Article reprinted from Western Roofing magazine July/August 2007.

Construction Up

May Construction Jumps 8%

by F.W. Dodge

(Editor’s Note: F.W. Dodge, a business unit of the McGraw-Hill Construction Information Group, has been a leading source of construction information since 1891.)

At a seasonally adjusted annual rate of $612.1 billion, new construction starts in May climbed 8% from the previous month, it was reported by McGraw-Hill Construction, a division of The McGraw-Hill Companies. A surge of activity by the non-building construction sector, both its public works and electric utility segments, boosted the dollar amount of total construction starts. Non-residential building in May showed moderate strengthening, but residential building continued to weaken, heading downward for the fourth time out of the first five months of 2007. On a year-to-date basis, total construction came in at $245.4 billion, down 15% from the January-May period a year ago. If residential building is excluded from the year-to-date statistics, new construction starts in the first five months of 2007 were essentially steady with last year.

May’s data lifted the Dodge Index to 129 (2000=100), up from 120 in April. “Homebuilding continues to languish, exerting a downward pull on overall construction activity during the first half of 2007,” stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “With inventories of unsold homes at high levels, and with mortgage rates now heading upward, it’s not expected that homebuilding will rebound any time soon. At the same time, there are segments showing a greater amount of construction starts in 2007. Highway and bridge construction is proceeding at a brisk pace, and public works in general is registering heightened activity. Non-residential building is seeing renewed growth for office construction, retail projects are maintaining a healthy volume, and school construction continues to see a broad strengthening trend.”

Non-building construction in May soared 43% to $142.3 billion (annual rate). Highway and bridge construction jumped 44%, with a huge push coming from the $1.4 billion start of the suspension span of the San Francisco-Oakland Bay Bridge. Aside from this massive project, highway construction continued to be very strong in May, with the largest contracting volume being reported in California, New York, and Texas. The “miscellaneous” public works category, which includes site work and pipeline projects, increased 71%, reflecting the start of the $1.9 billion Rockies Express natural gas pipeline (“West” portion), covering the states of Wyoming, Colorado, Nebraska, Kansas, and Missouri. The environmental public works categories in May were mixed, as sewers climbed 45% with the help of a $142 million sewage treatment plant expansion in Virginia, while declines were reported for water supply systems (down 9%) and river/harbor development (down 21%). The non-building total in May was also boosted by a 139% increase for electric utility work, reflecting the start of large power plant projects in West Virginia ($250 million), Washington state ($150 million), and Illinois ($123 million). Murray indicated, “Public works and electric utility construction are reflecting what is still a very supportive financial environment in 2007, more funding is coming from the federal and state governments, plus there’s more private spending for energy-related work.”

Non-residential building, at $198.0 billion (annual rate), grew 4% in May. On the plus side, office construction advanced 35%, regaining an upward trend after a sluggish performance in March and April. In May, large office projects were started in Charlotte, North Carolina ($420 million), Nashville, Tenn. ($126 million), Miami, Florida ($118 million), and Atlanta, Georgia ($114 million). Through the first five months of 2007, the top five metropolitan markets in terms of dollar volume of new office starts were: New York, New York, Washington, D.C., Charlotte, North Carolina, Miami, Florida, and Dallas-Ft. Worth, Texas. Murray noted, “While still well below the levels that were reported in the late 1990s, office construction over the past year has shown healthy growth, and 2007 is seeing continued expansion.” Healthcare facilities also had a large gain in May, bouncing back 37% from a weak April, with very large hospital projects started in Ann Arbor, Mich. ($523 million) and Grand Junction, Colo. ($200 million). Manufacturing plant construction in May registered a 34% increase, led by the start of three large ethanol plants located in Indiana ($156 million), Ohio ($130 million), and Wisconsin ($75 million). May increases were also reported for two of the smaller institutional structure types, transportation terminals, up 40%; and public buildings (detention facilities and courthouses), up 8%.

On the negative side, several commercial categories showed a moderate loss of momentum in May. Store construction settled back 7%, although May did include the start of a $200 million shopping mall in Deer Park, New York. Murray indicated, “While retreating in May, the strength for store construction so far in 2007 is noteworthy, with the first five months up 10% in dollar volume compared to last year. The competitive retail landscape continues to support more store construction, even with the sharp decline in residential development that has taken place over the past year.” Other commercial structure types with moderate May declines were hotels, down 10%; and warehouses, down 15%. With regard to the institutional categories, school construction slipped 7% in May, taking a brief pause after the strength shown earlier in the year. Church construction in May was also down 7%, and amusement-related projects dropped 25% from elevated contracting in April.

Residential building in May decreased 2% to $271.8 billion (annual rate). Single-family housing continued to weaken, sliding an additional 2%, as this market has yet to provide firm evidence that it’s bottoming out. By region, single-family housing in May showed this pattern, 4% declines in the South Atlantic, the South Central, and the West, while the Midwest edged up 1% and the Northeast advanced 8%. The May pace for single-family housing at the U.S. level was 20% below the average for full year 2006. Murray stated, “The rate of decline for single-family housing is not as steep as last year, but there are a number of reasons why the decline is still in progress. Inventories of unsold homes are substantial, and lending standards have tightened considerably for non-traditional mortgages. In addition, the cost of financing is now rising, the 30-year fixed mortgage rate averaged 6.2% during the first five months of 2007, but by mid-June it had moved up to 6.7%.” Multi-family housing so far in 2007 has generally weakened, yet this structure type was able to register a 2% gain in May. Large multi-family projects that reached groundbreaking in May were located in Honolulu, Hawaii ($129 million), St. Louis, Missouri ($123 million), Atlanta, Georgia ($116 million), and Denver, Colo. ($93 million). “Although the condo boom is definitely winding down, the current year is still seeing a number of major condominium projects get underway,” said Murray.

The lower amount for total construction during the first five months of 2007 was due to this pattern by major sector, residential building, down 28%; non-residential building, down 4%; and non-building construction, up 6%. As 2007 proceeds, it’s anticipated that the decline for residential building will become less severe, as the comparison begins to include the weak residential activity in the second half of 2006. By geography, the first five months of 2007 showed total construction with the following performance relative to a year ago, the Midwest, down 9%; the South Central and the Northeast, each down 11%; the South Atlantic, down 17%; and the West, down 23%. •••