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AEC Recovering Slowly

I-495 Capital Beltway in northern Virginia construction project
Spending on highway construction projects—such as this overpass above the I-495 Capital Beltway in northern Virginia—is expected to increase slightly this year. Courtesy of Transurban-Fluor 

A new report forecasts the 2012 architecture, engineering, and construction fields by market sector and finds that little improvement can be expected over last year. While some trends are positive, a slow recovery is likely. 

January 24, 2012—The 2012 U.S. Markets Construction Overview recently released by the FMI Corporation, a Raleigh, N.C.-based architecture, engineering, and construction (AEC) consulting firm reveals little cause for celebration. But the annual AEC report, which forecasts major construction markets through 2015, reveals that certain drivers and trends are worth watching.

The FMI forecast of the 2012 construction markets has not changed significantly since last year and continues to indicate a slow recovery, as housing starts remain down to .03 percent of gross domestic product and state and local construction spending declined by $25 billion in 2011. In addition, the report finds that spending for government-funded construction, especially infrastructure, is expected to decline this year, even with the reauthorization of transportation funding through March. The private equity industry will remain in a wait-and-see mode, the report states.

The report forecasts 6 percent growth in put-in-place construction (CPIP) for 2012. When adjusted for inflation to 2006 dollars, however, the forecasted increase is just 3 percent. GDP growth continues to inch upward, albeit sluggishly—growth in the second quarter of 2011, the most recent quarter for which data was available, was just 1.3 percent, according to FMI. The construction industry unemployment rate jumped to 16 percent last month, according to the Associated Builders and Contractors’ recent unemployment numbers. (Click here to read Civil Engineering magazine online's article on job gains in December.)

“The overall theme is things are improving and will continue to slowly improve,” says Phil Warner, a research consultant for the FMI Construction Overview report. 

Construction as a Percentage of GDP graph 

Overall construction as a percentage of gross domestic product
will increase only slightly this year, but improvements are
expected over the next five years. Courtesy of FMI Corporation

A significant finding in the report is the improving health of engineering and construction (E&C) firms, the report states. As a whole, E&C firms’ median year-over-year revenue growth measured 4.5 percent at the end of July 2011. “More contractors are also engineers, and more engineers are acquiring contracting firms,” says Warner. “They are becoming full providers. That trend in E and C companies will continue. We see the potential for more mergers.” (Click here to see the Civil Engineering magazine feature “Rise of the Superfirm.”)

Growth in nonresidential construction is expected to remain slow in 2012, according to the report. “The one major question mark holding nonresidential back is government spending for power, utility, bridges, and roads,” Warner says. “The transportation sector has been strong the last few years during the recession, and largely boosted by stimulus. Nobody expects another stimulus in the foreseeable future. Stimulus money is on hold or being renewed temporarily. The transportation bill is a good example.”

The transportation construction sector was expected to have declined 3 percent in 2011 to $37.2 billion, according to the report. Air travel, intermodal transportation, and container ports are expected to grow and to help drive the transportation sector in 2012, the FMI report projects. Warner projects the move to public-private partnerships (P3) to gain traction as well. “P3 is the interesting thing when it comes to complicated road and bridge projects,” he says. “There are roadblocks but it will be a helpful boost.” Highway and street construction is expected to make up 2 percent of its 2011 losses; the recent transportation funding reauthorization will help it keep from declining further in 2012. 

Transportation Construction Put in Place graph 

Spending on transportation projects, including ports and
intermodal centers, declined in 2011 but should begin to pick
up this year. Courtesy of FMI Corporation

The FMI report cites an August 2011 analysis by Deltek, Inc.—a Herndon, Virginia-based supplier of enterprise software to federal contractors—that projects that the federal budget for architecture and engineering services will grow slowly between now and 2016; the current budget of $8.1 billion is expected to rise slightly to $9.5 billion over the next five years. And much of that growth will come in the later portion of that timeframe; FMI finds that overall federal construction budgets will be cut by $2 billion in 2012. Warner says that funding for many construction projects will ultimately be determined by forces unrelated to need. “It is in the political sphere, not the practical sphere,” he notes.

