2007 Southeast Construction Outlook

Region Will See 2 Percent Decline in 2007

By Scott Judy

Continuing its overall downward path from 2006 into and through 2007, total construction activity in Southeast Construction's four-state region will decline by 2 percent this year, with approximately $129.1 billion in new starts projected by McGraw-Hill Construction's Research and Analytics division.

The regional forecast is worse than the company's national forecast for a 1 percent downturn.

Jennifer Coskren, an analyst with McGraw-Hill Construction - publisher of Southeast Construction - indicated the four-state region's overall total will be impacted by the still-declining residential sector, especially in Florida.

"Because of its status as an investor-driven housing market, the Southeast will experience a worse decline for residential construction - down 8 percent versus down 5 percent nationally," Coskren said. "But on the positive side, nonresidential construction will provide a stronger boost to the Southeast region, with a 11 percent increase compared to a national gain of 6 percent."

Indeed, McGraw-Hill Construction is predicting that, generally speaking, current trends will remain unchanged in 2007, and residential will continue to nosedive in the coming 12 months.

"We do expect a continuation of the trends set in 2006 to extend in 2007, with some adjustments," Coskren said. "The most notable change is the steeper deceleration in the multifamily market. For the Southeast, the value of multifamily construction will decline by an estimated 13 percent after negligible declines in 2006.

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"In contrast, engineering is looking for a stronger year compared to 2006, with nominal value of public works and electric utilities construction set to gain 14 percent compared to 2006's modest 3 percent increase."

Regional Outlook

Reflecting the overall historic strength of the Southeast region, relative to other parts of the country, contractors remain cautiously optimistic regarding at least certain market segments.

"The Southeast construction market will continue to flourish as contractors continue to build the large mixed-use projects that were started in 2006," said Tom Raney, senior vice president for marketing for R.J. Griffin & Co. of Atlanta.

Millard Choate, CEO and president of Atlanta-based Choate Construction Co., also sees selective market growth.

"Certain Southeastern construction market segments should continue to expand in 2007, fueled by demographic shifts; high-density, mixed-use developments; (and) continued job growth of the Sunbelt," he said.

Jessie Brewer, co-COO with Skanska USA Building in Charlotte, predicted the historically high-flying Southeast will continue its leadership role - and continue to face the related hurdles of worker shortages and increased costs.

"The Southeast is clearly the most robust construction market in the USA in terms of the amount of opportunities and project appropriation," Brewer said. "Business planning has just been completed for 2007 and we see just as many opportunities and activity as 2006.

"The challenge for contractors and construction managers in such an active market is finding qualified subcontractors, trained management and skilled workers to do the work," Brewer continued. "2007 will undoubtedly continue to deal with the resource shortages, but also construction budget challenges. Clients will be faced with hard decisions between the appropriated budgets they have and the cost of construction.

"We don't see higher-than-expected inflation occurring, but the owner budgets haven't been revised to accommodate last year's drastic hike in construction costs."

In terms of markets, there will continue to be some changes in the busiest segments.

"From a sales point of view, 2007 should be as strong as 2006," said Dean Gwin, president of sales and marketing for Gate Precast Co. of Jacksonville, Fla., a specialty contractor that works throughout the region. "Multifamily construction continues a downward trend, but medical, governmental and office construction are expected to fill the void."

McGraw-Hill Construction more or less agrees with Gwin. The company uses three major categories in its forecasting - nonresidential, residential and nonbuilding, the latter of which includes public works projects, road construction and other infrastructure-type contracts - and bases its figures on the full value of new project starts.

Residential: More Negativity

Overall, the Southeast's residential market will be down by 8 percent, while nonresidential will improve by 11 percent and nonbuilding by 14 percent, according to McGraw-Hill Construction. (For more detailed state information and perspective, see the following state-by-state assessments.)

More specifically, new 2007 residential contracts in Florida, Georgia, North Carolina and South Carolina are expected to total roughly $79.7 billion, down 8 percent from McGraw-Hill's estimated 2006 total of $86.9 billion. If the 2007 number proves correct, that would represent a more than 15 percent decline from this sector's 2005 high of nearly $94.1 billion.

