Flooring News and Information

Washington, DC, Oct. 30—Hesitant home buyers, cautious real estate investors, the weaker fiscal standing of state and local government and a reduced demand for commercial space will pose the biggest challenges to the construction industry during the first half of 2002. But despite those issues, low interest rates and the potential support of a federal stimulus package should help construction activity improve during the second half of 2002. The result is that the value of new construction starts for all of 2002 is projected at $481 billion, just slightly below the $481.4 billion estimated for 2001.

That outlook was presented by Robert Murray, vice president of economic affairs for the Construction Information Group, a division of The McGraw-Hill Companies. Murray delivered his annual forecast to industry leaders at F.W. Dodge's Outlook 2002 Executive Conference held at the Capital Hilton in Washington, D.C.

"Against the backdrop of a slowing economy, construction has stayed reasonably healthy for most of 2001, helped by an offsetting pattern by project type. It's true that commercial building has lost considerable momentum this year, dampened by weaker business conditions and tighter bank lending standards. However, further expansion was reported for public works, electric power plants, and schools. In addition, single family housing for much of 2001 has stayed strong—even factoring in a fourth quarter decline, single family housing should be able to match 2000 levels," said Murray.

For all of 2001, Dodge construction starts are projected to climb 2% from 2000 levels (reaching $481 billion). Although it is only modest growth, 2001 will have marked the 10th consecutive year of expansion for construction activity, when viewed on a current dollar basis.

Prior to September 11th, the economy was already teetering close to recession. Economic growth during the first quarter was reported at 1.3%, followed by 0.3% in the second quarter.

According to Murray, "the impact of the events of September 11th will be to deepen and lengthen the economic slowdown already underway. Substantial layoff announcements in travel related industries join high technology as depressed sectors of the economy. The weak job market, along with diminished confidence levels, means that consumer spending will not provide the same support as in previous years. However, the stage has been set for the economy to improve as 2002 proceeds, given lower interest rates and the fiscal push coming from the federal government. This will also have a positive impact on the construction industry."

Murray had the following to say about the year ahead for specific areas of the construction industry: Single family housing will retreat through early 2002, as home sales and construction are adversely affected by the weak job market and diminished consumer confidence. When uncertainty eases, homebuyer demand will be able to show a greater response to low mortgage rates. The full year is projected at 1.175 million units (F.W. Dodge), a 2% decline from 2000, which translates into no change in dollar terms.

Public works construction will advance 2%, as continued expansion for highways and bridges counters a slower pace for other public work categories. Electric utilities, following robust growth the previous four years, will begin to settle back as the post-deregulation surge in new power plant construction recedes.

Income properties will slide an additional 3% drop in dollar volume, corresponding with a 5% drop in square footage. The steepest decline is projected for hotels, while stores, warehouses and offices will experience moderate retrenchment. Apartment construction is the income property type most likely to avoid a decline, since it continues to be viewed favorably as a target by the real estate finance community.

Institutional building will advance 3%, due to further expansion for schools combined with a moderate increase for healthcare facilities. However, reduced contracting is expected for courthouses, churches, amusement-related projects and airport terminals.

Manufacturing building is expected to edge up 2%, as its extended four year decline reaches bottom in early 2002. This category will still be extremely weak by historical standards, down 35% in dollar terms from its most recent peak in 1997.