Contractor Story Part 3 of 3


December 31, 2003

Part 3 of 3: '04 Constructon Forecast

By Joe Salimando

Previous installments in this three-part 2004 forecast piece covered the consensus overview + residential (Part 1) and a nonresidential perspective plus looks at the office and multifamily markets (Part 2). Below, we'll look at a few other major subsectors in nonres, plus nonbuilding construction.


Retail Structures

Retail has been the "sleeper" category in nonresidential. For one thing, government numbers do not track retail facility construction, blending it in to "Commercial" -- where retail is supposed to be about 65% of the total (on average) . . . which is not helpful. For another thing, there are "mixed-use" buildings, with retail and office, or retail and warehouse, in the same building. How do you classify a building in a city where the ground floor is 100% retail, and the top eight floors are office?

MHC's square footage data tell a pretty good story for retail construction. Here it is, by year:

2001 -- 279M sq. ft. (down 10% from 2000)

2002 -- 257M sq. ft.

2003 -- 277M sq. ft. (estimated)

2004 -- 285M sq. ft. (forecast)

So while the square footage total for 2004 isn't stupendous, it is: (a) up from 2003, and (b) higher than the 2001 figure. It's not that far from the 2000 figure, which was on the other side of 300M sq. ft. In terms of dollars, MHC puts 2004's spending at $20.8B -- up 7% from 2003, and up 14% from the 2002 figure.

What's the story here? Several key things have been happening, I've learned, and they all make sense:

a. The residential construction analysts are fond of pointing out that retail construction follows new housing developments around. In other words, if one or more new housing developments springs up in a place where grass and trees formerly cohabited in peace with bunny rabbits and hawks, you suddenly find all kinds of retail shooting up nearby -- strip shopping malls, major shopping centers, grocery-dominated retail locations, department stores, the ubiquitous six 7-11s and four McDonald's, and you-name-it.

If you live in an area with suburbs that are growing (as I do), you see this yourself when driving around. There are so many shopping centers in so many places in Northern Virginia, where I live, and they all basically look pretty much the same. They have the same stores, more or less. Some of them even have similar-sounding names (I live not far from the Fair Oaks and Fair Lakes shopping emporia, which are actually NEAR each other).

b. Our national predilection to spend is a big support for retailers in general and those who build retail structures. One way of looking at this is to see U.S. GDP in perspective. So -- here's some perspective:

1968 -- consumer spending = 61.3% of GDP

1976 -- 63.0%

1983 -- 64.7%

1988 -- 65.7%

1993 -- 67.0%

1998 -- 66.7%

2002 -- 69.9%

Do the math: While it's not my point here, it is worth your time to note where the U.S. once devoted 37% to 39% of GDP to UNconsumer spending -- in the 1968/76 period (i.e., GDP came from places like investments in equipment and buildings!) -- today that share of the economy has contracted to 30%.

c. Obviously, some retail stores were built in locations that are no longer quite as viable. This stuff happens. While the store owner might be able to relocate or sell the store fixtures, the merchandise, etc., the store itself cannot be picked up in Detroit and put down in Arizona, following the auto worker retirees! You can locate a job in the service sector almost anywhere -- as the note above about "offshoring" demonstrates only too well.

But retail is like a never-ending threshing machine, spitting out unneeded or unsuccessful stores on one end, and yet producing new ones ad infinitum in other places.

The story here, obviously, is that building retail structures has been a smart thing to do in the United States of America! If you assume (as I do) that GDP will grow over time, and that America will continue to prosper over the intermediate and long terms, then building a place where you can accept rents from national, regional, and local retailers is a very sound strategy. There will be places to put the stores (as new housing developments are created). The might well be an increasing amount of the national pursue devoted to shopping (hey, if we can get control of that Iraqi oil -- and make it flow -- we can probably keep crude oil prices beneath $25/bbl. for 30 years!).

And retailers don't look at the situation as "overstored." Not at all. Is Wal-Mart done building? Is Home Depot done remodeling? Answer: Not even close!


