2007-08 Construction OutlookModular Building Institute

March 12th 2007

Jim HaugheyChief EconomistReed Construction Data www.reedconstructiondata.com

US Business Cycle Status March 2007

Growth

Decline

GDP

New Residential

InstitutionalPublic Works

Commercial

Summary

Good construction economic environment in 2006-07…..

Capacity needs spur commercial marketsHigher public budget balances spur institutional buildings and civil projectsAverage plus job and income growth limits decline in residential marketCredit costs rise but remain cheapMaterials prices rise but less than in 2004 or 2005

Total construction spending2005 +10.7% 2006 +4.9% 2007 +1.0% 2008 +7.6

US Economic Growth SlowsWorld economy still growing at full capacity…But US GDP growth slips under capacity in Spring 2006…However, US investment growth will remain above average…So pressure on prices and availability begin to ease

01234

05 06 07 08

Capacity limit

Key US Growth Drivers (Foreign)Immigration provides 50% of US population growth – new law could cause a big boost or a big cut in immigrationExports grow twice as fast as domestic economy

China - 25% of world economic growth in 2006-076-8% GDP growth in large materials exporting countries – India, Russia, Turkey…

Little help from Europe and JapanEuropean growth peaks at 2.4%Japanese growth averages only 2%

Key US Growth Drivers (Domestic)Inventory reduction period endingConfidence indexes average and risingAfter tax profit margin at all time high 8.9%Strong gains in state/local tax receiptsConstruction consequencesFactory capacity strained at 80% usage rate Retail vacancy rate (9.9%) at four-decade low with rents rising 3.0% per yearOffice vacancy rate (15%) falling for three years with rents rising 5% per year0.6% K-12 enrollment growth outpaces new classroom supply

Construction Supply EnvironmentMaterials cost steadied and availability of all job site resources improved late in 2006

This is temporaryContractors will face modest tightening in supply markets beginning in the spring

Contractor employment peaked in Sept ’06Construction labor availability improving until late ’07Factory labor availability improving through 2008

Supply conditions for site work and specialized NR building materials and labor will continue to progressive tighten through 2008

Construction Materials Price Trend

World commodity shortage and speculation

4.6%Dec 05 to Jan 07

Hurricanes17.0%Sept-Nov 2005

Suppliers catch up except cement and gypsum

-1.0%October 2004 to August 2005

Slow supply response to demand surge

18.0%Jan –Sep 2004

Weak Economy0.9% annual rate2000-03

Project Inflation High But Slowing

RS MEANS Cost Index (y/y% change)

02468

1012

Q1-04

Q2-04

Q3-04

Q4-04

Q1-05

Q2-05

Q3-05

Q4-05

Q1-06

Q2-06

Q3-06

Q4-06

30 City Average –includes labor

2007 Outlook: 6-7%

Materials Price Rises Slowing

2.70.70.7Const. Machinery3.40.90.9Brick26.6-12.9-1.7Nonferrous pipe

4.40.83.1Asphalt roofing & siding

-6.0-5.4-0.4Plastics products-15.53.55.7Softwood lumber6.5-4.4-0.1Structural Steel3.2-5.6-0.1Gypsum products6.91.1-0.2Cement

% change12 months

% Change3 months

% Change 1 month

Materials Price Outlook

LowSteadyHighDieselLowStableAverageFlat GlassModestUpAverageBrickLowDownHighConst. Plastics

HighUpAbove Avg.AggregatesAverageUPHighSteelHighUpAbove Avg.CementLowDownHighGypsumModestStableAveragePlywoodLowStableLowLumber

Risk of 07-08 Inflation

Current Trend

Current Price vs. Trend

Credit Rate OutlookInterest rates steady through 2008 Contractors and their customers (but not homebuyers) will face easing credit standards with improved balance sheetsShort rates (1 Y T-Bill) for operating loans

March: 5.00% Yearend: 5.00%

Long rates (10 Y T-bill) for investments loansMarch: 4.7% Yearend: 5.00%

30 Year Fixed MortgageMarch: 6.20% Yearend: 6.35%

Why is Credit So Cheap?Long-term rates depend on the demand for & supply of credit plus inflation expectations

Demand: Unusually low because high profits limit borrowing needsSupply: Unusually high because of huge inflow of foreign capital (i.e the US balance of payments deficit) to the US as a safe havenInflation expectations: Steady at about 2.3% because “core” inflation rate, excluding energy and food, is near 2.3% with very high labor productivity

