The latest forecast from McGraw-Hill Construction spells it out.
In 2008, the leading market for multifamily construction was New York, which experienced a relatively modest 6 percent drop in the number of dwelling units started from the previous year. This compares to more severe 2008 declines in such markets as Washington, D.C. (down 23 percent), Atlanta (down 24 percent), Los Angeles (down 40 percent), Las Vegas (down 61 percent), Miami (down 60 percent), and Chicago (down 62 percent). In 2009, the New York market will see greater retrenchment, affected by the upheaval in its financial sector and declines in financial services jobs. For the U.S. as a whole, the tight lending environment will restrain development of both apartments and condominiums. It is expected that secondary markets will see a more moderate retreat this year, and public housing projects may be lifted by funding from the stimulus package.
Commercial building in 2009 is forecast to decline 21 percent in dollars and 26 percent in square feet. This is on top of what took place during 2008—down 17 percent in dollars and 27 percent in square feet. The extent of the 2009 slide will depend on the effectiveness of new efforts to help the banking system regain its footing, including returning to the original premise of the bailout bill in which troubled mortgage-backed assets are removed from bank portfolios. It is not expected that the stimulus package will provide immediate benefit to the commercial sector, although gains in employment and a more moderate recession will be a plus in a year or so.
Construction of stores and shopping centers most directly showed the impact of the weak economy during 2008, with a 34 percent decline to 207 million square feet. This followed record high levels during 2005–07, in which construction exceeded 300 million square feet per year. That strength reflected the expansion efforts of major retailers, as well as the push for new store formats such as open-air shopping centers or “lifestyle centers.” But as the economy lost momentum in 2008, retail sales slipped, causing several retail chains to declare bankruptcy. The weakness of the retail sector in early 2009 was highlighted by the bankruptcy and liquidation of Circuit City, and more store closings will take place this year. Retail sales will stay weak for most of 2009, providing little impetus to add new store space. For 2009, store construction will drop an additional 27 percent to 150 million square feet.
This decade’s rise in office construction was more restrained than in the past, as activity reached 218 million square feet in 2008, well below the prior peak of 298 million square feet in 2000. These conditions allowed vacancy rates to stay within the relatively healthy range of 10 percent for downtown markets and 14 percent for suburban markets.
The tougher lending climate in 2008 dampened construction, as activity fell 25 percent, to 164 million square feet, yet there were a few markets, such as New York (up 100 percent) and Houston (up 48 percent), that saw large percentage gains. The New York market in particular was lifted by the start of World Trade Center Towers 2, 3, and 4 in Lower Manhattan, with a combined office space in excess of 6 million square feet. But it was announced in January that, for the near term, these buildings would likely be built either to grade or as two- to six-story structures (compared to the planned 79 and 71 stories). The originally conceived high-rise towers would have to wait. And the weak employment picture is contributing to a rise in office vacancies. CB Richard Ellis reported that in fourth quarter 2008, downtown office vacancies rose to 11.7 percent, while suburban office vacancies reached 16.3 percent. For 2009, office construction will decline another 24 percent, to 125 million square feet.
The institutional structure types in 2009 are forecast to retreat more gradually than commercial building, with contracting down 6 percent in dollars and 10 percent in square feet. In part this reflects the less volatile behavior shown by this sector, which responds to state and local fiscal conditions with a lag, and in part it reflects funding support coming from the stimulus bill.
The educational building category in 2008 registered a 1 percent gain, to 222 million square feet, combined with an 8 percent gain in dollar volume. Growth was particularly strong for high schools, which climbed 10 percent in square feet. College and university construction edged up 1 percent, exceeding the enhanced pace achieved in 2007. Yet the tight credit environment will dampen construction in 2009, as contracting slips 8 percent, to 205 million square feet.
There is anecdotal evidence that projects are being deferred, as local governments and institutions focus on trying to meet operational expenses. The decline in the size of university endowments is another constraint. At the same time, numerous school-construction bond measures have passed recently, especially in California and Texas, and some of this funding should still have an impact at the construction site in 2009. Furthermore, the stimulus bill has the potential to support more school renovation projects, which lifts the dollar volume of construction starts (although not the square feet). This support will limit the decline for the educational category in dollar terms to 6 percent in 2009.
Hospital construction in 2008 had a record year, climbing to 110 million square feet as the result of a 25 percent surge for new hospital projects that more than offset a 7 percent decline for other health-treatment clinics and nursing homes. This maintained one of the current decade’s trends: the substantial rise in the number of large-scale hospitals under construction. However, this year’s weak economic climate will cause more health-care projects to be deferred.
Toward the end of 2008, large hospital chains witnessed a decline in their financial performance, and financially strapped states may face greater difficulty in quickly meeting Medicaid obligations. On the plus side is the added funding provided for Veterans Administration facilities. Overall, the health-care facilities category in 2009 is forecast to retreat 13 percent, to 97 million square feet.