Health Care & Education

I liked the BLS's grouping of health care and education employment data. For one thing, these have been THE hot markets in nonresidential since the dot-com/telecom bubbles blew up in 2000. For another thing, they are not -- from a hard-edged point-of-view -- contributors to national economic growth. Unless, of course, you see healing the sick and educating the young as vital to the future of our nation!

Here's MHC's four-year take on square footage of new construction in these markets:


New Construction Contract Values -- Education & Health Care 



Health care

Sq. Ft. (millions) Change Sq. Ft. (millions) Change
2001A 274 + 9% 91 + 4%
2002A 253 - 7% 97 + 6%
2003P 240 - 5% 88 - 9%
2004F 223 - 7% 83 - 5%
Source: McGraw-Hill Construction. A = actual, P = projected, F = forecast


Are you surprised to see the declines? I certainly was. So I went to the FMI Corp. data -- to see the improvement numbers.


New Construction + Improvements -- Education & Health Care 



Health Care

New Improve New Improve
(billions of unadjusted dollars)
2000A $36.9 $17.1 $6.2 $11.8
2001A $41.7 $19.2 $6.3 $11.3
2002A $45.4 $20.5 $8.4 $12.4
2003P $45.3 $21.5 $8.4 $12.7
2004F $43.7 $20.7 $7.9 $12.7
2005F $45.7 $21.0 $7.7 $13.3
Source: FMI Corp. A = actual, P = projected, F = forecast


With FMI's dollars for improvements in hand, we can see that total construction and improvements for healthcare and education are estimated at a nice round $85 billion in 2004, down a slice from $87.9B in 2003 -- but up handsomely from $72B in 2000. When I look at it, I think the FMI numbers for education are -- if true -- woeful. We have one heck of a lot of schools standing up, but a lot of them were built 20 to 50 years ago -- they are in need of serious help. Apparently, we have $1.5 trillion to $2T over the next 20 years to spend on geezers (like me!); that's the estimate from the Congressional Budget Office of the second-decade cost of that Medicare Drug plan just passed into law.

But we clearly don't have even hundreds of millions to spare to create a healthy learning environment for kids.

To get up on the soap box for a moment: Studies are coming out on the in-building environment and how kids learn. Increased exposure to DAYLIGHT in a school building ramps up test scores -- to the extent that it seems the kids must be cheating! Indoor air quality  cheats kids out of the opportunity we struggled to give them by funding a public school system in this country.

By the way, I don't have a dog in this fight; I'm childless by choice. But I know kids, I like kids. Someday I hope to be 75 years old. That's 25 years from now. I anticipate seeing a 30-year-old doctor, when I need to. Perhaps she will be 35. Right now, my doctor is IN SCHOOL. The 30-year-old is five; the 35-year-old is 10. I need these young people to learn -- NOT to learn who George Washington was (although that's worthwhile) and the date on which he said farewell to the troops . . . but how to think, and how to learn.

I can't believe the disparity between what we're ready to collectively invest in prescription drug benefits for seniors (me included), and what we're NOT willing to invest in the learning environment for the kids. A few years ago, education authorities estimated it would take less than $200 billion to make the essential repairs needed in our nation's schools. As you see above, we're backing that up with $20B a year -- much of which is probably NOT going to the tasks identified in that estimate.

OK, I'll get off my soapbox.




MHC's data shows square footage of hotel and motel new construction to rise to 50M in 2004, up from 45M in 2003 and 40M in '02.

PricewaterhouseCoopers says the U.S. lodging industry will spent $3 billion on renovations in 2004, up from $2.4B in 2003, according to Hotel & Motel magazine. Why? "Owners have done a good job of managing their bottom lines, but to do that [capital expenditures] have been one of the first things to be cut. As the market improves, more money will be needed to go into the properties." That's from Bruce Lowrey, vp of GMAC Commercial Mortgage Corp., quoted in the article.

From the same magazine: An American Express survey found that the number of travelers planning to spend more than $5,000 on their vacation trips in 2004 was 11%, nearly double the 6% found in the same survey one year ago.

PricewaterhouseCoopers -- using data from Smith Travel Research -- predicted revenue per available room (revPAR, a hotel industry measurement) would increase 4.9% in 2004.


