2008 Southeast Construction Outlook

Forecast comments from leading Southeast construction industry representatives.

By Scott Judy

The collection of nasty economic conditions currently swirling around the national economy will continue to have a significant adverse impact on total construction activity in Southeast Construction’s four-state region.

Those well-documented conditions the mortgage crisis and related housing meltdown, credit crunch, plunging dollar and soaring oil energy prices have caused some economists to predict a national recession is on its way. Whether or not that happens, the Southeast construction economy will feel the slump in a substantial and real way.

In fact, as most regional contractors know, it’s already happening. According to McGraw-Hill Construction, the total value of construction starts for 2007 in the four-state region of Florida, Georgia, North Carolina and South Carolina is now estimated at $118.1 billion. That’s roughly $11 billion lower than the $129.1 billion the company had predicted would occur in 2007 and $12.7 billion below the $130.8 billion in new starts the Southeast experienced in 2006.

advertisement

It will get worse in 2008, the company says, with the total value of new project starts in the four-state area expected to drop another 7% and total about $110.1 billion overall – the lowest dollar volume since 2003.

Additionally, while nonresidential construction such as commercial and industrial projects mostly improved during 2007, offsetting the already declining residential sector, that won’t be quite the case in 2008. Instead, many of the markets making up McGraw-Hill Construction’s nonresidential category will be down considerably.

The forecast for an overall 7% decline in the Southeast for ’08 is significantly worse than the 2% decline that McGraw-Hill Construction is predicting for the national construction economy.

Jennifer Coskren, an analyst with McGraw-Hill Construction, publisher of Southeast Construction, reports that the coming year will be mostly negative, with some positive pockets.

“Overall for the Southeast, the outlook is not bright for 2008, and we’re anticipating another 11% decrease in the value of the Southeast’s multifamily sector, following 2007’s 22% decline,” Coskren says. “The outlook for nonresidential construction in 2008 is mixed. On the commercial side, the impact of the weakened housing market and credit liquidity troubles will be more fully realized. Total commercial and industrial (starts) for the region will be down 20%, though a rather large part of that decline will come via manufacturing.”

Regional Outlook

At the same time, outside of the residential market, there is some positive news for some sectors.

Likewise, as is their nature, many contractors and other industry members are remaining as upbeat as possible about their prospects for 2008. A Southeast Construction online poll reflected a note of cautious optimism.

According to the poll, roughly 20% of respondents expect their “local region’s construction market” to improve during 2008, while approximately 36% of respondents expect a “steady” year ahead. However, a significant 38% expect a decline. (The remaining percentage was unsure.)

“While the market is generally steady, we see a potential slight decline,” says Paul Anderson, co-COO for Skanska USA Building’s Southeastern Region in Atlanta. “In Florida, for example, work has stopped in the commercial residential market, and property tax issues have slowed work down across the state. The Southeast will become an even more competitive market. Construction managers will have to work more efficiently than ever for customers.”

Bill Anderson, president of Associated Builders and Contractors of Georgia in Atlanta, adds, “Atlanta will be strong in most commercial segments, especially health care and education, but there will probably be projects delayed or scaled back because of the concerns about the residential market.”

Farther south, in Miami, Dan Whiteman, president of Coastal Construction Co., admits the condominium market will “stay soft through 2008,” and he adds that school districts are taking a “wait-and-see approach to whether they are going to have funds available” due to a series of state-mandated cuts in property tax revenues.

In fact, Whiteman says there is real concern that trade contractors that have previously kept busy in the condominium market could be headed toward real trouble.

“Many of our subcontractors might (get in financial trouble) due to other projects they have undertaken in recent years,” he says. “Some of these projects are not going to be successful, which may well cause them to go into default. Should this happen and subcontractors not get paid by other developers and contractors, then this could impact their ability to perform on our projects.”

Mike Geary, executive vice president with James B. Pirtle Construction Co. in Davie, Fla., indicates the trouble could extend to general contractors as well.

“South Florida has a lot of large contractors that kept extremely busy the last couple of years with the condo boom. Now that the condo market is gone, these contractors are looking to fill a big void by entering new markets. But there is not enough to go around, and many of the contractors will be forced to scale down their operations.”

McGraw-Hill Construction’s numbers for 2008 indicate there may be more cause for pessimism than optimism, however. A review of the projections for each of the company’s three primary market sectors residential, nonresidential and nonbuilding follows.

