Construction activity slips during first half of 1999

Real Estate Weekly,  July 21, 1999  

• E-mail
• Print
• Link

New construction contracts in May were reported at a seasonally adjusted annual rate of $379.6 billion, down 2 percent from the previous month, according to the F.W. Dodge Division of The McGraw-Hill Companies.

Housing continued to settle back from its superlative performance of several months ago, while non-residential building was essentially flat. Offsetting much of the loss of momentum for housing was a heightened amount of non-building construction (public works and utilities).

May's data produced a 151 reading for the Dodge Index (1992 = 100), down from the upwardly revised figure of 153 for April. The Dodge Index registered especially strong readings at the end of 1998 and into early 1999, achieving a record high of 65 in January, before retreating in subsequent months.

"Single family housing is now easing back to a more sustainable pace, and the public works sector has been able to pick up some of the slack during the early months of 1999," said Robert A. Murray, vice president of economic affairs for F.W. Dodge. "At the same time, non-residential building has been a bit more subdued than expected, and more support from this sector would help ensure that 1999 comes through as yet another year of growth in this decade's lengthy expansion. While it's true that the rate of increase for total construction appears to be decelerating, it should also be emphasized that the level of activity continues to be very healthy."

Residential building in May fell 8 percent to $170.8 billion. This was due to a 5 percent drop in the value of single-family starts, combined with 25 percent retrenchment by the multi-family side of the market after an especially strong April. Since reaching its most recent peak in January, single-family housing has fallen 12 percent, although May still came in 2 percent above the same month a year ago. Constraints on the supply side, namely shortages labor and materials, are limiting the pace for single-family construction. Mortgage rates are also rising, reaching 7.6 percent in mid-June, although the dampening effect of higher rates will likely be felt more fully during the latter half of 1999.

By region, residential building in May revealed this pattern - the Northeast. down 22 percent; the South Atlantic, down 14 percent; the Midwest, down 8 percent; the South Central, down one percent; and the West, up one percent.

Non-residential building, at $129.3 billion, was down one percent in May, reflecting a mix of pluses and minuses by project type. On the plus side, office construction jumped 29 percent, regaining the heightened levels witnessed earlier in the year. Several large projects in May helped to push the office total upward, including a $187 million project in Chicago, a $161 million project in Omaha, Nebraska, and a $108 million project in New York City.

"Office construction still carries upside potential," Murray said. "Fears of a credit crunch have subsided, and although real estate investment trust aren't providing the same spur to new construction as in the past, more traditional sources of real estate finance such as pension funds have been picking up the slack."

Moderate growth was registered by schools, up 6 percent; manufacturing buildings, also up 6 percent; hotels, up 5 percent; and stores, up 2 percent. The downward pull came from several institutional categories, including public buildings, down 25 percent; amusement-related projects (theaters, convention centers and sports arenas), down 39 percent; and transportation terminals, down 49 percent after a strong April which featured the start of a major airport terminal project in Detroit.

Non-building construction advanced 13 percent in May to $79.5 billion. The major push came from several large projects, most notably the $1.4 billion Alliance natural gas pipeline in the Midwest, which runs through the states of Illinois, Iowa, Minnesota and North Dakota. Construction of electric power plants also had a strong May, posting a fivefold increase from a subdued April with the support of a $225 million power plant project in Connecticut.

"After five straight years of decline, electric power plant construction showed a modest increase in 1998, and the early results for 1999 indicate that double-digit growth will occur this year," Murray said. "A number of states have now passed deregulation plans, and as a result, there is a push for more modern, cost-effective generating capacity."

Other public works categories had a weak May, as highway and bridge construction retreated 22 percent from an elevated April, and sewer and water development work fell 30 percent. The weakness for highways and bridges will likely be short-lived, given the increased funding for transportation public works now coming from the new federal highway bill.

During the first five months of 1999, total construction activity on an unadjusted basis was 3 percent above the same period a year ago. Non-residential building was 6 percent below its year ago pace, while the residential and non-building sectors showed respective gains of 9 percent and 5 percent.