For MHC, which tracks contracts for new construction, "manufacturing" as a category has fallen off the edge of the universe. In 1998, new manufacturing building construction was reported as $12.1B out of $405.6B in total construction -- 3%. That was down over the decades, of course. BUT: The forecast for 2004, is $6.0B out of $508.9B -- or less than 1.2%. FMI Corp.'s data, which include improvements with new construction, shows $14.6B in total manufacturing construction in 2004 -- 58% of it being improvements. But even that figure is down significantly from the $23B level FMI reported as "actual" for each of 2000 and 2001.

In a forecast prepared in August, the National Association of Manufacturers projected nonresidential investment in structures to rise by 1.9% in 2004. A bigger gain was seen for IT (a 13.1% gain) and equipment (up 11.7%). More positively -- feeding those expectations for a stronger 2005 -- NAM saw manufacturing output in 2004 rising by 4.7%; the estimate was for a weak 1.4% gain in 2003.

BUT PERHAPS WE ARE NOT MAKING LESS! Manufacturing centers on OUTPUT and EMPLOYMENT. OK, most folks say -- manufacturing employment is down, and low-tech jobs are leaving for China, where manpower costs less than 10% of what it costs here. So we don't make any more pillows in the U.S., and perhaps we don't have much of a future as manufacturers of carpets and rugs.

BUT: What about OUTPUT? Are we making less stuff? 

I've gotten this question a number of times (including as a presenter). I've wondered myself. I've LOOKED. Finally, I came across an answer from the economist at the U.S. Chamber of Commerce -- read it here.

In a nutshell: Fifty years ago, manufacturing represented 30% of U.S. GDP and provided four out of every 10 jobs. In the five decades since, manufacturing OUTPUT has increased by 180%. That's not too shabby (it averages 2% a year, compounded). But nonmanufacturing output has risen 420% over the same period. So what's happened is that "everything else" now dwarfs U.S. manufacturing -- now there are fewer than 15 million people employed in making things (fewer than 15% of the jobs) -- and manufacturing contributes only 14% of GDP.


Nonbuilding Construction

Nonbuilding construction is all about what also is called "public works." MHC's numbers for this have it rising from $67.9B in 1998 to $87.6B in 2002 -- a 29% gain in four years . . . your tax dollars at work. Thanks to reduced taxes dollars, this area has stagnated since, at $78.9B in 2003 and $80.5B in 2004, according to MHC.

One problem with this area is that everyone seems to define it differently. MHC excludes electric utility construction; Reed Construction Data blends "power" in. Does Communications work go under nonbuilding construction? One might answer, reflexively -- "of course" -- but that's not where the Census Bureau puts it in its monthly "construction spending" report.

Reed's way of seeing things puts total nonbuilding construction at $165.9B in 2002, $162.8B in 2003, and $169.8B in 2004. Yes, there are shifts in there, but essentially that total is flat (unlike the MHC numbers above). The big '04 gainer in the Reed way of seeing things is Communications, set to post an 11.9% gain -- but to only $17.8B, a bit more than 10% of the overall. Reed also shows a gain in "Power" construction, to $36.9B -- up from $36.5B two years ago. By way of contrast, the MHC numbers for new construction by electric utilities are $12B in 2002 and $7.5B in 2004.

[Did somebody say "electrical disconnect?" Hey, leave the punning to me, willya?]

FMI's numbers come closer to Reed's in total ($174.5B foreseen in 2004) -- but different in specifics. FMI has $45B in "utilities" spending for 2004, vs. the $36.9B Reed has for "Power." There are other differences.

While I am unable to pin it down, I don't think anyone can poo-pooh this sector. It provides a lot of employment to electrical contractors of all types, including (and especially) those who do outside work, including long-haul broadband installations; those who build power-generating facilities large and small; and those who do things like roadway lighting and traffic signal work. Much of this work generates sales for distributors of things made by manufacturers!

Overall, nonbuilding construction includes a heavy component of both roadway/highway work and government funding. In fact, the intersection of the two (federal and state government funding of highway work) accounts for a big proportion of this category. In the Reed numbers, "Power" is more than one-fifth of nonbuilding construction.