Commercial construction spending is forecast to reach $45 billion in 2012, slightly ahead of 2011. Although U.S. retail sales rose 0.5 percent in August, many shopping malls are going bankrupt and closing, the report finds. Instead of competing with big-box chain stores, more urban malls are including the big-box stores. Such big-box stores as WalMart Express, WalMart Market, and CityTarget are reducing their footprints and moving to the cities, according to the report. FMI finds that commercial construction lags residential by 12 to 18 months. Trends in this sector include open-air centers replacing traditional, enclosed malls; vacant big-box stores undergoing renovations that reposition them for uses as healthcare and educational centers; and ever greater increases in online sales. Lower fuel prices that may help increase consumer spending in 2012 could be a factor in an increase in commercial construction, the report notes.

In the nonbuilding structure sector, power construction is expected to increase 5 percent in 2012, due to the growth of sustainable energy projects. Sewage and waste disposal construction is expected to grow, as upgrades in some areas will be mandated by law. Water supply construction is expected to grow 4 percent to $15.6 billion in 2012, as measures will be taken to repair leaky pipes and substandard water facilities. “The potential work there is huge, but you won’t see it go that big,” says Warner. “But I think more people are getting the message.” He says ASCE’s report cards on America’s infrastructure “show the potential we need to get done but it is not making enough impact yet.” (Click here for additional information on ASCE’s report cards.)

Conservation and development construction is expected to grow 5 percent in 2012, in part because President Obama’s fiscal year budget includes $1.48 billion for construction in the civil works program of the U.S. Army Corps of Engineers. Additionally, the Environmental Protection Agency has a $100-million brownfields program and a $600-million Superfund hazardous waste cleanup program, the report notes.

In other areas of nonresidential construction, lodging will show some signs of growth at 4 percent in 2012—at slightly above $10 billion. Occupancy rates have increased slightly to 62 percent but still not enough to justify much in the way of new building plans; the focus will be on getting finances in order and rejuvenating older properties, the report says. Office construction is highly dependent on employment, the report finds, and it will take several years until there is enough employment growth to spur new construction (unemployment is expected to remain around 9 percent in 2012, FMI says). Office construction did drop another 5 percent in 2011, compared with a 32 percent drop in 2010; in 2012 that market will grow slightly to $45.5 billion.

Health care construction is forecast to grow 3 percent in 2012. Growth in this sector will be driven by construction of special-care facilities, integrated clinical facilities, new building technologies, and renovation and modernization that will make such facilities greener and more patient friendly. Education construction is forecast to grow by 4 percent for 2012. School construction should hit $91.1 billion. Although school construction has been faring well, current cuts in state and federal budgets threaten another downturn, the report finds, though a rise in the use of prefabricated/modular school construction should help. Religious construction lost another 4 percent in 2011 and will continue to be weak in 2012 with $4.25 billion expected.

Public safety construction will drop 3 percent again in 2012 to around $12 billion but is expected to remain active as overcrowding in jails and prisons leads to new and renovated facilities. Amusement and recreation construction is expected to grow 4 percent in 2012 to reach $17.4 billion. Stadium construction has been strong with a number of new stadiums and ballparks opening, and several large projects are currently in the funding and planning stages, FMI reports. Most construction in this sector calls for multiuse projects or combinations of retail, hotel, and housing.

The manufacturing sector has been one of the hardest hit in the recession with a 33 percent construction drop in 2010 and another 6 percent decrease in 2011. FMI predicts a further 2 percent loss in 2012 to $35.8 billion. Growth is not expected to return until 2013. Several multibillion-dollar projects, however, are under construction.

In residential construction, the forecast calls for a 12 percent increase—9 percent when adjusted for inflation. While that appears to be a strong recovery, housing is just starting to move up from the bottom, the report states. The total represents stronger multifamily construction and home improvements as well as single-family housing starts; however, the total of $303 billion is equivalent to the total CPIP in 1997. In 2006 dollars, the gain is closer to 9 percent for 2012. The report states that the economy can recover without a housing market recovery, but it will do so slowly.

The New England regional construction market is expected to have the lowest CPIP for 2012; the largest increase will be in the Mountain region, with an anticipated 17 percent growth, largely attributable to construction for mining and natural resources operations.

Other notable findings in the report include the notion that green construction will drive demand for LEED-certified buildings; changing technology could impact how many workers firms need; and many firms will face succession and transition challenges as baby boomers age out of the workforce.



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