2006 Southeast Construction Market Outlook

Industry Will See Big Opportunities but Face Big Concerns This Year

By Scott Judy

Construction activity and opportunities for future work should remain strong in the Southeast this year, but major concerns over the availability and costs of materials and labor are threatening to dampen the region's longer-range prospects.

Click on the links below for detailed information by State:

Florida

Georgia

North Carolina

South Carolina

For 2006, McGraw-Hill Construction Research and Analytics is predicting the Southeast states of Florida, Georgia, North Carolina and South Carolina will experience a collective 2 percent gain over 2005 in the total value of new construction contracts for a total of $131.2 billion.

That 2 percent uptick is just off of the national pace, which is forecast to experience a roughly 3 percent gain next year. Further, it compares to a 12 percent growth rate that the region experienced in 2005.

"The Southeast region continued to outperform the U.S. in total construction growth in 2005, but will slow to the national average (+2 percent) in 2006," said Kim Kennedy, manager of forecasting with McGraw-Hill Construction Research and Analytics. "The reason is that Southeast construction is more heavily concentrated in housing than other regions, and next year housing activity will begin to decline."

Local contractors see the bright side, too, but the vast majority of those interviewed for this story are also worried about the looming issues of costs related to materials and labor.

"The 2006 construction outlook for the southeast United States is volatile to say the least," said Ken Petterson, manager of preconstruction services for Hensel Phelps Construction Co. in Orlando. "The resource demand caused by the damages from Hurricane Katrina, coupled with an extremely large volume of privately funded development, will test our ability to secure building materials and provide our projects with sufficient labor."

Jessie Brewer, co-COO with Skanska USA Building in Charlotte, concurred that these issues could be much more troublesome in 2006 than in 2005.

"I don't think we've seen as bad as it's going to get, frankly," he said. "They really have not begun to rebuild the Gulf Coast yet. We're cautioning our owners to expect to see some price hikes when the major rebuilding begins. In the past two years, we've seen double-digit increases in the cost of construction. Without a doubt, it will be at least that in '06."

The issue even has the potential to take the high-flying multifamily market down a bit, said Rex Kirby, president and general manager of the Florida division of Suffolk Construction Co. in West Palm Beach.

"There are rumblings of concern that the land and construction costs are reaching a point that may delay some projects, as the sales price is at a peak for the consumer," Kirby said. "We expect continued increases in material, operating and labor costs due to challenges such as the destruction of a major metal stud galvanizing facility and several drywall manufacturing plants by Hurricane Katrina, rising gas prices and demand for skilled workforce. In South Florida, we are already considerably short of the skilled labor needed for the volume of work."

Of course, these local concerns are part of a national trend toward increased costs. In fact, some have started to question whether the round of increases being forecast for this year aren't merely reflecting cost inflation rather than increased activity.

Engineering News-Record's editorial in its Nov. 21 forecast issue raised this issue.

Despite McGraw-Hill Construction - the publisher of ENR and Southeast Construction - forecasting a record 2006, ENR stated: "Lurking below the surface is a pervasive uneasiness about inflation. Economists interviewed by ENR are virtually unanimous in citing rising costs as their major concern and the biggest threat to their forecasts. One economist speculated that as much as one-third to one-half of the apparently robust growth in the highway market could be purely inflationary. In fact, if inflation stays its course, many forecasts actually will be calling for real declines."

Despite the very real concerns, optimism pervails in the sunny Southeast.

"The best market in the entire U.S. is in the Southeast - bar none," said Skanska's Brewer. "The market looks very strong."

In Charlotte, Pat Rodgers, president and CEO of Rodgers Builders, said, "We continue to see the outlook as positive for the Carolinas. There are market areas that are stronger than others."

Kirby added: "2006 is set up to be a record year for us. Our backlog is significant for both 2006 and 2007. The bottom line is the work is plentiful in South Florida."

Those specializing in multifamily construction should find themselves busy, if not overwhelmed. A. Shaw Dargan III, president of condo specialist Dargan Construction Co. in Myrtle Beach, S.C., is simply amazed.

"I've never seen anything like it in my life," he said. "The amount of work is just unbelievable - it's more than we have ever done in our 55-year history. We have 10 projects under construction right now, which is about $300 million, and we are looking at close to $400 million for 2006. It's nuts."