RS Means Project Cost Trend (incl labor)

Total Project Cost Up Sharply in 2004-05(cost index for January of each year, 1993 = 100)

110120130140150160

2001 2002 2003 2004 2005 2006

Jan ’07 = 165.0

Residential Market Status“Core” home demand (less speculative and subsidized buyers) has about stabilizedHome supply remains excessive and will restrain starts and builders’ margins through 2008Home affordability is improving but will stay well below peak 2004-05 levelHome remodeling spending has jumped nearly 20% higher since new home starts began to decline sharply

Housing Inventory Adjustment2.5-3.0 month surplus of homes for sale

175,000 new SF homes50,000 condos1,400,000 existing homes

Surplus has stabilized but not declined since last fallJanuary: New home starts and sales approx. in balance but existing home listings probably exceed sales

Condo surplus much higher than Single-FamilyMore “for sale” listings yet to come of recently sold homes with mortgage rates reset higher and Midwestern homes who owners lost their jobs

Inventory Adjustment Will Be Local360 metro area are each a distinct housing market with different inventory and demand change characteristicsMost metro markets have no inventory surplus or will absorb it quicklyThe burden of adjusting inventory – the accompanying falling sales prices - will fall very heavily on a small number of overbuilt markets

…Consequences for HomebuildersStarts peak at 2.265 million in January ‘06 then decline to 1.408 million in January ‘07

Homebuilders’ margins plunge, especially production builders who had bought land years earlierLargest starts and price declines for investment condos and for starter homes in the Southwest, Rocky Mountains and Florida

Starts steady at 1.7 million by year end

2006 2007 2008

Single Family 1.478 1.313 1.423

Multi Family 0.340 0.324 0.330

Total 1.818 1.636 1.753

Regional Housing Outlook

391,0008.8%

360,000-19.5%

447,000-15.1%

West

883,0003.8%

851,000-6.9%

914,000-8.7%

South

313,00020.2%

260,000-9.0%

286,000-20.0%

Midwest

166,0000.0%

166,000-3.2%

172,000-9.3%

Northeast

200820072006

What Sunk the SF Market?Withdrawal of speculative buyers when quick capital gains prospects disappeared

10-12% nationally25% or more in the previously hottest marketsHeavily concentrated in coastal retirement & resort markets

Loss of marginally qualified entry level buyers when mortgage approval standards tightened and prospective buyers saw earlier buyers begin to default

10-15% nationally25% or more in fast growth/ high home appreciation markets in the southeast and southwest

What Supports the MF Market?Condos are the weakest market now because they were most attractive to both speculators and subsidized entry level buyersBut rising apartment demand offsets this

Refugees from the SF market120,000 new jobs a monthContinued inflow of immigrants

Nonresidential Building Outlook

Project starts have increased progressively since summer 20052006 % change

commercial: 18%institutional: 14%All NR: 13%

NR Construction spending 15 % higher in Dec than a year earlier

Commercial Building Boom Matures(% change last 12 months)Office Hotel Retail

Rent 5.0% 7.9% 3.9%Vacancy -1.1% -0.2% -0.7%New Plans 65% 105% 34%

2007-08 OUTLOOK

Spending ($) 32% 19% 17%

Starts ($) 22% -21% -13%

Source: Reed Construction Data, Property & Portfolio Research

Institutional Market Growth Drivers

State & local tax receipts strongIncome and sales tax receipts up 6% from a year ago; trend is slightly higher

State & local budget balances highBudget reserves up to 9.8% of expenditures

Investment returns high and risingDow Jones Industrial Index up17% from a year ago

Institutional Construction Spending

9%9%20%Amusement/Recreation

4%13%11%Public Safety

11%8%4%Religious

7%10%7%Education

14%16%14%Healthcare

200820072006

Key MarketsHotels boom ending

Spending up 67% from a year agoBut starts are near peakREVPAR up 7.5-8.0% in 2006, mostly rateRoom supply now beginning to growAir travel up 5% in 2006

Nursing home/assisted living soarsSpending up 43% from a year ago; starts up 39%Starts forecast to nearly double in the next two years2006-06 surge driven by privatization trend, encroachment on MF housing market and improved public funding

Key Markets (2)Stand alone multi-retail weakening

Spending up 6.3% from a year agoDecline likely in 2007-08Old stores abandoned to move to mallHousing related decline in home center sales

