Positive Outlook 2005

Market forecast is mixed, but overall construction should be up in 2005.

This year is shaping up like a good one for construction, with homebuilding activity staying near its record highs and nonresidential construction continuing the rebound that started in 2004.

“The level and composition of construction spending is shifting,” said Ed Sullivan, chief economist for the Portland Cement Association (PCA). “The strengthening economy and an increase in interest rates have set the stage for a recovery in public and nonresidential activity.”

PCA expects overall growth in the GDP to be at 3.4 percent for 2005. Rising oil prices will keep economic activity in check this year and somewhat slow growth, Sullivan said. PCA is forecasting a 2.9 percent increase in construction put in place for 2005.

Ken Simonson, chief economist of the Association of General Contractors (AGC), described himself as “faintly optimistic” about the economy in 2005.

“We’ll continue in the range of 3 to 5 percent growth in each quarter,” he said. “As the year goes on, we should see a gradually improving labor market and inflation should stay low for the most part.”

Concrete Concepts readers seem to share a positive outlook on the economy. In a recent e--mail survey, 84 percent responded that they expect business to be up in 2005.

Residential construction

The National Association of Realtors (NAR) is forecasting 1.87 million housing starts in 2005, a decline from the projected 1.95 million last year and just above the 1.85 million in 2003.

“We’re setting our fourth consecutive record year for existing home sales and even with strong fundamentals … we simply can’t set records every year,” said David Lereah, NAR’s chief economist.

Although mortgage rates are expected to increase next year, they will remain historically low, averaging 6.4 percent, Lereah said.

“That will help to limit the effect of rising prices and maintain generally favorable housing affordability conditions in most of the country,” he said.

The forecast from the National Association of Home Builders (NAHB) is similar, predicting a drop to 1.85 million housing starts this year, said NAHB chief economist David Seiders.

On the positive side, Seiders said the remodeling market should grow next year because of the incredible increase in home equity due to rising home prices.

The forecasts of the PCA and the AGC are similar to those of NAR and NAHB, predicting a slight decline to near--record levels.

Nonresidential construction

2004 reversed several years of declining nonresidential construction, basically staying flat from 2003. In 2005, some are expecting a solid increase in construction volume.

The PCA is predicting a 9.9 percent increase in private nonresidential construction and 3.8 percent increase for public construction. Unlike the last few years where residential construction has led the way, nonresidential construction will be very strong over the next several years, Sullivan said. PCA is predicting 14.6 percent growth in 2006 and 8.8 percent growth in 2007. That growth will be led by a 53.5 percent increase in manufacturing construction in 2004 after years of double--digit declines, Sullivan said.

AGC’s Simonson, though, is predicting manufacturing – and nonresidential construction as a whole – will take a little longer to rebound.

“It’s probably going to be another year before the manufacturing sector grows enough to increase construction,” he said. “We’re seeing very few announcements of new factories.”

The same holds true for office construction, he said. “Businesses have been very slow to absorb the record vacancy rates in many markets,” he said.

Some areas will see positive growth this year. “Health care will continue to be a growth area as it has been for the last several years,” he said. “Lodging should also be good. We’re seeing more business travel and there’s a lot of pent--up demand from the last several years.

“Retail will also improve,” he said. “We’re going to see plenty of ‘big boxes,’ and malls are making changes and starting to fight back.”

Material prices

The big wild card in determining how the economy and the construction market will perform next year is volatile prices for raw materials. While some long--term relief may be on the way, it appears 2005 will see more shortages.

“We’re not hearing of any improvement in the availability of cement,” Simonson said. “Worldwide demand will remain strong and U.S. cement demand is going to continue to outstrip cement production.”

Simonson is more hopeful that steel prices – which soared 80 percent last year – will stabilize this year, because it is easier for companies to increase production.

Oil prices, on the other hand, will continue to fluctuate.

“That affects the cost of doing business from operating expenses for equipment to surcharges on freight deliveries,” Simonson said.

The PCA now estimates that there are tight cement supplies in 35 states and predicts that those shortages will continue well into 2005. Although demand for residential projects will decrease, that shortfall will be made up by the increase in nonresidential activity. Domestic production will slowly increase over the next few years, but the best chance of reducing shortages is an increase in the availability of imported cement, according to PCA.

That availability will depend on the ability of importers to find available shipping capacity, which has been tied up by record construction activity in China, said John Mothersole of Global Insight, an economic consulting firm.

“A year ago, a tanker cost $35,000 a day. Today that cost is $135,000,” he said.

Several industry groups, including NAHB and AGC, have urged the federal government to remove tariffs on Mexican cement imports to help meet the shortage. Mothersole said there is no indication that issue will be resolved soon. He said he expects cement prices to continue to increase, peaking this spring before making modest declines.