fulmer construction forecast 2005

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40 ELECTRICAL CONTRACTOR JAN.05 www.ecmag.com

FOCUS

By John Fulmer

A group of these gurus assembled at the Reed Con-

struction Datas North American Construction Forecast

conference and the McGraw-Hill Outlook 2005 Executive

Conference in Washington, D.C., last fall. At Reed, the

consensus was the current economic downturn is tempo-

rary, but the experts there were cautiously optimistic. They

felt a recovery would begin this year and gain momentum

through 2007 in the face of higher interest rates and slow

job growth. Several industry sectors, such as industrial

with 14 percent growth and public works with 2 percent,

will have a good two-year run.

With the Federal Reserve expected to raise the federal

fund rates above 3 percent in the last half of 2005 and

worries over oil and building-supply prices, the McGraw-

Hill group thinks the economys expansion will idle downto 3.5 percent, down one-half percent from 2004. They

also spotted some general trends: Moderate job growth will fuel demand for offices and

multifamily housing, though residential building may scale

back from 2004s record pace because of higher interest

rates Looser lending standards will offset higher interest rates

and free up construction funding An improved economy will ease the states fiscal woes

and pump up the institutional building sector Bridge and highway construction will rise while electric

utilities will decline 8 percent. In the latter area, a lossin plant construction will be partly balanced by transmis-

sion-line work

The big picture

So how does this translate into cold, hard cash? Robert

Murray, vice president of economic affairs at McGraw-Hill,

said the contract value of total U.S. construction should

reach $585.5 billion in 2005, a 2 percent jump over last

years figure, but a rather disappointing number considering

construction spending rose 9 percent between 2003 and

2004. (See chart on page 41.)

Murray noted this all hinges on single-family housing

and said that sector should drop 3 percent in 2005 after

achieving double-digit dollar growth the previous three

years. McGraw-Hills estimate reflects construction starts

and varies significantly from Reeds figure for 2005s es-

timated U.S. total construction spending (or put-in-place

construction), which tops the trillion mark, a 4 percent

jump from 2004. But, again, the growth rate weakened

when compared to 2004s estimated 7 percent increase.

Reed also includes renovation construction, which isnt

listed in McGraw-Hills estimate. Heres the breakdown

from Reed: $384 billion in new residential spending; down 4 per-

cent from 2004 $138 billion in residential improvements; up 7 per-

cent $317 billion in nonresidential; a 13 percent hike $181 billion in nonbuilding a 7 percent jump

In general, the economy may decelerate significantly

in 2005 according to Merrill Lynch chief North Ameri-

can economist David Rosenberg. He sees a growth rate

of just 2.5 percent in the first quarter of next year. And

according to Peter Morici, a University of Maryland busi-

ness professor: Gross domestic product, the value of all goods and ser-

vices produced, will grow at a 3.5 percent annual rate,

down 3/10 to percent from 2004

The economy will create 144,000 jobs per month andthe unemployment rate will fall only modestly Inflation, influenced by international commodity mar-

kets, will register at 2.4 percent in 2005, down 1 percent

from 2004.

However, Morici projects the consumer price index will

settle down as gas prices continue to fall.

That pulls a lot of prices with it, he said.

Single- and multifamily housing

David Seiders, the National Association of Home Build-

ers chief economist, also called housing volume a key to

the economy and thinks, as Murray does, housing starts

Last years ELECTRICAL CONTRACTORs Construction Forecast

went halfway out on a limb to prognosticate that 2005

may be a big year all around. Its easyand wiseto be

tentative in predicting this years economy, and some in-

dustry gurus have done just that, sticking with maybe.

Construction


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41 www.ecmag .com JAN.05 ELECTRICAL CONTRACTOR

will recede. Still, single-family starts will

remain positivethough unable to match

the phenomenal growth of the past two

yearsand multifamily will keep a steady

pace. The national homeownership rate

will continue to growalbeit more slowly

than in the recent pastand will hit a re-

markable 70 percent by the decades end,

Seiders said.