Within the residential sector, both single- and multifamily will continue their deceleration. Single-family construction in the four-state region is expected to hit nearly $64.7 billion in 2007, 7 percent down from 2006's estimated $69.6 billion total. As Coskren noted, multifamily will decline at a greater rate, 13 percent, and tally just under $15 billion.

Actually, she added, residential has the potential to be even worse than that.

"The Southeast housing market performed far worse (in 2006) than anticipated, and the quick unraveling came as a surprise," Coskren said. "Housing as an investment has become decidedly less attractive, and investor buying, particularly in Florida, has grinded to a halt. Because investors had become such a large share of home sales - the National Association of Realtors estimated that 40 percent of all 2005 home sales were second homes, either vacation homes or investments - this pullback caused a piercing change in the housing market.

"Given the swift change in buyer psychology, the risks for next year's Southeast market, in my opinion, are weighted heavily on the negative side," she continued. "We are calling for a 7 percent decline in single-family value, with an 8 percent decrease in Florida. While these declines are significant, given the unprecedented run-up in residential construction value over the last three years, contract awards could tumble even further (in '07)."

Nowhere is that being felt more severely than in South Florida, the epicenter of the Southeast's condo building boom.

"New starts in condominiums have basically come to a screeching halt," said Thomas P. Murphy Jr., chairman and CEO of Coastal Construction Group, Miami. "However, there are still some select projects being built - good projects, either at the top of the market or the other end of the market geared to 'workforce' or affordable housing, since there is a great need for affordable housing in South Florida."

Rex Kirby, president and general manager of West Palm Beach-based Suffolk Construction Co., agreed.

"The residential market - condominiums - has slowed dramatically," he said. "It is not 'dead' as some have claimed, but could be described that way as compared to the last three years.

"We still have several condominium projects in preconstruction with experienced and reputable developers. These projects will go forward. The marginal projects are dead or dying."

Elsewhere, the opinion is more mixed. In Orlando, the condo market appears slowed but not dormant due to the city's proximity to so many vacation destinations, said Steve Rivers of Hardin Construction Co.

And while Millard Choate, president and CEO of Atlanta-based Choate Construction Co., predicted that Atlanta's housing market, including condos, "will be on the downswing due to market saturation and increasing interest rates," others are seeing an upswing in another portion of the multifamily market - rental apartments.

Brett Fortune, principal of Atlanta-based Fortune-Johnson General Contractors and current chairman of ABC of Georgia, said, "It should be no surprise that with rising interest rates new apartment construction will be on the rise."

Fortune, whose firm specializes in multifamily housing, said his firm's backlog of new work through 2008 is at a historic high.

Elsewhere, Tampa's condo market is taking a hiatus in 2007, and Myrtle Beach, S.C., is seeing some lull in this sector as well.

Nonresidential: Record Highs?

The 11 percent jump in the Southeast's nonresidential market - for a record $33.1 billion tally - will be the result of significant gains in many of the sectors that make up this category, according to McGraw-Hill Construction.

Commercial and industrial, a subset of the nonresidential category, is expected to improve by 14 percent. Some of the highlights here include a 74 percent increase in manufacturing starts for a $1.5 billion total, as well as a 29 percent jump in the volume of new hotel and motel starts, which should tally more than $1.8 billion.

"Manufacturing will experience a stellar year in 2007," Coskren said, citing the new Kia Motor Plant in Georgia; a $100 million gypsum plant for BPB America in Roxboro, N.C.; and a $100 million Poly-East Manufacturing plant in Chester, S.C., among the more notable projects expected to start in 2007.

She added: "Florida's manufacturing sector will see an additional lift thanks to the government's investment in alternate fuel resources. In August, Gov. Jeb Bush signed into law a $100 million plan to diversify the state's fuel supply. One company, US EnviroFuels, is taking advantage of the state's more accommodative policy and announced proposals for two new ethanol plants over the next several years."

Other nonresidential highlights include a 7 percent uptick in educational construction, which should hit a record nearly $7.1 billion in '07, according to McGraw-Hill.

Coskren credited the improved educational market mostly to increased spending at the K-12 level, but added that "several college and university projects slated for 2007 will further aid the outlook for education buildings."

Another major sector, health care, will come down off of its historic high in 2006, when McGraw-Hill Construction estimated nearly $3.2 billion in new projects got started. This year, this market will decline by 6 percent but still tally nearly $3 billion.

