McGraw-Hill Construction Outlook: Construction Industry to Experience One Percent Decrease in Growth in 2003

Business Wire, Oct 23, 2002

Business Editors

WASHINGTON--(BUSINESS WIRE)--Oct. 23, 2002

Several constraints on the construction industry, specifically low demand for commercial space, potential rising interest rates and reduced tax revenues eventually impacting public works and institutional buildings, will contribute to a 1 percent decrease in overall construction growth in 2003. That is according to Robert Murray, chief economist of McGraw-Hill Construction, part of the McGraw-Hill Companies (NYSE: MHP). Mr. Murray will deliver his annual forecast to industry leaders today at the Outlook 2003 Executive Conference in Washington, D.C.

"Over the past two years, the construction industry has exhibited a split personality. On the plus side, single family housing has been robust, advancing to the point that 2002 will see the highest level of new starts in over two decades. Public works, supported by elevated contracting for highways and bridges, has maintained the steady growth present at the end of the 1990s. Institutional building, led by the school construction boom, achieved a record high in 2001 and should come close to matching that amount in 2002," said Murray.

The construction industry would derive some benefit from an improving economy in 2003, but it will also have to deal with several constraints. The states and the federal government are now under considerable fiscal stress, due to diminished tax revenues arising from the 2001 recession. Public works and institutional building have yet to see a negative impact, but some dampening will become discernible in 2003.

"Interest rates are currently very low, yet some upward movement may take place in 2003 as a result of strengthening business conditions, or possibly a spike in oil prices related to events in Iraq. And, the current economy is beginning to look similar to the jobless recovery of the early 1990s, with firms continuing to cut costs and postpone additions to staff. Assuming employment growth remains tepid through 2003, there will be little growth in the demand for commercial space, and little incentive to pick up the pace for commercial construction," said Murray.

In a broad sense, total construction has stabilized at the current dollar amount achieved in 2001, although next year's drop may be greater should the economy falter.

On the negative side, the downturn for commercial building has turned out to be more severe than first expected. It was generally believed that lenders and developers had been careful to avoid the excesses of the 1980s, but the surging high-tech sector in the late 1990s lifted demand for office and warehouse space in a number of major markets. With the bursting of the tech bubble, that demand has dried up, and a substantial amount of sublease space has been put back on the market. In addition, commercial building has been hampered by tighter bank lending standards, rising insurance costs, and a "wait-and-see" approach towards investment decisions by the real estate community.

As a result of this varied behavior by structure type, the value of new construction starts for 2002 is projected to be steady, holding in the range of $495 billion to $500 billion. This follows total construction gains of 5 percent in 2001 and 6 percent in 2000, as well as 10 percent average annual growth during the 1996-99 period.

"Clearly, a process of deceleration is underway, but the loss of momentum has been more gradual than in previous construction cycles," said Murray. The following are the main points for the 2003 construction market:

    --  Single-family housing will ease back from this year's
        exceptionally strong level. The number of starts will be down
        3 percent to 1.215 million units (Dodge basis), which
        translates into no change in dollar terms. Housing starts in
        2003 will still be high by recent standards, 6 percent above
        the average reported for the second half of the 1990s.

    --  Public works construction will drop 3 percent, after rising 5
        percent in 2002. Fiscal 2003 federal spending for highways is
        likely to be lower than the previous year, leading to a 4
        percent decline for highway and bridge construction.

    --  Electric utilities will continue to retreat from the record
        high reported two years ago, with the value of construction
        starts down 24 percent in 2003.

    --  Income properties will post a slight 2 percent gain in dollar
        volume, due to an expected increase for multifamily housing.
        Excluding multifamily housing, the commercial categories in
        2003 will drop an additional 1 percent, following the 16
        percent plunge reported in 2002. On a positive note, the rate
        of decline for commercial building will be much less severe in
        2003, setting the stage for renewed growth in 2004.

    --  Institutional building will edge up 1 percent in dollar
        volume, although square footage will be down 2 percent. School
        construction will continue to settle back from its record high
        reached in 2001,while healthcare facilities should at least
        equal this year's heightened contracting.

    --  Manufacturing building is expected to rise 6 percent from its
        dismal 2002 level, helped by modest improvement in capacity
        utilization. Next year's dollar amount will still be 22
        percent below 2001, and more than 50 percent below the most
        recent peak in 1997.


The Sequence of Expansion
   Billions of Dollars


                          1997  1998  1999  2000  2001  2002  2003
                          ----  ----  ----  ----  ----  ----  ----
Total Construction       362.3 405.6 448.3 474.3 496.2 498.9 495.1
                            9%   12%   11%    6%    5%    1%   -1%

Single Family Housing    130.0 152.3 164.3 176.9 186.8 204.0 203.3
                            1%   17%    8%    8%    6%    9%   -0-

Public Works              67.4  67.9  74.2  78.0  83.9  88.2  85.5
                            8%    1%    9%    5%    7%    5%   -3%

Electric Utilities         2.4   3.4   9.4  13.5  23.7  14.5  11.0
                           -3%   43%  180%   43%   75%  -39%  -24%

Income Properties         83.5 101.6 108.4 113.0 103.0  92.5  94.2
                           20%   22%    7%    4%   -9%  -10%    2%

Institutional Buildings   65.1  68.3  80.6  84.0  90.7  93.8  94.7
                           17%    5%   18%    4%    8%    3%    1%

Manufacturing Buildings   14.0  12.1  11.4   8.9   8.2   6.0   6.4
                            7%  -14%   -6%  -22%   -8%  -26%    6%