The construction industry lost considerable momentum in 2008, and McGraw-Hill Construction reported the value of new construction starts fell 15 percent last year, to $547 billion. It was the second straight decline after the 7 percent pullback in 2007. Single-family housing continued its descent last year and was joined by a steeper downturn for multifamily housing as weakness for commercial building emerged. The institutional structure types, such as schools and health-care facilities, managed to hold up fairly well, but such factors as eroding state and local finances have raised concern about the prospects for the institutional categories going forward.

 

The U.S. economy is in the midst of an extended and deep recession. Real GDP in the fourth quarter of 2008 dropped 3.8 percent, and further declines are anticipated through at least the first half of this year. The employment statistics show that a steady loss of jobs took place over the course of 2008, with the number of payroll jobs falling by 2.6 million, and the early 2009 layoff announcements don’t bode well for the near term. Despite the substantial efforts undertaken to thaw frozen credit markets, including the $700 billion financial bailout package implemented last fall, there have been only faint signs that lending standards are beginning to ease. According to the Federal Reserve’s January 2009 survey of bank lending officers, a full 79 percent of the respondents indicated they had tightened standards on commercial real estate loans during the fourth quarter of 2008, not much less than the 87 percent reading for the third quarter. In addition, the weak economy is depressing the fiscal health of state and local governments, so more construction projects are being placed on hold.

 

President Obama’s stimulus package should help cushion some of the construction downturn expected for 2009. While a large share of the approximately $120 billion in construction-related spending is directed at infrastructure work, there’s also funding directed at buildings. Energy-efficiency upgrades for federal buildings were provided $4.5 billion, and Veterans Administration hospitals and other medical facilities were given $1.2 billion. Spending would also be directed at the repair and construction of public housing units, as well as home weatherization efforts. While specific allocations for school construction were removed from the stimulus bill at the conference committee stage, additional funds were directed at shoring up the fiscal health of states, and some of this money could be used for school modernization projects. This will help counter to a small degree the steep correction for the commercial structure types expected for 2009 and in all likelihood 2010.

 

Given the weak environment, total construction starts in 2009 are forecast to slide another 11 percent, with double-digit declines for multifamily housing and commercial building, but a relatively modest retreat for the institutional structure types. The following are some of the patterns revealed by major construction sectors during 2008, and what’s expected for 2009.

 

Multifamily housing in 2009 is forecast to drop 22 percent, in both dollar terms and units. While a substantial reduction, it’s not quite as severe as what occurred during 2008 (down 37 percent in dollars and 33 percent in units). The steep correction to the condominium boom has been under way now for a couple of years, pulling down the number of large-scale multifamily projects that have reached the construction start stage. At the height of the condo boom in 2005, the construction start statistics show that there were a total of 61 multifamily projects valued at $100 million or greater that reached ground breaking, most of them condo towers. By 2008, the number of large-scale multifamily projects had fallen to 25, most of which were apartment towers. The tough lending climate has recently played a larger role in the multifamily downturn, with the most visible case being the 150-story Chicago Spire in downtown Chicago, reported as a construction start in 2007 by McGraw-Hill Construction. This project was put on hold in October 2008, because its developer could not get funds to continue construction.