"Health care has been enjoying an incredible run over the last several years, and we anticipate another relatively strong year in 2007," Coskren said. "The planning pipeline still remains full."

In Florida, biotech is another subsector of health care that's gaining momentum.

"We see tremendous opportunities in the biotech industry that is relocating or expanding into Florida," said Suffolk Construction's Kirby. "So far, Scripps, Burnham and Torrey Pines have chosen Palm Beach County, Orlando and Port St. Lucie for new facilities, and others are looking. The University of Miami announced a $1 billion commitment to biomed research, and other universities are gearing up as well."

Nonbuilding: More Momentum

Meanwhile, the nonbuilding segment is also forecast to hit a historic high, of nearly $16.4 billion, with the streets and bridges subsector moving up 19 percent to an all-time record of more than $7.5 billion and the broader "public works" category increasing 11 percent to $15.2 billion.

"The Southeast's street and bridge contracts will outpace the nation, thanks in part to lucrative transportation spending bills passed in Florida and Georgia," Coskren said. "In May 2006, Jeb Bush signed into law $9.1 billion for 2007 highway funding, which includes plans to construct 379 new lane mi. and replace 11 bridges, among other projects. This $9.1 billion is sharply higher than the $7 billion earmarked in the 2005/2006 budget.

"Meanwhile, Georgia's investment in its streets and highways remains unprecedented in the state's history. During fiscal 2006, the state spent $2.25 billion on transportation infrastructure, more than double fiscal 2005 levels. Georgia's commitment to road improvements will continue to give contract awards a lift through 2007."

Other sectors making up the "public works" banner include environmental public works, which is expected to improve by 9 percent for a $4.4 billion total, and "other public works," which is estimated to decline by 4 percent and tally about $3.2 billion in new contract starts.

Also under nonbuilding, electric utilities will see a huge 89 percent increase in '07, said McGraw-Hill Construction, with new starts in this category totaling slightly less than $1.2 billion.

A state-by-state round-up follows.

Florida

The Sunshine State accounts for roughly one-half of the four-state area's total construction volume, so as goes Florida, so goes the Southeast.

Florida's looming 3 percent decline for '07 is actually worse than the Southeast as a whole. (By comparison, only one of the other three states in the region is predicted to decline in '07; the other two are either steady or positive.) Total construction volume in Florida is forecast to be about $63.2 billion.

Moreover, Florida's '07 decline will be due strictly to continued retrenchment in the residential sector, which McGraw-Hill Construction predicts will see a 9 percent decline this year and total nearly $40.9 billion. Combined with the company's estimate for residential of about $45.1 billion for '06, that represents a nearly 22 percent drop from this sector's historic high of roughly $52.3 billion in 2005.

The good news is that other construction sectors will be experiencing record or near-record levels in '07, according to McGraw-Hill Construction.

The nonresidential sector is expected to improve by 10 percent in '07 and experience approximately $14.7 billion in new contract starts. That's well above any other year since 2000.

Making up that bigger nonresidential category are two separately surging subsectors: commercial and industrial, which is expected to jump 13 percent and tally a historic high of nearly $7.8 billion; and institutional buildings, which is forecast to increase by 6 percent for a $6.9 billion total.

The nonbuilding category is also poised to grow significantly, with about $7.7 billion in project starts during '07. Making up that total is an approximately $7 billion public works market that will be 11 percent higher than '06, and an electric utilities sector that should total about $662 million for a 63 percent increase over '06.

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Georgia: 1 Percent Down

According to McGraw-Hill Construction's estimate, 2006 was a record year for Georgia contract activity. The company estimated total construction volume at roughly $27.9 billion - about $1 billion better than 2005.

This year should be almost on par with last year's record, but 1 percent down to approximately $27.6 billion.

Of course, Georgia's state totals are indicative of its biggest market, Atlanta. It looks like another good year for this area, the most active construction metro in the Southeast region, according to McGraw-Hill Construction.

"All indications point to continued growth in Atlanta's commercial construction market in 2007," said Bill Anderson, president of Associated Builders and Contractors of Georgia.

Apparently, Anderson's correct.