Looking away from the numbers, here are some generalizations about these categories:

  • Electrical generating facilities are suffering, in many areas, from overcapacity. That does not mean we won't see new construction in California and the Northeast. But the nationwide boom is over; one can anticipate power plant construction remaining flat (or declining) for perhaps the next fours years, at best; maybe through 2010 or later, at worst. Having been substantially deregulated, the power market -- which once was isolated from market swings by rules and the actions of state regulators -- has already gone through one spate of overbuilding. Now, on a national basis at least, is in the quiescent stage (the downside of the roller coaster).

  • Electrical transmission & distribution construction "should" go gangbusters, starting now and ending perhaps in a decade. Such a development is needed, but no one is projecting it. Why not? Electric utilities, having won their independence from state regulators, are now in a bad financial state; and it's not getting better just yet. So the needed T&D construction -- exposed to the view of all on 8/14, in the blackout that put 50 million Americans and Canadians in the dark -- must wait.

  • Public works construction's fate is partially dependent on state finances. State governments were having trouble making ends meet as their fiscal years ended (most states end their years on June 30). An economic recovery would produce more tax revenue, closing the gap between state spending and revenue. In the interim, some states have cut back on public works spending -- even, in Ohio, impacting funding for education construction.

I apologize for being unable to make sense of the numbers here. I have worked at it! All of the sources I've researched say pretty much the same thing: A slight increase in public works or nonbuilding construction in 2004 over 2003. I have tried and failed to find better sources in this area. For the moment, it's a question mark.


Summary - Consensus Outlook

If you've read this epic start-to-finish (including parts one and two) and are now saying "gee, he left a lot out," you're quite right. I've written 2004 construction forecasting articles for both TED magazine and Electrical Contractor. These articles different significantly in emphasis -- both from this one and from each other -- but all three came out in the same place. Hopefully, you are a subscriber of at least one of those; you can get a heck of a lot more information in either one (or both).

Of course, there's more to an electrical distributor's business than contractors and construction. There are end-users who buy direct from distributors -- owners and managers of commercial buildings, for example; and the manufacturing plants that remain in business in the U.S. Unfortunately, the outlooks for each niche and place seem to vary. For example: A recent Merrill Lynch report on Rockwell, parent of Allen-Bradley, found reason to be bullish on the company and its stock in the anticipated 2004 retooling of automotive industry plants (Rockwell gets about one-sixth of its sales from that sector). On the flip side are the textile factories that are closed and closing and are unlikely to reopen; a fair amount of those are in the Southeast.

I can't say that I know enough about deferred maintenance and upgrades on the industrial side vs. manufacturing migration to call it a "wash" -- I have to leave it as an open question. Certainly, if the automakers are planning a big retooling effort, that's good for any number of suppliers to those companies, and suppliers to those suppliers . . . a bunch of happy OEMs?

Add to that the projection of a big gain in Communications construction. The gain is big percentage-wise, of course; this segment has been shrinking, and dramatically so, since the bubble popped in 2000. But more Communications work means more ancillary activity . . . pushing up business from non-Communications customers, and non-contractor customers.

With construction forecasters seemingly all in one place, the consensus outlook -- in electrical industry terms -- can be described as "brightening." Pretty much, total construction stays in the same place in 2004, if the consensus is correct. Pretty much, housing stays on a high level, but drops off just a bit. Some key nonresidential sectors pick up -- but just a bit (and, many of the forecasters say, with strength growing in the year's second half . . . stop me if you've heard THAT one before!).

On the whole, if 2002 and 2003 were good for you, it's unlikely your company will find itself immersed in a sludge pit in the coming year. On the other hand, if the past 24 months have not been among your favorites, 2004 might be a case of "stay alive 'til 2005" -- albeit, with a little bit of an upward bias after the 4th of July.

At least, that's where the consensus comes out. My opinion differs. More about that soon, right here on TEDMAG.

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Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oaken, Va. To e-mail him, click on the link in his name; or call 703-255-1428.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer's obsession with elephants, not his political leanings.


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