Construction Starts See 11 Percent Drop Through 2008

MBA (6/20/2008 ) Palaparty, Vijay
Declines in single-family housing will contribute significantly to an expected 11 percent drop in overall new construction starts for the remainder of 2008, according to a forecast from McGraw-Hill Construction, New York. The Construction Outlook Midyear Update estimates new construction starts at $558.5 billion.
Single-family housing continues to weaken in 2008 with declines of 28 percent in dollar volume and 31 percent in dwelling units, steeper than what occurred in 2007, said Robert Murray , vice president of economic affairs at McGraw-Hill Construction. “The single-family market is being adversely affected by falling home prices, mounting inventories and tight lending conditions," he said.

Overall new constructions starts fell 9 percent to $628.3 billion last year—the first decline for total construction since 1991. The report said the rate of descent for single-family housing on a quarter-by-quarter basis will not be as severe as last year; it predicted the bottom will be reached sometime during the latter half of this year.

Multifamily housing—expected to decline another 22 percent by the end of the year—did not weaken as much as single-family housing. “However, multifamily construction is likely to see further downward pressure from the added supply,” Murray said. “In addition, proposed multifamily projects are now receiving greater scrutiny from lenders, as the result of more stringent lending standards.”

Commercial building continued expansion into the first quarter of this year. But the report said the slower economy and tighter lending conditions are causing projects to be deferred.

“The loss of momentum will take firmer hold as the year proceeds,” Murray said. “For 2008, commercial building will retreat 8 percent in dollar volume and 16 percent in square feet. Stores and warehouses are the most vulnerable to decline in the near term, while lesser reductions are anticipated for hotels and office buildings.”

The slowdown in the commercial building driven by a lack in store construction has been due to lagging retail sales, the report said. The report forecasts store construction to decline 19 percent this year.

“With retail owners feeling the pressure of a weak economy, major retail chains have announced slower capital spending and fewer store openings,” Murray said. "One pressing concern relates to how much store construction will respond to the housing decline that’s been underway for two years now. The current disconnect won’t continue much longer and the weaker economic picture of 2008 adds to the downside risk."

The report predicts institutional building will continue to see strength with the amount of educational structures being built, helped in particular by expanding colleges and universities. The 2008 forecast for institutional building calls for a 2 percent gain in dollar volume, although square footage will decline 3 percent.

Manufacturing buildings, though expected to experience some dampening because of the slower U.S. economy, will benefit because oft he weak U.S. dollar and domestically produced goods, giving the latter more competitive advantage in overseas markets, the report said. The dollar volume for manufacturing building will rise 7 percent to $18 billion while square footage terms will slide 6 percent to 78 million square feet .

The report said public works construction in 2008 will also rise 2 percent in dollars. The push will come from greater federal funding for transportation projects combined with more focus on infrastructure repair and maintenance.

"Tighter fiscal conditions at both the federal and state levels of government are an emerging concern for the public works sector, but any restraint on construction is more likely to be experienced next year," Murray said. "Last October's outloook focused on the slowing economy and tight credit conditions. That environment has proven to be even more difficult than expected."