Nonresidential construction is forecast to tally nearly $8.3 billion in Georgia for 2007, or about 16 percent better than 2006's nearly $7.2 billion estimate. The commercial and industrial portion of the nonresidential category is expected to improve by 12 percent to tally about $4.3 billion, while the market for institutional projects is projected to jump a whopping 20 percent for a roughly $4 billion figure, McGraw-Hill estimates.

The news isn't as good in the other categories. Residential construction, including both single- and multifamily projects, is expected to decline by 7 percent in 2007, for approximately $15.3 billion in new contracts.

The nonbuilding market will be a bit of a downer, too. Projected to decline by 5 percent, it should total approximately $4 billion in 2007 - still good enough for the second-best total for this category since at least 2000.

Public works projects will be down by 8 percent in '07, from nearly $4.2 billion experienced last year to this year's $3.8 billion estimate. This downturn may be the result of simply being unable to keep pace with last year's strong growth. The $4.2 billion estimate for 2006 was a roughly 22.4 percent improvement over what McGraw-Hill reported for '05 and was impacted by the Georgia Department of Transportation's record spending on its Fast Forward program.

Construction of electric utilities in Georgia will get a shot in the arm, though, more than doubling to an estimated total of $202 million in new starts.

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North Carolina: Steady

McGraw-Hill Construction predicts a steady and slightly improving picture for the Tarheel State. Though the company is officially predicting a flat year for North Carolina, the total construction estimate of nearly $25.4 billion would mark an all-time high. At presstime, the company estimated the 2006 total would be $25.3 billion.

Here, too, though, residential is seen as declining in '07. This year, the decline should be about 6 percent, with total residential construction hitting roughly $15.9 billion. That's down from the record high of more than $16.8 billion in '06.

The next-biggest market, nonresidential, will likely be up 8 percent in '07, to an expected $6.7 billion. This time, though, this category's subsectors are up and down, according to McGraw-Hill. Commercial and industrial starts are expected to escalate a significant 27 percent this year from '06, for a roughly $3.1 billion market.

Meanwhile, the institutional market will likely retrench by about 5 percent and come in at about $3.6 billion. That would be down from this sector's record '06 volume of nearly $3.8 billion.

North Carolina's nonbuilding market should soar in '07, with McGraw-Hill Construction estimating about $2.8 billion worth of work. That would be a 27 percent jump over '06, when this category totaled an estimated $2.2 billion.

Within the nonbuilding category, public works contracts should escalate by a hefty 25 percent and aim for a record volume of slightly more than $2.6 billion. The electric utilities subsector, estimated to see about $162 million in new starts, will jump by a strong 60 percent over '06, when these projects tallied just $101 million.

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South Carolina: Surging at 2 Percent

South Carolina, the smallest construction market in Southeast Construction's coverage area, will show the greatest growth in 2007, 2 percent, according to McGraw-Hill Construction.

This will happen despite an expected double-digit decline in residential. McGraw-Hill expects the total of single- and multifamily construction starts to fall 10 percent in 2007, to an estimated $7.6 billion total. That's down from last year's $8.4 billion estimate.

The next-biggest construction category, nonresidential, will show strong growth, however, and should move up by 11 percent. This market is estimated to hit about $3.4 billion in '07, up from the '06 total of about $3.1 billion.

Despite that overall uptick, nonresidential's commercial and industrial building segment will be flat compared to '06, and should total about $1.5 billion. Institutional buildings, however, should jump by a significant 21 percent and tally roughly $1.9 billion, McGraw-Hill indicated.

The rest of the state's overall growth in '07 will come from the surging nonbuilding category. After experiencing about $2.4 billion in new starts in 2004, this sector went deeply into the doldrums, with volumes of roughly half that amount in 2005 and 2006 - between $1.2 billion and $1.3 billion in each of those years.

That was partly the result of the ending of the state's ramped-up "27-in-7" road construction program.

Either way, '07 will mark a revival of sorts for the nonbuilding category, with a 54 percent increase and an estimated $1.9 billion in new starts expected. Within this category, McGraw-Hill expects the public-works subsector will rebound by 46 percent and is projected to total about $1.8 billion, up from last year's $1.2 billion figure. Also, starts of electric utilities projects are expected to amount to about $132 million - still a modest figure but well above last year's lowly $24 million tally.