Perhaps Bill Pinto, CEO of Atlanta-based Hardin Construction Co., summed it up best: "2006 is going to be a busy year for almost everybody. As long as pricing doesn't throw cold water on it, 2007 will be busy as well."

Or, perhaps it was Dargan, who said simply: "We are very blessed. We better get it while the getting is good."

The Regional Numbers

McGraw-Hill Construction, which uses the value of newly signed contracts for future activity, is predicting the Southeast's total construction will equal approximately $131.2 billion in 2006. That's about 2 percent higher than the figure reported for 2005 of $128.9 billion.

Nearly $88 billion of the 2006 total is slated as residential, which includes single- and two-family homes as well as apartments and condominiums. McGraw-Hill Construction is predicting this sector, which grew 17 percent last year, will finally slip in '06 and experience a 1 percent decline overall. (It should be noted this market has more than doubled in value since 2000, when it totaled nearly $42.8 billion.)

That's due entirely to a long-expected decline in single-family construction, which McGraw-Hill Construction expects will retrench by 3 percent overall throughout the four-state area but still total $72.3 billion.

Multifamily projects will slow from their current pace. After this market grew by 16 percent in 2005, the forecast calls for 5 percent improvement in '06. Multifamily (which includes apartments, condos and two-family) will grow from a $14.9 billion total in 2005 to $15.6 billion this year.

"Single-family housing will slow in all four states, but only turn negative in Florida," said Kennedy with McGraw-Hill Construction. "Apartments/condos will also begin to slow in Florida next year, and that long surge in condo construction may finally begin to ease - although levels of activity will remain very high."

There's brighter news in store for the Southeast's nonresidential market, according to McGraw-Hill. While several sectors saw double-digit declines in '05, all will swing positive - and some significantly so - in 2006. Overall, nonresidential construction in the Southeast should tally roughly $28.5 billion this year. That's an all-time high, and the first time this category has beaten its previous peak in 2000 of $26.6 billion.

"Florida hotel construction will grow strongly next year as tourism and business travel remain robust," Kennedy said. "Related to that, amusement construction, including convention centers, will be strong throughout the region. The healthy business environment will also encourage a boost in manufacturing starts, although levels will remain historically low due to the large amount of offshoring that has occurred."

McGraw-Hill Construction breaks down its nonresidential category into two sectors, commercial and industrial, as well as institutional. The commercial/industrial category should improve by 11 percent over 2005 and provide an estimated $13.7 billion in construction to the region. The institutional category should experience even better growth, 14 percent, to tally about $14.8 billion, compared to 2005's $12.9 billion.

The nonresidential category is alternatively divided into 13 subsectors. By category, the 2006 prognosis for these construction markets are as follows:

• Amusement, social and recreational buildings - up 33 percent in 2006 to total $1.9 billion.
• Dormitories - up 1 percent compared to 2005 for a $683 million total.
• Government service buildings - up 16 percent to total approximately $1.3 billion.
• Hospitals and other health facilities - an 8 percent uptick in 2006 for a total of slightly more than $3.1 billion.
• Hotels and motels - up 38 percent in '06 for an estimated $1.3 billion total.
• Manufacting plants, warehouses and labs - up 24 percent to $919 million.
• Office and bank buildings - up 11 percent to nearly $3.2 billion.
• Parking garages and automotive services - up 10 percent to about $1.8 billion.
• Religious buildings - up 20 percent to tally $767 million.
• Schools, libraries and nonmanufacturing labs - up 8 percent to total approximately $6.1 billion.
• Stores and restaurants - up 7 percent to total roughly $4.3 billion.
• Warehouses (excluding manufacturer-owned) - up 5 percent to nearly $2.2 billion.
• Miscellaneous nonresidential buildings - up 66 percent to roughly $929 million.
  

McGraw-Hill's nonbuilding category, which includes highways, water supply and other infrastructure-type sectors, is also predicted to grow in '06, though by only 2 percent for the entire region, and with positives and negatives.

Mostly it will be a case of what was down is now up, and what was up is now down.

For instance, bridges, which grew by 43 percent in '05, will decline by 12 percent this year and total nearly $1.6 billion. Electric power, gas and communications projects, which escalated by 7 percent last year, will drop by 19 percent to total slightly more than $1 billion in '06.

