Following three years of precipitous decline, the construction market may have finally hit bottom and be in the early phase of a rebound with housing leading the way.

McGraw-Hill Construction is forecasting that total construction starts will climb 11% to $466.2 billion in 2010, following an estimated 25% decline in 2009. The forecast was announced at the 2010 Construction Outlook conference in Washington, D.C.

Robert Murray delivered the McGraw-Hill Construction forecast.
Photo: Bruce Buckley

After a 39% drop in construction between 2006 and 2009, an improving residential market and signs of strength in some public sector markets could spark a turnaround in 2010, says Robert Murray, vice president of economic affairs for McGraw-Hill Construction.

“This is not a booming market; it is just inching upward,” he says.

Given the volatile economic conditions of the current recession, Murray notes that the industry may not realize a significant rebound in 2010 even if the worst is over. “At the very least, we're stabilizing after years of steep declines,” he says.

Despite a continued slump in the commercial and manufacturing sectors, improvements in single-family and multifamily housing will help buoy total construction spending next year, Murray says. Single-family housing may have hit bottom in 2009 with an estimated 430,000 units started. Construction could rise 30% next year to 560,000 starts, returning to levels on par with 2008 when 549,000 units were started.

Murray notes that even with the rebound, levels remain 65% below the mid-decade peak of the housing boom. His residential forecast hinges on continued low mortgage rates and the extension of first-time homebuyer tax credits.

Multifamily housing will also begin to regain traction, rising from 140,000 units started in 2009 to 160,000 units in 2010—a 14% rise. Murray credits some of the improvements to stimulus funds and community-level block grants provided through the U.S. Dept. of Housing and Urban Development. Although the sector could rebound, activity remains only about one-third as high as 2007 levels when 452,000 units were started.

Non-residential building sectors have yet to bottom out, according to McGraw-Hill Construction forecasts. The commercial and manufacturing sectors could continue to struggle next year with an estimated 6% drop in combined contract value of starts to $55.5 billion. In 2007, those sectors accounted for $113 billion in new starts. Manufacturing could take the biggest hit, dropping 14% to $9.4 billion as capacity issues continue to hamper the sector.

Among commercial buildings, hotels could see the largest drop, declining by 9% to $4.5 billion. Office buildings starts will ease back another 3% to $19.7 billion, as employment remains weak and businesses curtail expansions. Stores have seen the most dramatic retreat, dropping from an all-time high of 314 million square feet of space to a predicted 95 million square feet in 2010—the lowest level in nearly 50 years.

Funding from the American Recovery and Reinvestment Act bolstered highway construction starts in 2009—a trend that is expected to continue to fuel work going into 2010. Total contracts by value for highways and bridges rose nearly $4.4 billion in 2009 to $57.3 billion. In the absence of a new federal highway bill, Murray expects appropriations to remain flat for highways and bridges in 2010; however, the last batch of stimulus projects could spark a 13% rise to $64.7 billion in total starts.

Mass transit, which saw $3.8 billion in new starts in 2007, is primed for a jump in funding thanks to the start of several megaprojects, including the $1.6 billion Dulles Corridor Metrorail project in suburban Washington, D.C. and a new $8.7 billion Trans-Hudson rail tunnel connecting New Jersey to Manhattan. The prospect of billion of dollars for high-speed rail projects could also fuel added work in the coming years, Murray says.

Institutional building construction should begin to stabilize in 2010, thanks in part to stimulus funds. After a 23% drop in square footage this year, McGraw-Hill Construction forecasts that the sector will flatten out with a drop of 2%.

Public buildings got a big boost from the ARRA in 2009 and will reap many of the benefits in 2010, as starts in the sector are expected to rise 8% to 51 million square feet—on par with the 2007 peak.

Healthcare projects took a big hit in 2009 in light of the tight credit market. The sector dropped 36% in 2009 to an estimated 70 million square feet of new space. That sector is expected to see 72 million square feet of new starts in 2010.

Educational buildings dropped 23% to 172 million square feet in 2009, as state and local governments pulled back projects and private institutions saw big drops in endowments. The sector is expected to continue its downward path in 2010 with 158 million square feet of new starts.

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