New and existing home prices, accord-

ing McGraw-Hills Murray, should increase

by 11 percent, and he envisions burgeoning

specialty markets for single-family housing,

including home theater, Internet alcoves

and separate male/female offices. Reed

forecasters expect mortgage rates to climb

a bit from a 5.94 percent annual average

in 2004 for 30-year fixed rates to 6.43 per-

cent in 2005.

In raw numbers, 1,425,000 new single-

family starts are expected this year, accord-ing to McGraw-Hill, down from 1,530,000

in 2004, which translates into a 7 percent

loss. Multifamily will have 445,000 starts,

a 2 percent gain from 2004s estimate of

435,000. The contract value of single-

family will drop to $267.6 billion, a 3

percent loss from 2004s total of $276.6

billion, while the 2005 multifamily num-

ber is $48.8 billion, a 7 percent gain over

2004s $45.4 billion figure. (See charts

page 42.)

McGraw-Hill expects the Midwest to beup 1 percent in single-family starts, the

only region with an increase. The South At-

lantic and West will be big losers at minus

5 percent. The Northeast at minus 7 per-

cent is the only region facing a decline in

multifamily starts, while the Midwest and

West should see double-digit expansion. In

fact, western states can expect a whopping

19 percent growth rate spurred by building

in cities such as Las Vegas.

The metro markets will be amazing,

said Murray.

2005Forecast

0 50 100 150 200 250 300

BILLIONS OF DOLLARS

350 400 450 500 550 600

2001 186.9 103.1 83.690.8

8.1 24.1

2002 214.2 94.0 87.990.0

5.4 12.0

2003 242.3 99.5 82.889.9

6.5 8.9

2004 276.6 110.0 85.991.2

7.0 6.0

2005 267.6 119.7 87.497.4

8.0 5.5


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Haughey wrote. In the leasing market, va-

cancy rates for leased buildings, while still

high, are declining. Overall rents are now

stable or slightly rising. This increase in

cash flow for building owners is prompting

more construction.

He outlined some other signs for nonresi-

dential expansion: Hotels reacting to rising room and oc-

cupancy rates Retailers adding space after a 7 percent

annual-sales jump Office expansion due to higher employ-

ment levels

Retail, industrial and real estate

At Reed, Glenn Mueller, Johns Hopkins

University professor and Legg Mason Inc.

real investment strategist, noted a physi-

cal real estate cycle reflects supply and

demand for space and drives occupancy

and vacancy. That sets rents and stimu-

lates construction. In the financial cycle,

changes in real estate capital affect build-

ings prices. In these cycles, sluggish expan-

sion is followed by precipitous decline.

We bottomed out in 1990, then peaked

in 2000. But it only took three years to go

back to the bottom. Well now start climb-

ing back up. This is a typical cycle, he

said.

Rental growth, he said, is slow nearly

everywhere except Southern California

and Florida, but should start moving up by

2006. Mueller believes the nations indus-

trial sector will grow in 2005, and as thejob market improves, so will the multifamily

and real estate. His colleague at the confer-

ence, Edward J. Sullivan, the Portland Ce-

ment Associations (PCA) chief economist,

has even higher hopes. He sees industrial

climbing strong and steady, reaching $35

billion by 2008, up from 2004s level of

just over $10 billion. Its a height industrial

hasnt reached since 1998.

Its optimistic, Sullivan said. But I

dont know if many will agree with that.

The chart on this page, Industrial Con-

struction Outlook, shows this dramatic up-

swing, with separate projections for spring

and summer of 20032008. In an e-mail,

Sullivan explained: I make three forecasts

per year. The spring forecast refers to my

projections made in the spring and the

summer [forecast], my forecasts made in

the summer. The intent was to show what,

if any, changes I have made regarding my

outlook for each of the sectors.

Despite good vital signs, Mueller thinks

hotel occupancy wont pass the 65 percent

average until 2007. Retail is the stron-

gest, most recession-proof market, and low

interest rates and home refinancing have

given consumers a lot of spending cash.

The average retail occupancy86 per-

centwill begin to grow in 2005.

Warehouses and RFIDIn 2000, warehouse construction hit 304

million feet but dropped to 184 million in

2003, a stunning 40 percent loss. What

happened? In the 1990s, a strong retail

sector and Internet sellers looking for stor-

age space boosted construction. But the

fabled dot-com bust and lukewarm retail

activity put speculative warehouse projects

on hold indefinitely and slowed build-to-

suit projects.