On the other hand, turning from negative to positive will be: sewer and waste, from 13 percent down in '05 to 10 percent up in 2006 for a total of nearly $1.7 billion; water supply, from down 15 percent to up 43 percent to nearly $1.7 billion; and water resources, from 12 percent down to approximately 15 percent up, for a total of roughly $4.2 billion.

Also, dams, reservoirs and river development projects will decline 10 percent this year and tally roughly $868 million, while "other nonbuilding" will also drop, by 6 percent, to total about $2.7 billion.

The biggest market, streets and highways, will improve by 8 percent for an estimated $5.3 billion worth of construction.

"Streets and bridges (combined) will grow 2 percent after a strong 12 percent boost in 2005," Kennedy said. "Also, transportation buildings, such as airport, bus and rail terminals, will be particularly strong in Florida and South Carolina."

A more detailed look at each state's prospects follows.

Florida

For the four-state region, Florida's the most active. McGraw-Hill Construction estimates new contracts in Florida will total approximately $64.8 billion in 2006 - or nearly half of the four-state's total.

"Florida's hardly been stronger," said Skanska's Brewer. "We're seeing really strong building programs in every one of the market sectors there."

Ron Autrey, president of Miller Electric Co., a regional contractor with headquarters in Jacksonville, added: "2006 will bring further expansion in Florida. Businesses and families continue to relocate to Florida in record numbers. The real estate bubble should continue for investors and builders.

"Health-care institutions continue planned expansions, and school systems cannot keep up with the need for new schools at all grade levels. The state budget for roadway construction and improvements will bring several billion dollars to the regional construction market."

Lyle Blanden, president of J.O. DeLotto & Sons of Tampa, said there's "real demand. We're in the throes of the baby-boomer influence still."

And Dr. Yorgos Papatheodorou, an economist with CH2M Hill Lockwood Greene in Spartanburg, S.C., said population and economic growth are keeping the markets growing. "The state needs more infrastructure, hotels, commercial development, hospitals, schools, roads and even power plants," he said.

Even so, McGraw-Hill Construction's Analytics Group is predicting an 8 percent decline in single-family construction to $35.1 billion, as well as a 4 percent dip in apartment and condo projects, for a total there of nearly $10.1 billion. Even with that decline, multifamily construction in Florida will account for more than two-thirds of the region's total.

In the nonresidential arena, McGraw-Hill's numbers bear out Brewer's and Autrey's predictions, with new contracts in this category expected to hit nearly $12.2 billion this year - significantly above the 2005 estimate of $10.9 billion.

Double-digit growth forecasts dominate the individual subsectors included in this market, several of which move to all-time highs. Amusement construction and the related hotel and motel market will each improve by 40 percent, with amusement totaling just over $1 billion and hotels tallying roughly $736.4 million.

Dormitories will improve 34 percent and total $232.3 million, while government buildings will increase by 22 percent for a $526.6 million market.

Hospital construction will jump 18 percent and total more than $1 billion for the first time since 2002. Manufacturing contracts will jump 36 percent and total $225 million, while office and bank buildings come back, growing 10 percent to tally nearly $1.5 billion.

Religious building construction will grow by 14 percent to total $260.2 million, while the value of store and restaurant construction is predicted to increase by 4 percent and tally slightly more than $1.9 billion, nearly reaching an all-time high. Also, the warehouse sector should jump 20 percent to reach a historic peak of about $1.1 billion.

Despite the continued growth in population, construction of schools and libraries will actually ease back in '06, by 8 percent, but still equal approximately $2.1 billion in new projects.

"Enrollment will grow 7.8 percent in Florida from 2004-2014, although (construction) will decline 8 percent in 2006 - but from historically high levels due to the classroom size reduction mandate that has brought construction to unprecedented levels," McGraw-Hill's Kennedy said. "It will remain particularly strong over the longer-term due to predicted enrollment growth."

The other, lone market forecast to decline is parking garages, which is expected to retreat by 12 percent to $965.9 million.

Nonbuilding construction will decline slightly in 2006, according to McGraw-Hill Construction. The company expects this market to total nearly $6.8 billion this year, down from the 2005 estimate of nearly $7 billion.

Construction of streets and highways, water supply systems and sewer and waste infrastructure are the only categories predicted to experience upticks this year, while bridges, dams/reservoirs and power supply projects will decline.