Residential: Decline Continues

The value of new 2007 Southeast residential starts was actually well off the pace that McGraw-Hill Construction had forecast for the year. Last year the company projected there would be $79.7 billion in new residential starts in the region for ‘07, which would have been an 8% decline from ’06. Now, McGraw-Hill estimates 2007 residential starts at $59.6 billion a whopping $20 billion below original expectations.

The biggest of the four state residential markets, Florida, felt the residential bust most severely and will continue to do so, analyst Coskren says.

“The Florida housing market remains in deep trouble,” she says. “Contract awards across the state are still in a freefall.”

Coskren adds that in August 2007, the company had adjusted its 2007 estimate for Florida residential starts to a 30% decline for the year. Now, McGraw-Hill expects the market to drop by more than 40% by the time the final numbers are in.

“We expect that the worst is over, though in my opinion the risks remain weighted on the negative and contract value could certainly turn in a worse performance than the 9% decline we have forecasted,” she says. “Given the incredible excess that still exists, and the surge in foreclosures, a rebound in 2008 is not on the table.”

Outside of Florida, the Southeast’s residential markets weren’t quite as bad during 2007 but will decline further in ‘08.

“In contrast to the turmoil roiling the Florida residential market has been the relative calm experienced by the Carolinas,” Coskren says. “North Carolina and South Carolina did not see the wild speculation that blanketed Florida and as such are experiencing a much more measured decline.

“For 2007, North Carolina fell by just 10%,” she adds. “A steeper decline, however, is anticipated for 2008, given the slowdown in sales and rise in foreclosures that state is beginning to see. On the plus side, though, price appreciation in North Carolina is continuing, which should forestall a Florida-type spiral.”

Overall, a residential turnaround could be as far away as 2010, Coskren adds.

For 2008, McGraw-Hill is forecasting that the Southeast’s residential project starts will tally approximately $53.9 billion, the lowest dollar volume for this category in six years.

Single-family construction starts are projected to decline an additional 9% in ’08 and total roughly $42 billion for the year another low. Multifamily construction starts are expected to tumble an additional 22% in ’08 and total about $11.9 billion, or approximately $6 billion below this sector’s most recent high of $17.8 billion in 2005.

Nonresidential: More Lows than Highs

Numerous nonresidential sectors in the Southeast soared to record highs in 2007, but many of these will be tumbling in ’08.

It turns out that some of those commercial markets were actually benefiting from the already-slumping housing market. And that won’t continue to be the case this year.

“After having made incredible money from the Florida housing craze, the unraveling of high-rise condo demand forced well-heeled investors and developers to search for alternative projects,” Coskren says. “With office space in shorter supply, (such as) in Miami and Tampa, office projects in particular entered the start stage at a swift pace. However, the credit turmoil, coupled with the slowdown in employment growth, is likely to cause a contraction in commercial construction, most significantly for office and retail.”

Overall, the company expects the Southeast’s nonresidential project starts to settle back by 7% and tally approximately $37.5 billion. That’s still a healthy market, second only to 2007’s estimated $40.3 billion total.

McGraw-Hill divides its nonresidential category into commercial and industrial, which will be down 19% in ’08, and institutional, which should improve by 12%.

The subcategories making up the commercial and industrial market will all be negative, according to McGraw-Hill: stores and shopping centers down 9%; office buildings, 13% decrease; hotels and motels, 19% down; other commercial buildings off by 13%; and manufacturing buildings decreasing by 43%.

On the institutional side, however, 2008 will still be positive.

The four-state region’s education sector is projected to grow by 4% and total about $8.1 billion in new starts. The health-care market will once again be a strong performer, improving by 23% to reach more than $3.7 billion a record high for this sector.

“Other institutional buildings” will also escalate, by 17%, to generate approximately $6 billion in new project starts during 2008.

Nonbuilding: More Momentum

The one main category forecast to improve is nonbuilding construction. McGraw-Hill Construction expects nonbuilding starts to improve by 3% and tally about $18.7 billion for ‘08, or about $500 million better than ’07.

As predicted, public works starts reached record levels during 2007 and should improve by a modest 2% during 2008, according to McGraw-Hill Construction. That should bring this important construction category to about $17.3 billion.

Within the public works category, construction starts for street and bridge projects will be flat or slightly down compared to 2007. This sector should total $8.5 billion in new starts during 2008, the same figure that it experienced in ’07.

Environmental project starts will be down an estimated 6%, compared to 2007, with ’08 starts tallying about $4.9 billion. “Other public works projects” are expected to provide about $4 billion in new starts in ’08, up 20% compared to 2007 when the Southeast saw about $3.3 billion in these projects.

Electric utility projects will be up 12% over ’07, with nearly $1.4 billion in new starts expected this year.