But vacancy rates, which peaked at

11.7 percent in third-quarter 2003 and fellto 11.2 percent a year later, are turning

around. Successful retailers are planning

distribution centers, and McGraw-Hill says

this sector, after 5 percent growth in 2004

(193 million square feet) will leap 14 per-

cent in 2005 to 220 million.

With warehouse construction, the Mc-

Graw-Hill report noted the rapidly develop-

ing use of radio frequency identification

(RFID) tags in tracking inventory. As Thom-

as E. Glavinich wrote in ELECTRICAL CONTRACTOR

in April 2004: Wal-Mart is requiring itstop 100 suppliers to put RFID tags on their

pallets and cases by Jan. 1, 2005. Simi-

larly, the Department of Defense (DOD) is

requiring suppliers to put RFID tags on its

shipments by 2005.

For electrical contractors, RFID technol-

ogy could mean limited opportunity in Cat

5 hard-wiring for stationary scanning sys-

tems and unlimited opportunities in wire-

less network installations. But the technol-

ogy is evolving and its potential is as yet

untapped.

2004 2005

Millions of starts

2.0

1.8

1.6

1.4

1.21.0

0.8

0.6

0.4

0.2

0.0


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To what extent the use of RFIDs will af-

fect warehouse demand is uncertain, the

report stated, but at the least it will increase

our need for new warehouse designs to be

able to accommodate new technology.

The institutional sector

Normally a steady performer, institutional

building has stumbled since 2002 and re-

corded its third straight decline in 2004

with minus 4 percent. McGraw-Hill blames

state and local governments poor health

and their taxing structure, which is, in turn,

tied to the economy. The states fiscal for-

tunes are irregular, but, in general, condi-

tions are improving, the bad times having

peaked. The report said: This should set

the stage for an improved performance by

institutional building in 2005, and the

broader forces affecting the pattern of in-

stitutional building are generally positive.

These forces are the following:

Rising student enrollments A growing elderly population

The population shift to the Sunbelt A large number of bond issues passed

recently The residential sectors strength in

20012004 will introduce need for insti-

tutional facilities

In short, the report stated institutional

will have a 3 percent gain to 518 million

square feet with slight improvement in

schools, healthcare facilities and trans-

portation terminals. Public buildings, such

as courthouses and churches, will suffer a

decline.

Building in education

In response to escalating student enroll-

ments and heavy state and local funding,

education construction hit a peak with

273 million square feet in 2001. But in

two years, it slid 12 percent to 241 million

square feet with the biggest losers being

Midwestern and Northeastern states. Cali-

fornia was the exception to the trend, rack-

ing up an increase of 3.2 million square

feet in 20012003.

In 2004, the pattern continued. Uni-

versity-related construction fell 19 percent,

triggering an 11 percent drop in high school

construction, a 13 percent decline in el-

ementary schools and a 14 percent skid in

junior high school construction. Community

colleges had a slight increase, but museums,

libraries and labs were down. At the time

of the report, educational construction was

a facing a possible 10 percent across-the-

board drop to 217 million square feet, the

skimpiest total since 1998s 203 million.

McGraw-Hill predicts that though in re-

treat, this sector will bounce back. Growing

enrollments in 2005 will continue through

2013. The bulk of this activity will happen

in the West, with an 11 percent gain, and in

the South, with a 5 percent increase.

Healthcare and other institutional

Healthcare construction in 2003 took a step

backward, dropping 5 percent to 92 million

square feet, according to the McGraw-Hill

report, and dropped 1 percent in 2004 to

91 million. Though this sector has seen de-

clines recently, it has grown considerably

in the past seven years. In 1997 through

2003, new construction averaged 93 mil-

lion square feet, up 28 percent from 1990

1997s 73 million-square-feet average.