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Georgia

There are good vibes in Georgia, too, where 2006 construction activity is expected to value roughly $27.8 billion. Of that amount, nearly $17.1 billion will be residential work, while nonresidential will total about $7.3 billion and nonbuilding will contribute $3.4 billion.

"Overall, I've heard very many optimistic comments about construction in metro Atlanta and Georgia, based on the amount of backlog our current contractor members currently have going into the new year," said Bill Anderson, president of Associated Builders and Contractors of Georgia. "Everybody's upbeat."

Hardin's Pinto added that he sees the Atlanta market as "continuing to be strong for several years," while Skanska's Brewer expected an "OK year" from Georgia's biggest metro in 2006.

McGraw-Hill Construction is bullish on Georgia's residential market. Though it sees the single-family market as slowing down from its current pace, the company is still predicting 4 percent growth for a record volume of $14.7 billion. Two-family houses should equal about $121 million. Additionally, the multifamily sector will jump 39 percent in '06, with apartments and condos registering roughly $2.2 billion in new starts.

Georgia's $7.3 billion nonresidential sector is predicted to be about $500 million stronger than last year, but is still a mixed picture for '06. Declining markets include: dormitories - down 16 percent to $115.6 million; hospitals and health facilities - down 3 percent to $811.9 million; manufacturing plants - down 11 percent to $159.4 million; and warehouses - down 22 percent to $703 million.

Several nonresidential markets are slated to accelerate with double-digit rates in '06. These include: schools and libraries - up 25 percent to $1.7 billion; parking garages and automotive services - up 60 percent to $466 million; government buildings - up 14 percent to $454.3 million; religious buildings - up 25 percent to $244.5 million; and hotels and motels - up 27 percent to $226.7 million.

Also moving upward in '06, according to McGraw-Hill, will be: offices and banks - up 9 percent to $756 million in new contracts; amusement, social and recreational projects - up 4 percent to $395.2 million; and stores and restaurants - up 5 percent to $1.1 billion. Also, "miscellaneous nonresidential" projects are predicted to improve by 1 percent and total $175 million.

The news is not as good in the nonbuilding sector, where McGraw-Hill is forecasting an overall decline, from slightly more than $3.5 billion in activity in 2005 to approximately $3.4 billion this year.

The good news: water supply projects - up 45 percent to $484.7 million; power plants, gas and communications - up 38 percent to $160.3 million; streets and highways - up 2 percent to nearly $1.1 billion; and bridges - up 6 percent to $342.2 million.

Meanwhile, the following categories are likely to dip: dams and reservoirs - down 27 percent to $162 million; sewer and waste disposal - 12 percent down to $584.9 million; and "other nonbuilding" - down 25 percent to $627.4 million.

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North Carolina

The feelings about North Carolina's contribution to the regional economy are positive, too.

"The Charlotte market and the Raleigh market continue to be strong," said Pat Rodgers of Rodgers Builders.

Jessie Brewer with Skanska added: "The Triangle is beginning to show signs of new projects and expansion. That area and some of the coastal areas are looking strong. Certainly the academic and health care (markets) there have strong building programs."

The data from McGraw-Hill Construction also back up those sentiments.

The residential market should be especially strong in '06, moving to a record pace of $16.6 billion in new contracts. Of that figure, single-family housing is expected to contribute a record $15.2 billion in new activity, while two-family houses will jump by 18 percent and tally $185.7 million. Construction of apartments and condos will bounce up by 36 percent to provide $1.3 billion in new projects.

The nonresidential market is also positive, with $5.8 billion in new activity expected in '06, up from last year's $5 billion level.

Only two sectors will be down this year. Dormitories are expected to decrease by 12 percent to total roughly $229.8 million. Also, the market for hospitals and other facilities will fall back from its record 2005, when new contracts escalated by 69 percent and totaled $751.5 million. For 2006, McGraw-Hill is forecasting a 9 percent retrenchment here, but with an additional $684.3 million in new contracts added to the market.

Quite a few subsectors should experience double-digit growth, according to McGraw-Hill: amusement, social and recreational - up 42 percent to $322 million; hotels and motels - up 39 percent to $191.8 million; manufacturing plants and related warehouses - up 80 percent to $362.7 million; offices and banks - up 18 percent to $714.2 million; parking garages and automotive services - up 60 percent to $283.6 million; religious buildings - up 32 percent to $152.6 million; schools, libraries and labs - up 15 percent to $1.5 billion; and nonmanufacturing warehouses - up 39 percent to $211.7 million.

