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New Construction Starts Slip in 2011

New construction starts for all of 2011 slipped 2 percent to $421.4 billion, following the slight 1 percent gain reported for 2010, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies. After the steep declines reported during the 2007-2009 period, when activity dropped a combined 38 percent, the overall volume of new construction starts has essentially stabilized at a low level during the past two years. For all of 2011, the Dodge Index averaged 89.

“The pace of new construction starts continues to fluctuate within a set range, showing stability in a broad sense but not yet making the transition to renewed expansion,” said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “Gains for a few project types are being offset by continued weakness for other project types, with the result that total construction is experiencing an extended bottom. During 2011, stronger activity was reported for multifamily housing, manufacturing plants, electric utilities, and even some commercial property types (hotels and warehouses). These gains were countered by further declines for the publicly financed parts of the construction industry, institutional building and public works, as well as by more weakness for single-family housing. For 2012, it’s expected that there will also be a mixed pattern by project type. The pluses may be able to outweigh the minuses, should the recent pickup in employment growth be accompanied by greater real estate lending by the banking industry, but this year will also see the constraint of diminished federal and state funding support for construction programs.”

The 2 percent decline for total construction starts at the national level during 2011 was the result of mixed behavior at the five-region level. Decreased activity for total construction was shown by three regions – the South Central, down 4 percent; the Midwest, down 9 percent; and the Northeast, down 12 percent. Increased activity for total construction was reported for two regions – the South Atlantic and the West, each up 6 percent, with substantial gains for new electric utility starts helping the total construction amount for each region.

Nonbuilding construction for the full year 2011 decreased 3 percent to $143.2 billion. The public works sector overall was down 15 percent, with declines across most categories. Highway and bridge construction dropped 6 percent, reflecting waning support from the federal stimulus act. The previous two years had seen expansion for highway and bridge construction, with 2009 up 8 percent and 2010 up 3 percent, as the result of the lift coming from the stimulus funds. Sewer construction in 2011 retreated 3 percent, while water supply projects fell a more substantial 17 percent, due to diminished federal and state financing. The miscellaneous public works category in 2011 plummeted 44 percent, as the result of a sharply reduced amount of new pipeline starts. At the same time, river/harbor development projects in 2011 were able to hold steady with the previous year.

Running counter to the mostly weaker activity for public works in 2011 was a 46 percent surge for electric utility construction, which achieved a new annual high in current dollar terms. In particular, sharp expansion was reported for solar and wind-power facilities, boosted by federal tax incentives that expired at the end of 2011.

Nonresidential building in 2011 as a whole dropped 4 percent to $154.8 billion, the same as the 4 percent retreat for 2010 but less severe than the 30 percent plunge back in 2009. Most of the downward pull in 2011 came from the institutional sector, which fell 14 percent. The two largest institutional categories, educational buildings and healthcare facilities, registered moderate declines of 12 percent and 9 percent, respectively. More substantial declines were posted by the smaller institutional categories – public buildings, down 14 percent; churches, down 15 percent; recreation-related projects, down 18 percent; and transportation terminals, down 29 percent.

The commercial sector in 2011 registered a 6 percent gain in dollar terms, a noteworthy change following the declines of 12 percent in 2010 and 42 percent in 2009. The upward push for the commercial sector in 2011 came from hotels, up 51 percent; and warehouses, up 18 percent; with both showing improvement from extremely depressed activity in 2010. While stores and offices continued to lose momentum in 2011, with respective shortfalls of 1 percent and 6 percent, the declines were considerably more gradual than what occurred during the previous three years. Manufacturing plant construction in 2011 surged 61 percent, reflecting both a broad-based upturn for this category as well as the boost coming from several massive projects, which included a $3.0 billion coal-to-gasoline plant and two large semiconductor plants.

Residential building in 2011 came in at $123.4 billion, up 2 percent from the previous year, and barely maintaining the upward momentum that began in 2010 with an 8 percent increase. Single family housing in 2011 retreated 2 percent in dollar terms, following the 6 percent gain during 2010 that reflected the lift to housing demand coming from the homebuyer tax credits that year.

The regional pattern for single-family housing in 2011 showed declines in four of the five major regions – the Northeast, down 15 percent; the Midwest, down 5 percent; the West, down 2 percent; and the South Central, down 1 percent. The South Atlantic was the one region able to post a 2011 increase for single family housing, rising 2 percent in dollar terms.

Multifamily housing in 2011 jumped 22 percent, continuing the upward trend that began in 2010 with an 18 percent increase. The regional pattern for multifamily housing in 2011 showed growth for all five major regions – the Midwest, up 5 percent; the South Central, up 14 percent; the Northeast, up 20 percent; the West, up 35 percent; and the South Atlantic, up 36 percent.

Murray noted, “The emerging if hesitant upturn for residential building is being led by multifamily housing this time, in contrast to previous cyclical upturns when single family housing led the way. The momentum shown by multifamily housing in 2011 should continue during 2012, due to its favored status by the real estate finance community. Given the slight improvement over the course of 2011, single family housing might also be able to see growth during 2012, although the level of activity will still remain quite weak compared to what was being reported for much of the previous decade.”