Several factors will help this area grow an

estimated 3 percent to finish 2005 with 94

million square feet in new construction: Medicare reform and corresponding big-

ger reimbursements

Hospitals are investing in new technology

and replacing older facilities in the face of

competition from specialty outpatient clin-

ics

Bigger demand for healthcare exists as

baby boomers grow older

The fiscal woes of governments have

squeezed financing of prisons, police sta-

tions, courthouses, and post offices. Steady

at 44 million square feet in 20002001,

this building type took a cut to 35 million

in 2003 but was expected to rebound 10

The China, oil, green axisIF A THEME DEVELOPED at McGraw-

Hill and Reed, it was a concern over

fuel prices, Chinas emergence as

an economic giant, and the impor-

tance of green building, which

was especially apparent by frequent

mention of the Leadership in Energy

and Environmental Design (LEED) ac-

creditation. A voluntary, consensus-based national standard for develop-

ing high-performance, sustainable

buildings, LEED seemed to be on

everyones mind. During a McGraw-

Hill panel discussion with three of

the countrys leading architects,

Carl Roehling, president and CEO

of SmithGroup, said many younger

architects see a LEED accreditation

as an essential resume-builder and

half of our clients ask for a LEED

building. (For more visit www.us-

gbc.org/leed/leed_main.asp)

At the time of the conferences,

oil prices were hovering at $55 a

barrel, yet Jim Haughey, in Reed

Construction Forecast Monthly,

said high energy prices, reduced

consumer confidence and lower

capital spending were mere bumps

in the road to continued economic

development. Job losses such asthose that occurred in previous oil

crises should not be a factor, his

report said.

As oil price-shocks go, this one is

minimal. Prices are higher but sup-

plies are readily available without

waiting or searching. Gasoline prices

would have to rise more than 60

centsto above $2.50 per U.S.

gallonto match the impact on the

economy of the 1991 oil shock. This

is very unlikely to happen, Haughey

reported.

China and commodities

Though Chinas commodity gobbling

caused building-material shortages

here, Haughey asaid Chinas oil

thirst was slaking and an absence

of lineups at the gas station would

seem to indicate the price of oil is

headed down soon.

He supposed the price per bar-rel would drop $5 in the next few

months, which proved to be pre-

scient. On Dec. 10, 2004, the price

of light, sweet crude for January

delivery had fallen to $42.53.

Also in late 2004, the oil markets

continued volatilitythe tensions

and troubles in Iraq, Russia and

other production areashad Edward

J. Sullivans Portland Cement Asso-

ciation adjusting its 2004 gross do-

mestic product projection, dropping

it from 4.4 percent to 3.9 percent,

and lowering 2005s GDP estimate

from 3.8 percent to 3.4 percent.

The downward adjustment to the

current forecast primarily reflects

significantly higher oil price as-

sumptions, the PCA reported in a

revised forecast. PCA fully incor-

porates the likelihood of continued

oil supply disruptions in the context

of strong global demand conditions,

resulting in a downward rigidity in

current oil price levels. The higher

oil price scenario will weaken over-

all economic growth. With higher

oil prices, consumer spending will

be partially compromised, inflation

will run stronger, job gains will be

smaller, and sentiment in both the

consumer and business areas will

be more sedate. Combined, these

factors lead to roughly a 50 basis

point reduction in PCAs previous

forecast for real GDP growth.

FOCUS / CONSTRUCTION FORECAST 2005
http://www.usgbc.org/leed/leed_main.asphttp://www.usgbc.org/leed/leed_main.asphttp://www.usgbc.org/leed/leed_main.asphttp://www.usgbc.org/leed/leed_main.asp


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45 www.ecmag .com JAN.05 ELECTRICAL CONTRACTOR

percent to 38 million square feet in 2004,

before dipping to 36 million in 2005. Other

points for these institutional areas: In 2002, religious building reached 52

million square feet, a high not seen since

the early 1960s. It dropped to 43 million

in 2004 Amusement-related buildingconven-

tion centers, sports arenas, theaterswas

at 94 million square feet during 19952000

but fell sharply in recent years, landing at

65 million in 2003. Its expected to make a

minor comeback to 73 million square feet

in 2005.

Manufacturing

For several long years in the recent past,

manufacturing was a wasteland, hitting the

skids at 67 million square feet in 2002.