Additionally, construction of stores and restaurants will improve slightly, by 1 percent, to total $720.1 million, while government buildings will remain on par with '05 and tally roughly $259.4 million. "Miscellaneous nonresidential" will grow by 5 percent to contribute $127.4 million to the market.

As in the other states, North Carolina's nonbuilding category is up and down but still positive. McGraw-Hill is predicting a record volume of new contracts of about $2.8 billion.

Markets expected to decline in '06 include: bridges - down 16 percent to $287.9 million; power, gas and communications projects - down 10 percent to $241.3 million; and "other nonbuilding" - down 18 percent to $377.9 million.

There's plenty of upside, though. Street and highway construction is expected to improve by 11 percent to tally nearly $1.1 billion. Water supply projects will jump a hefty 77 percent to contribute $340.2 million to the market, while sewer and waste disposal contracts will increase by 35 percent and total $359.1 million.

Additionally, contracts related to dams, reservoirs and river development are expected to improve by 12 percent over 2005, and equal roughly $150.9 million.

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South Carolina

The good news even extends to South Carolina, the smallest of the four state markets and historically the least robust.

The total value of new construction in South Carolina should equal about $13.3 billion in '06, according to McGraw-Hill Construction. Of that amount, residential should tally roughly $8.4 billion, nonresidential about $3.2 billion and nonbuilding approximately $1.7 billion.

Single-family construction will stay flat compared to 2005 and should equal nearly $7.4 billion in '06. Two-family homes will increase by just 1 percent but still reach a record level of $89.3 million. Apartment and condo construction will improve by 11 percent to reach a historic peak of $980.2 million - and well above the amount generated by this market just two years ago when it registered $597 million in new contracts.

The Palmetto State's nonresidential sector, which has mostly hovered between roughly $2.3 billion and $2.5 billion for the majority of the past decade, will finally break through the $3 billion level and tally about $3.2 billion this year.

The biggest subsector market, schools, libraries and labs, will jump 10 percent to contribute roughly $780.3 million, while the next-biggest, stores and restaurants, should escalate by 40 percent to total about $528.8 million. The value of new hospital and other health facility starts will increase by 48 percent to $486.4 million.

The other gaining markets include: amusement, social and recreational - up 71 percent to $189.7 million; dormitories - up 3 percent to $105.4 million; government buildings - up 55 percent to $86.5 million; hotels and motels - up 48 percent to $143.6 million; offices and banks - up 7 percent to roughly $250.3 million; parking garages and automotive services - up 18 percent to $104.6 million; religious buildings - up 9 percent to $109.2 million; warehouses - up 65 percent to $132.9 million; and "miscellaneous nonresidential" - up 208 percent to about $122.7 million.

The state's nonbuilding market is up, too, but well off its historic peak in 2004 when it reached $2.4 billion. McGraw-Hill Construction's prediction for 2006 is a $1.7 billion nonbuilding sector, which is on a par with recent years.

Bridges and streets and highways will each be up significantly in '06. The value of new bridge contracts will jump 105 percent to total $265.9 million, while street and highway work will improve by 34 percent to an estimated $697.5 million.

Sewer and waste disposal projects will also increase, by 57 percent, to a roughly $230.7 million level, while water supply contracts should equal about $125.4 million, about 46 percent better than last year.

Declining markets include: dams, reservoirs and river development - down 13 percent to $70.9 million; power, gas and communications - down 33 percent to $20.9 million; and "other nonbuilding" - down 11 percent to $265.4 million.

Conclusion

Despite these positive numbers, questions remain.

Will 2006 truly bring expanded opportunity for the Southeast's contractors?

Or has the increase in materials and labor costs simply "inflated" the market's value?

If the region's surge in construction activity continues at this pace - and the rebuilding of the Gulf Coast begins in earnest - will contractors be able to secure materials and manpower to get the jobs done? Or will the challenge prove overwhelming - thus throwing "cold water" on this historically hot market?

Will the condo boom continue?

And will a downturn in the single-family housing market - after years of predictions - finally come to pass?

Answers to these questions will play themselves out in 2006, so stay tuned.