2009 Midyear Outlook: Worse Than Expected

It’s Official: Contract Activity Will be Lower Than the Experts Figured

However, because so few projects are moving forward on the commercial side, the real concern is 2010. Meanwhile, contractors who are able to land some stimulus projects might end up as the lucky ones.

By Scott Judy

At the end of 2008, when the nation’s financial system seemed on the verge of a complete meltdown, the outlook for 2009 construction activity certainly was not a rosy picture.

Bill Pinto, president of Hardin Construction Co.

In the 2009 Outlook that Southeast Construction published in January, McGraw-Hill Construction economists Robert Murray and Jennifer Coskren used phrases like “clearly in retrenchment,” “this bodes particularly poorly” and “less than upbeat” to describe what awaited contractors in the then-coming year.

Even so, at the time, McGraw-Hill Construction predicted only a 6% decline, to about $77.6 billion, in the value of new contracts signed in 2009 in the four-state region of Florida, Georgia, North Carolina and South Carolina, compared to 2008. Because the prediction was on the heels of a significant decline during 2008more than 25% from 2007’s levelsit may have sounded somewhat realistic at the time.

But it wasn’t low enough.

Now, McGraw-Hill Construction is downgrading its forecast to roughly $63.4 billion, or $14.2 billion lower than the original estimate. On a regional basis, two of the company’s three broad construction categories are dragging down the overall number. Those two are as likely expected: residential and nonresidential. Meanwhile, nonbuilding—which includes infrastructure—is performing above expectations.

For example, previously McGraw-Hill Construction had forecast that the region’s nonresidential market would deliver nearly $30.5 billion in new contracts during ’09. Six months into the year, the company is now anticipating that this sector will generate about $25.8 billion worth of new work.

Tom Raney, Senior vice president with R.J. Griffi n & Co., Atlanta.

Meanwhile, the residential market continues to shrink to new lows. In January, McGraw-Hill’s economists had predicted this sector would deliver nearly $31.1 billion in new projects, or 9% lower than 2008, when that market retrenched considerably. Those same economists now see only $18.9 billion in new residential projects moving forward this year. (For perspective, the residential market experienced $94.7 billion of regional contracts during 2005.)

In fact, the residential market will be hard-pressed to outpace the relatively booming nonbuilding sector, which is benefitting from the stimulus. Indeed, McGraw-Hill Construction now forecasts nearly $18.7 billion in nonbuilding contracts will move forward in 2009. That’s up from its January market outlook of roughly $16 billion, and higher than the $15.5 billion experienced in 2008.

State-by-State Data All four states in the region are suffering.

In Florida, McGraw-Hill Construction now calls for $28 billion in new ‘09 contracts. That’s roughly $3.7 billion—or more than 10%—below the company’s original forecast of $31.7 billion.

For Florida, it’s mostly the residential category that’s underperforming estimates. McGraw-Hill Construction now predicts that this sector will deliver $7.3 billion in new work during ‘09. That’s $4.5 billion lower than its original forecast of $11.8 billion.

John Reyhan, executive vice president with Skanska USA Building, Atlanta.

Nonresidential is lower than expected, with the current forecast $11.2 billion, versus the original ’09 tally of $12.6 billion.

Nonbuilding is cranking, though, and McGraw-Hill now anticipates $9.5 billion in new contracts for this sector, up from the original forecast of $7.25 billion.

The story is much the same in Georgia, minus the big nonbuilding uptick. McGraw-Hill Construction now expects $14.7 billion in total ‘09 contracts, down from the original forecast of $18 billion.

Nonresidential is now forecast to deliver $6.7 billion in new contracts, while the residential market may only generate about $4 billion in new projects. That adjustment to the residential forecast is more than 33% lower than the company had expected back in January, when it predicted nearly $6.2 billion for this market.

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Nonbuilding construction in Georgia is now expected to be only slightly better, with the current forecast at nearly $4 billion, up from the original $3.7 billion.

North Carolina’s overall number is down considerably, too. In January, the prognosis had been $18 billion in new 2009 contracts. McGraw-Hill Construction now expects $13.6 billion in new contracts.

The state’s nonresidential market is now forecast to total $5.4 billion, down from the early forecast of $6.3 billion. The residential market, originally estimated at $8.5 billion, is down to just $4.8 billion.

The state’s nonbuilding market is now expected to hit nearly $3.5 billion, up from the original estimate of $3.2 billion. That’s still down from 2008, however, when nonbuilding totaled an estimated $4 billion.

In South Carolina, McGraw-Hill Construction now expects only $7.1 billion in new state contracts during 2009. That’s below the $9.8 billion the company had anticipated earlier this year.

The state’s nonresidential market forecast has been cut to $2.6 billion, down from the original estimate of $3.4 billion. The residential outlook has been slashed. Instead of the $4.5 billion originally predicted, the new figure is just $2.8 billion.

Thanks to the stimulus, the state’s nonbuilding market is nearly on target with McGraw-Hill Construction’s original forecast. Instead of the nearly $1.9-billion original estimate, this market is now pegged at about $1.75 billion.

The Opinions Sources contacted for this story were seemingly singing from the same songbook, with a chorus of “low expectations.” Comments included: “2009 has lived up to its low expectations;” “Unfortunately, 2009 is evolving about as we had anticipated;” and “2009 has been as difficult as expected.”

The issues contributing to the downturn are, likewise, as expected—continued problems with financing and tight credit; declines in capital budgets, especially among public-sector owners; and intense competition for contracts.

Though many opinions were negative, there is some contractor-style optimism.

“Our revenue will stay about the same in 2009 as for 2008,” says Rex Kirby, president and manager of Suffolk Construction in West Palm Beach, Fla. “It’s not the growth we projected prior to the financial collapse, but based on what I am seeing and hearing, we will take it. 2010 has me concerned.”

Most would probably “take” that kind of revenue performance, says Mark Wylie, president and CEO of the Central Florida Chapter of Associated Builders and Contractors in Orlando.

“Commercial construction activity is at low tide in Central Florida,” he says. “We see an extraordinary number of generals and subs pursuing a few public projects.

“Commercial lending dried up last summer and the drought has not been broken. Federal stimulus funds are also not coming into commercial construction, for the most part.”

Tom Raney, senior vice president of R.J. Griffin & Co., Atlanta, is also downbeat.

“New commercial projects are slow to start, primarily because the banks have been out of the market for the past 10-plus months,” he says. “There are a few exciting things happening, in select commercial markets, where owners have the financial strength to capitalize on the substantially reduced construction cost. (But) the overall commercial market is slow and has the potential to be extremely rough.”

John A. Reyhan, executive vice president with Skanska USA Building in Atlanta, agrees.

“There’s a wait-and-see approach,” he says. “Essential projects are still happening, but there is more competition than ever before to secure them.”

Bill Pinto, president of Hardin Construction Co. in Atlanta, sees some ups with the downs.

“Activity continues to ramp up as public and private owners test the marketplace with the hopes of getting a bargain, a construction price that might make their pro forma work and entice a lender to come to the table,” he says. “The remainder of 2009 will be flat, at best, but for some movement in the public and institutional markets.”