Shopping centers still expandingSpending up 27% from a year ago; starts unchanged from a year ago – probably at peakKey drivers are moving to better locations and redecorating to get new “image”; raw space needs are a distant thirdGrowth slows – but still very high - ahead as fewer housing developments are built

Key Markets (3)MF Housing does not decline with SF

Spending up 8% from a year agoSpending (after inflation) dips marginally in 2007Apartment gains offset condo declinesResort condos are the weakest market5+ unit building starts down 5% in 2006

Office development now catching upSpending up 18% from a year agoStarts still risingOffice employment growth triple the rest of the economyLease turnovers now pushing rents higher

Key Markets (4)Hospital Construction Expands Strongly

Construction spending up 24% from a year agoConstruction starts up 15% in 2006 but off in the last few monthsBuilding surge is fueled by rising insurance premium income and public subsidies for health careCurrent projects are heavily renovation and replacement

Industrial Construction Will DeclineWarehouse construction spending gains only matched inflation last year but factory construction spending gains outpaced inflation by 8%.Ahead, 37% fall in construction starts in 2006 means reduced job site activity in 2007

Key Markets (5)Education Market Grows 10% in 2007

Education construction spending, including inflation, rises 10% in 2007 (2006 = 7%)New starts up 9% in 2006K-5 market is shrinking but middle school and high school markets are expanding quicklyModest growth continues for higher education, primarily special building rather than classrooms or dormitoriesGrowing market driven by strong state and local government budget reserves

Key Modular School Marketsannual % change in construction spending

2004 2005 2006 2007All Education 3.9 5.7 7.2 10.0Al K-12 5.3 4.9 8.5

PUBLICK-5 11.0 -1.1 -0.96-8 8.7 11.4 21.19-12 1.5 9.0 9.6

Private K-12 -3.9 -14.0 8.1

Heavy Construction Market TrendsExpanding erratically at a rapid pace

Starts up 34.7% in 2005 but only 1.0% in 2006Inflation adjusted spending declining in recent months but up 8.6% in the last 12 months

Higher capacity needs and improved public funding boost heavy construction spending in 2007-08

2007 = +8.8% 2008 = +13.1%

Demand from heavy contractors will keep upward pressure on the costs of site work, paving and foundations

State Economic GrowthPhiladelphia FRB Economic Activity Index Latest 3 Months (annualized)

*The index for each state is based on job, wage, hour and income data and serves as a proxy for GDP growth.

Data source: Philadelphia Federal Reserve.Map: Reed Construction Data and Reed Construction Data –CanaData.

Regional Economic TrendsPhiladelphia FRB Activity Index (annualized)

3mo. 1 Yr. 3 Yr.Rocky Mtn. 5.7% 5.7% 5.7%South Central 3.9 3.7 3.2Pacific 3.4 3.6 4.3South Atlantic 3.1 3.4 4.0Mid Atlantic 3.1 2.8 3.0New England 3.0 2.9 2.9Great Lakes 1.7 2.0 1.9Plains 1.5 2.9 2.9

Regional Construction Starts Trends

Buildings (exl. SF) –ann. % change‘05 ’06 ’07

Plains 9% 35% 20%Great Lakes -8 36 7South Central 16 18 9Rocky Mountain 31 17 2New England 27 9 -1Mid Atlantic 8 5 8South Atlantic 13 2 10Pacific 0 -3 1Source: Reed Construction Data, Associated Construction Publications

2006 Starts NR and MF

$2.390 BOrlando$4.340 BDallas

$2.438 BPhiladelphia$4.454 BDenver

$2.491Indianapolis$4.847 BPhoenix

$2.694 BAustin$4.939 BMiami

$2.996 BSan Diego$5.270 BWashington

$3.179 BBaltimore$5.540 BHouston

$3.670 BDetroit$6.164 BSan Francisco

$3.723 BSeattle$6.520 BChicago

$4.020 BLas Vegas$11.733 BLos Angeles

$4.141 BAtlanta$11.912 BNew York

% Change in Starts Last Two Years

-1%San Diego66%Denver

-8%Columbus78%New Orleans

-13%Buffalo79%Houston

-15%Louisville84%Raleigh

-26%Jacksonville89%Indianapolis

-27%Portland104%Montgomery

-31%Birmingham118%Baltimore

-43%Norfolk129%Phoenix

-43%Memphis216%Boise

-63%Greenville244%Austin

Reed Construction DataConstruction data and forecasts updated continuously at buildingteamforecast.com