There are reasons for the falla strong dol-

lar in the late 1990s that made U.S. exports

more expensive and manufacturers who

moved production overseasbut whatever

the case, this depressing decline has been a

sore point for many electrical contractors.

But remember the good old days? In

1997, this sector was at 191 million square

feet. A small part of that was regained in

2003 with a hike to 71 million square feet,

and 2004 saw another small increase to

73 million, spurred in part by auto plant

construction in Oklahoma, Texas and Mis-

sissippi; the $600-million conversion of

an Arizona Intel semiconductor plant; and

a $300-million expansion to a California

biotech manufacturer. These projects, and

others like them, will help manufacturing

reach 80 million square feet in 2005, a 10

percent jump, according to McGraw-Hill.

Public works, electric utilities

Moribund government spending affected

this sector, too, as public works money be-

gan drying up in 2003 after several years

of growth. But in 2004, prompted by the

need for water and sewer works, these proj-

ect types jumped 4 percent to reach $85.9

billion.

A 2004 bill by Congress set forth these

spending levels: Highways up 4 percent (from 2003 lev-

els) to $33.6 billion

Mass transit increased 1 percent to $7.3

billion

Airport grants didnt budge, remaining

at $3.4 billion

Army Corps of Engineers construction

funding cut 3 percent

EPA water infrastructure grants raised

3 percent

The EPA Superfund account received an

8 percent bump upward

But in 2005, President Bush set a 0.5

percent limit on discretionary funding and

things look tight, except for the Transpor-

tation Security Administrationhomeland

security was exempt from the limitwhich

received a 20 percent increase, including

$250 million slated for airport upgrades.

At the time of the report, 2005 levels were

not set by Congress, but they look similar

except for a 13 percent EPA cut and a 7

percent raise for the Corps.

Closing the books

Sullivan, who delivered the U.S. construc-

tion overview at Reed, noted many signs

of a brighter economy. After a 20012003

drought, investment spending has made a

strong return and will no doubt help replen-

ish funding for manufacturing construction

and other sectors that have fallen on hard

times. Job growth looks good. The fiscal cri-

sis in most states, he said, is fading. Still,

the signs portend only a modest recovery in

most sectors and slight declines in some

others. And oil prices are the most frighten-

ing bugbear, the biggest wild card for many

an economic pundit. Not a real boom year,

yet certainly not a bust. Just a time to be

cautiously optimistic. EC

FULMER is editor of ELECTRICAL

CONTRACTOR and SECURITY+LIFE SAFETY SYSTEMS.

He can be reached at 301.215.4516

[email protected].

Still China was a focal point.

Haughey said Chinas decision to

cool down its blistering-hot economy

caused cuts in worldwide orders in

every sector.

China accounted for more than 25

percent of world economic growth in

the last year, so the canceled orders

had a significant impact immedi-

ately, Haughey wrote.

Because China had been hoardinginventory of many commodities, the

countrys MayJuly (2004) orders

were probably below their consump-

tion and will have to rise later in the

summer Haughey added.

The Green Approach

The oil price spike, Chinas grow-

ing needs and green building are

related. Limited supplies of fossil

fuels and competition from nascent

economic giants such as China for

those supplies have forced U.S.

builders into innovative design prac-

tices. During a Reed industry panel

discussionand throughout the

conferenceit was common to hear

talk such as this, which comes from

the Greenway Group Inc., whose

chairman, James P. Cramer, was the

conference moderator:

Green and sustainable design

and development are shifting

gears into increasingly high

demand.

Intelligent and integrated build-

ings are becoming the norm.

Some dont have a clue about

[LEED] but its coming to this

industry.

In short, contractors will be forced

into using new and unfamiliar

design criteria if they wish to com-

pete, especially for government

contracts, a sector that will most

certainly employ the most stringent

green guidelines for sustainable

buildings.

0% 10% 20% 30% 40%

Most Significant Design Trends Over Next 5 Years

% of respondents

Smart growth/livable communities

Building security

Increased use oftechnology in design

Rehabilitation vs.new construction

Integrated internationalbuilding code

Other

Green architecture

Healthy buildings; mold

SOU

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fulmer construction forecast 2005

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