near record $24 billion in 2008 and could drop 30% in 2009 to $16.8 billion. At that level, starts by dollar value would still be the fourth largest of the decade.