2011 Construction Outlook

The extended decline in U.S. real estate construction markets is finally hitting bottom, and three prominent industry economists predict a stronger 2011 before several markets—from housing to hotels—ramp up to double-digit percentage growth in 2012.

“We’re on the cusp of a turnaround in construction,” said Kermit Baker, chief economist for the American Institute of Architects (AIA).

Ken Simonson, chief economist with Associated General Contractors of America (AGC), added: “Total construction spending will be up for the first time in five years.”

Baker, Simonson, and their fellow chief economist from Reed Construction Data (Reed), Jim Haughey, presented their 2011 construction outlooks during a national webcast sponsored by Sage Construction and Real Estate. While their forecasts didn’t always agree, their messages were generally the same: 2011 will be a growth year in single-family and multifamily housing, plus retail and hospital/laboratory commercial buildings, before construction spending takes off virtually across the board in 2012.

The residential market was the one about which the three industry economists were most in agreement.

AGC’s Ken Simonson predicted that single-family housing permits would rise gradually this year, and the current multifamily construction upturn would accelerate as the demand for rental units continues to rise. Overall, Simonson predicted that total residential construction would grow 5 to 10 percent. Likewise, Reed’s Haughey forecasted 6 percent growth for residential this year.

The AIA’s Baker reviewed a couple of positive trends in the residential market. First, the Architectural Billings Index, a leading indicator of future construction activity, reached or exceeded 50 in the latest three months, signifying an overall increase in billings. In addition, in a December AIA survey of architecture companies, residential designers expected an average of 2.4 percent growth in revenues in 2011.

“We’re in the midst of a design recovery now,” Baker said.

Meanwhile, 2011 forecasts for the nonresidential markets were more of a mixed bag. The most bullish was AGC’s Simonson, who predicted a rise of 0 percent to 5 percent, with increases in the warehouse, hotel, hospital, and higher education sectors. The other two economists, though, anticipated a continued decline in total nonresidential construction. Reed’s Haughey envisioned a 3.7 percent drop, with only retail and health care returning to positive growth. AIA survey respondents expected a 2 percent overall decline after adjusting for inflation.

But the nonresidential environment changes entirely in 2012. Reed’s Haughey forecasted a 24 percent jump in residential construction and a 14 percent rise in nonresidential construction. In specific sectors, he predicted hotel construction climbing 22 percent, offices up 16 percent, and retail expanding 12 percent. Baker’s AIA survey mirrored that optimism, with commercial construction expected to increase 11 percent in 2012, and overall nonresidential construction rising 5 percent.

“The [economic] conditions are good, but we have yet to realize them,” Haughey said.

Of course, the economists cautioned that conditions could change. In fact, Haughey characterized Middle East revolutions and steep government spending cuts as “two dark clouds” hanging over his forecasts, because higher gas prices and lower public sector spending could dampen the overall economic recovery.