As I draft this article in early November, the mid-term elections have come to a close (and with them the hideous campaign ads!)As projected by most political pundits, we witnessed a major shift in the balance of power in the House of Representatives. In other words, for once, the forecasts were correct!
Unlike the current political landscape, the non-residential construction market has been frustratingly difficult to predict. This time last year, most experts were forecasting a weak first six months of 2010, followed by more robust activity in the second half of the year.Of course, just the opposite occurred, and now, we are limping to the finish line of a very challenging year. And, our visibility into 2011 is limited at best.
Despite the lack of clear direction in our primary markets, we must make an effort to project activity levels and budget for next year. Remember what our parents told us; If at first you don't succeed, try and try again. So, without further ado, here is a best guess as to the direction of the non-residential construction market in 2011.
A Tale of Two Halves
As we wind down this year, the outlook for 2011 appears hauntingly similar to last year's forecasts for 2010. That is, a weak first half followed by more robust activity in the latter part of the year. However, unlike late 2009, when there was little available data to back up the claim, we have recently seen some indications that the 2011 forecast could have legs.
Each month the American Institute of Architects publishes its Architectural Billings Index (ABI). With the exception of one or two months this year, the ABI has been increasing, albeit to levels that still projected declining activity. However, in September, the ABI crossed over the magical 50 barrier (50.4 to be exact), which suggests, for the first time since January 2008, an increase in demand for services at the country's non-residential design firms. And, even though the overall ABI slipped back to 48.7 in October, the individual indexes for the commercial, industrial, and institutional sectors were above the 50 mark for the first time in more than two years—a sign of potential growth in projects most likely to utilize Ultra-Span trusses.
Given that the ABI is generally regarded to project actual construction starts 9 to 12 months out, it is not unrealistic to expect some improvement in the primary markets for Aegis fabricators by 3rd quarter, 2011. This assumes, of course, that the projects currently being designed will actually be funded.
Reading of 50 or more = increase in billing activity.
Source: American Institute of Architects
To add a level of support to the ABI outlook, we can report that, at least anecdotally, we are seeing signs of potential, albeit modest, improvement.
Each month, Aegis commercial personnel call on more than 100 architect and engineering firms throughout the country. Although most of these firms have undergone dramatic downsizing through the prolonged construction recession, in just the past few months our team has picked up a hint of an "uptick" in activity. Again, no one is suggesting it is time to break out the party hats and streamers. Nonetheless, there seems to be a feeling of improvement. Only time will tell.
The other bit of anecdotal evidence we can point to is reports of more private money beginning to make its way back into the system. Retail, assisted living, and hotel projects that had been on the shelf due to lack of funding are now resurfacing and preparing to break ground. Should this trend continue and perhaps strengthen, it could prove somewhat of an offset to anticipated lower public spending.
Reed Construction Data Outlook
Each calendar quarter Reed Construction Data presents a panel of experts who discuss the current and forward state of the non-residential market. The following are excerpts from their October 21, 2010 webcast "After the Fall: When and Where Construction will Rebound."
Jim Haughey, Chief Economist, Reed Construction Data
- Lenders requiring 40% equity from private developers vs. 15-20% in "go go" days.
- All new projects under very tight scrutiny by lenders
- 2011 GDP projected "sluggish" +2.7% (but at least still growing)
- Glut of private office/commercial space largely absorbed since almost no new construction has taken place in this sector—positive for future activity
- Public construction will decline at State and Local levels due to falling tax collections
- 2010 TOTAL Non-res construction spending will be down 23% from last year
- 2011 TOTAL Non-res forecasted up — 3%
- Hotel/Office — no growth
- Retail — 4%
- Healthcare — 7%
- Education — 4%
- Public Safety — no growth
- Regional growth in New England & Upper Midwest
- Regional softening in South and Southwest
- "Stimulus" $$ for buildings (vs. highway) FINALLY getting into the "system". Should mean uptick in some govt. projects in 2011
Ken Simonson, Chief Economist, Associated General Contractors of America
- Higher Education and Public Safety spending should approach 2008 levels next year
- Pre K-12 and Healthcare will continue to lag previous high water marks
- Currently, construction sector unemployment is THE HIGHEST in the economy—more than 17%
- 2010 material costs forecast up 2-4% while finished building costs down. Result is squeezed (zero) margins for most GCs.
- Signs are pointing to improved construction employment, but levels are 5-50% below the "peak years", depending on state (NV, CA, AZ, FL the worst)
Dr. Kermit Baker, Chief Economist, American Institute of Architects
- Construction currently the worst performing segment of the economy (As if we didn’t know that!)
- AIA member firm payrolls probably now at the bottom of the cycle
- Down more than 25% since mid-2008
- Architectural Billings Index has been up almost every month since Jan ’09.
- Commercial/Industrial ABI up 5 months straight
- Institutional index trending up
- Regionally strongest in Northeast and Midwest
- 2011 Forecast for TOTAL NON-RES= +4%--weak first half followed by more meaningful recovery in 2nd Half
For our Customers
Whatever direction the market takes in 2011, you can be certain of one thing: Aegis Metal Framing will be right there with you. We will continue to invest in all areas of our business to ensure we can offer our fabricator partners the best overall value in the cold formed steel truss industry. From the pending release of our Steel Engine next-generation software, to new product launches like the 25USWC, to enhanced on-line marketing resources, we are committed to you and the industry you serve.
Thank you as always for your business!