2009 Southeast Construction Outlook

Last Year was Worse than Expected. Could ’09 Be as Bad?

By Scott Judy

Once, not too long ago, 2009 was supposed to be the year when the housing market turned around and the nation’s overall economic situation would finally start to improve.

Of course, that hope all but died sometime during 2008, with the final nails driven into the proverbial coffin last September, when the depth of the nation’s economic and fiscal crisis became evident.

As a result, the coming year is almost certain to provide additional economic pressures to contractors, designers, owners and other industry members around the Southeast and the rest of the country, as almost all market sectors will experience declines, according to the latest information from McGraw-Hill Construction, publisher of Southeast Construction.

In a related national forecast article by Bruce Buckley, Robert Murray, vice president of economic affairs for McGraw-Hill Construction, is predicting a 7% national downturn in the value of new contracts for the entire U.S. construction industry during 2009, for a total construction estimate of $514.6 billion. That compares to the 12% national drop that is estimated to have occurred during 2008, according to Murray.

“By whatever broad measure of the industry that you look at, it’s clearly in retrenchment,” he says.

The four-state Southeast Construction region of Florida, Georgia, North Carolina and South Carolina experienced a much more severe downturn during 2008 than did the rest of the nation.

McGraw-Hill Construction’s official forecast for the four-state region as a whole is a 6% decline from 2008.

A year ago, for example, McGraw-Hill Construction had anticipated a 7% decline during 2008 for the Southeast region. In fact, the value of all 2008 construction contracts in the four-state market is now estimated at $82.7 billion, or 38% below 2007’s final tally of $115.2 billion.

Therefore, though the company is projecting a similar decline as it did last year, senior economist Jennifer Coskren admits that considerable uncertainty remains, and that the potential for further downturns remains.

“The outlook for all four states in 2009 is less than upbeat,” Coskren says. “The economic crisis of 2008 will cast a considerable pall over the forecast, particularly for commercial construction. Given the incredible uncertainty surrounding both the economy and construction markets, we are expecting further erosion in total construction for all four Southeast states.”

Elaborating on the nation’s economic crisis and its continuing impact on Southeast construction activity, Coskren says: “The list of projects derailed or abandoned because of the credit crisis grows long, and no city has been immune. While credit is likely to ease in 2009, thanks to the infusion of $250 billion to banks across the country, the weak economy will keep lending standards tight. This bodes particularly poorly for commercial and multifamily construction.”

Regional Outlook: Nonresidential

McGraw-Hill Construction uses three broad categories of construction: nonresidential, residential and nonbuilding (for public works, infrastructure, etc.). For the Southeast as a whole, the company is forecasting a 6% decline in the nonresidential sector during 2009, for a total value of about $30.5 billion in new starts. That total compares to the current estimate of $32.6 billion for 2008.

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Hardest hit within this sector will be the commercial and industrial subcategory, Coskren says, which is projected to decline by 13% overall, for a regional estimate of $13.9 billion in 2009, down from 2008’s nearly $16.1 billion tally.

“All of the commercial markets are at risk, but I’m most concerned with stores and offices,” she says. “Stores in particular have undergone a difficult 2008, with construction down an estimated 16% for (2008). We expect another 14% drop, though the (commercial) market could register steeper declines if consumer confidence continues to plunge.”

While the subcategory of stores and shopping centers is expected to decline by 14%, to about $4 billion in new 2009 Southeast projects, other nonresidential subsectors are expected to experience even worse drops in the coming year. The Southeast’s market for office buildings, for example, should tumble 16% in 2009 to tally about $3.3 billion. That comes on the heels of a 39% regional downturn for this market during ’08.

“Office construction is likely to face further weakening in 2009,” Coskren says. “While initially losses in office employment had been more moderate than the broader economy, the pace is likely to intensify with the troubles plaguing the financial services industry.

Meanwhile, the value of hospitality projects could lessen by 19% from 2008’s $2.3 billion figure to total an estimated $1.9 billion during ’09. Last year, this market was flat compared to 2007.

The market for institutional buildings (also considered part of McGraw-Hill’s nonresidential category) is projected to remain even with 2008. Within this subcategory, the value of new health care projects in the Southeast is expected to increase by 11% during 2009, for a regional total of about $3.25 billion, up from 2008’s estimated $2.9 billion tally.

At the same time, the regional market for education projects is expected to decline by 7% in the coming year, to an overall estimate of $7 billion in new starts. That compares to 2008’s $7.5 billion.

Residential: Bottom Coming?

The Southeast’s residential sector has been declining significantly for several years now. Last year was another terrible year for this sector, as the region’s overall total for new residential projects fell from $56.2 billion experienced in ’07, to the $34.1 billion of 2008.

For 2009, there’s good news, and bad. The bad news is that McGraw-Hill expects another negative year for residential. The good news is the company can’t foresee that there’s much room to fall further, and is forecasting only a 9% decline, for an estimated value of $31.1 billion for the entire four-state region. (For perspective, that would be only roughly one third of the value registered by this sector in 2005, when it tallied $94.7 billion in new starts.)

“One positive to glean (for residential construction): we do believe we are approaching bottom, and the market will begin to turn in 2010,” Coskren says. “However, the word of caution is that the market remains fragile and the downside risks remain large.”

The Southeast’s single-family market should easily hit its lowest volume in many years in 2009, when McGraw-Hill Construction expects to see a total of about $24.4 billion in new projects. That compares to 2008’s single-family tally of roughly $26.5 billion – which was nearly $18 billion below 2007’s total of $44.2 billion for that category.

Despite optimism about the market for rental apartments, Coskren reports that any gains in that niche won’t be able to overcome the dearth of new condominium projects throughout the region. Overall, the Southeast’s previously high-flying multifamily sector will decline by 13% overall in the Southeast in 2009, to tally just $6.6 billion in new starts.

Nonbuilding: Flat

Compared to the other markets, the flat forecast for the Southeast’s nonbuilding sector is relatively good news. While it is projected to remain virtually even with 2008, and total about $16 billion overall, several of its subcategories are expected to show solid gains.

“We are cautiously optimistic for street and bridge work, with increases expected in Florida, Georgia and South Carolina,” Coskren reports. However, she adds, “While we are calling for a modest gain in road work for Florida, we must issue it with a caveat. What underlies our relatively optimistic forecast is Gov. Charlie Crist’s ‘Accelerate Florida’ plan, which he hopes will fast-track $1.4 billion worth of transportation work during 2009. But budget troubles could potentially derail Crist’s plans.”

The environmental public works segment won’t do as well in the coming year, McGraw-Hill Construction predicts, with an estimated 20% downturn projected. That would put this sector at about $4.7 billion in new Southeast projects in ’09, down from the 2008 total of $5.8 billion.

The company’s forecast for “other public works” is $3.2 billion, or 16% ahead of 2008’s final estimate of nearly $2.8 billion. Electric utility contracts in the Southeast are expected to tally about $1.2 billion in 2009, according to McGraw-Hill, about 12% behind the 2008 total of roughly $1.3 billion.