Ups and Downs in 2006

A fairly healthy December construction climate resulted in an overall construction spending figure for 2006 that was nearly identical to the 2005 dollar amount.

According to McGraw-Hill Construction, Lexington, Mass., total construction spending in 2006 came in at $663 billion, essentially the same dollar amount as 2005. This marked a change from the double-digit growth of 2004 and 2005, when the value of new construction starts climbed 11 percent and 12 percent, respectively.

Within that flat overall spending pattern, however, there were dramatic differences in the trends of the three major building sectors. While residential construction spending dropped by 12 percent in 2006, the non-residential sector moved up by 14 percent and infrastructure spending jumped by 19 percent.

In December, new construction starts increased 2 percent compared to the month before. Residential building edged upward, and greater activity was also reported in the infrastructure sector. However, non-residential building in December settled back from its recent strength.

Looking back on 2006 overall, from the spring of 2006 through late fall, a sharp downturn for single family housing was outweighed gains by non-residential building and public works. But at the close of 2006, single family housing began to stabilize, making it possible for total construction to register a slight increase after its extended decline.

“The 2006 pattern for total construction was shaped by the single family downturn, a notable change compared to the lift that single family housing provided during the first half of this decade,” remarks Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “Last year also featured growth for such nonresidential structure types as hotels, offices, and schools, combined with a brisk pace for the public works sector. That increased amount of construction was supported by positive market fundamentals, such as declining vacancies and rising rents, along with greater funding coming from the federal and state governments.”

Venturing a forecast for this year, Murray says, “For 2007, it appears that the worst of the single family slide is over, but the climate for nonresidential building and public works may not be quite as favorable as last year.”

As 2006 came to a close in December, non-residential spending fell 4 percent. Office construction dropped 45 percent from a November that included $1.6 billion related to the estimated cost of the Freedom Tower in lower Manhattan.

On the commercial side, store construction in December was steady with the prior month, and growth was reported for warehouses, up 14 percent; and hotels, up 45 percent. Construction of manufacturing plants increased 27 percent, boosted by the start of a $500 million cement plant in Missouri.

On the institutional side, school construction had a strong December, rising 9 percent. Health care facilities continued at a high level, growing 6 percent as six hospital projects valued each at $100 million or greater reached groundbreaking. The smaller institutional structure types in December were mixed - public buildings, up 17 percent; churches, up 10 percent; amusement-related projects, down 8 percent; and transportation terminals, down 54 percent.

For 2006 as a whole, nonresidential building advanced 14 percent to $204 billion, a faster rate of growth than what took place in 2005 (up 9 percent) and 2004 (up 5 percent). Hotel construction in 2006 soared 89 percent, boosted by groundbreaking for a number of very large hotel/casino projects in Las Vegas, Atlantic City, and other sites. Office construction climbed 37 percent, regaining upward momentum after stalling in 2005.

The top five markets for office construction in 2006, ranked by the dollar amount of new construction starts, were: New York, Washington, Phoenix, Chicago, and Dallas-Ft. Worth. Store construction in 2006 edged up 1 percent, essentially maintaining the heightened volume achieved the previous year, while warehouse projects slipped 7 percent. The manufacturing plant category registered a 22 percent gain in dollar terms, aided by a surge of ethanol plant construction projects across the nation.

The institutional structure types also contributed to the full year gain for nonresidential building. The educational building category climbed 10 percent, maintaining the expansion that was re-established in 2005, as broad growth was reported for primary schools, high schools, and colleges/universities. Healthcare facility spending rose 6 percent, showing additional expansion on top of the 25 percent increase witnessed in 2005.

Residential building in December rose 2 percent to an annual rate of $296 billion, the result of a 3 percent gain for single family housing alongside a 3 percent multifamily decline. Even with the slight drop, multifamily housing continued to see very large condominium projects reach groundbreaking, including four December projects in California, Hawaii and South Carolina.

The 2006 annual total for residential building was $338 billion, down 12 percent from 2005. Single family housing dropped 14 percent in dollar volume and 18 percent in dwelling units. The regional pattern for single family housing showed the steepest dollar declines in the Midwest, down 22 percent, and the West, down 21 percent.

“The surge of investor-led demand had buoyed the single family market in 2004 and 2005, leading to unsustainably high prices and excessive inventories; the 2006 pullback represents a major step towards correcting these imbalances,” says Murray.

Multifamily housing for all of 2006 was down 1 percent in dollar volume and 5 percent in dwelling units. “The mounting concern about overbuilding has led to reduced condominium development in some markets, such as Miami, but other markets continue to see strong levels of construction,” says Murray.

Non-building construction in December increased 12 percent. The public works sector included gains for highways, up 5 percent, and sewer construction spending, up 8 percent. The electric utility category jumped 132 percent in December, reflecting the start of a $1 billion coal-fired power plant in Pennsylvania.

For the full year 2006, non-building construction climbed 19 percent to $121.4 billion. Transportation public works showed healthy growth, with highway spending up 14 percent and bridge spending up 15 percent. “Highway and bridge construction was helped in 2006 by the enhanced funding contained in the current federal transportation bill; at the same time, further expansion this year will depend on Congress quickly passing the fiscal 2007 appropriations for transportation work,” Murray comments.

The top five states for highway and bridge construction in 2006 were Texas, California, Florida, Georgia and Illinois. Electric utility construction in 2006 surged 90 percent, bringing a four-year decline to an end. Greater contracting was present across a range of power plant types (fossil-fuel, natural gas, wind and solar), as well as transmission line projects. The top five states for electric utility construction in 2006 were Texas, Wisconsin, Colorado, Nevada and Pennsylvania.

The annual statistics for total construction in 2006 showed reduced activity in three of the five major regions: the West, down 2 percent; the Midwest, down 3 percent; and the South Atlantic, down 5 percent. The two regions that were able to show growth for total construction in 2006 were the Northeast, up 2 percent, and the South Central, up 12 percent.