Gains Seen For Construction In New England

By Paul Fournier | September 28, 2010

Although residential construction startups will continue to slide in New England for the next six months, caused mainly by adjustable-rate mortgage defaults and the resulting credit problems, startups for nonresidential building will more than offset the housing decline in 2008.

According to Jim Haughey, chief economist for Reed Construction Data (RCD), housing permits have dropped in every New England state over the past 12 months, from a decrease of 8.1 percent in Maine to a marked decline of 31.1 percent in Vermont. But the economist also notes that startups for nonresidential buildings in New England in the coming year will approach $12.9 billion. This is an increase of $620 million, or 5 percent, over last year's pace.

Also advancing in 2008 will be the value of transportation construction, including highways, bridges and transit construction, which Haughey sees exceeding $1.9 billion — a gain of roughly $215 million, or 12 percent, over the previous year.

Not so sanguine is the forecast for sewer and water construction, with an estimated $660 million in contract awards for 2008, a precipitous drop of 32 percent from last year's $975 million.

While total nonresidential contracts in New England are expected to decline about $490 million, or 3.2 percent, to $15.88 billion, there will still be plenty of construction work for contractors this year, according to FMI Corporation, the Raleigh, N.C., construction management consulting firm.

Nonresidential Rising

The Raleigh firm, which tracks public and private construction through collection and analyses of building permits and other sources, indicates there will be a substantial increase in the value of nonresidential building construction put in place in New England in 2008.

FMI's latest forecast shows New England will see $40.3 billion worth of construction put in place in 2008, excluding residential. That's a 5.9-percent increase. Even when discounting for a big bite of inflation — maybe half — it's still an increase.

Of the projected $40.3 billion in work, about $31.5 billion will take place in the construction of nonresidential buildings. This is 6-percent more than 2007's performance. Educational building continues to be the largest component of this group, with a whopping $12.9 billion in construction expected to be put in place in 2008 — a 6-percent gain. Office construction, ranking second, is likely to increase 7 percent to $3.7 billion, while commercial building will climb 4 percent to $2.9 billion.

Non-Building Advances

Other good news: Non-building construction to be put in place is also expected to exceed last year's showing according to the consultants, who predict a total of $11.2 billion for this category, an advance of 5 percent. In this category, the value of power facilities construction is anticipated to be $4.2 billion, while highway and street construction put in place should increase about 4 percent to $4 billion. All other major components of non-building construction are likewise predicted to improve in 2008: sewage and waste disposal ($1.5 billion, 4 percent); water supply ($1 billion, 4 percent); and conservation and development ($0.5 billion, 5 percent).

The attitudes of New England contractors appear to corroborate the predictions, based on results of a recent survey.

New England Contractors More Optimistic

Based on the just-released 2008 Wells Fargo Construction Industry Forecast, published by Wells Fargo Construction, a division of Wells Fargo Equipment Finance, Inc., New England contractors are more optimistic about business prospects for 2008.

The company builds its forecast on interviews with executives of construction contractors and equipment distribution companies whose primary businesses cover the entire spectrum of construction. These include construction of commercial and industrial buildings and warehouses; excavation or clearing; government projects such as roads, highways and bridges; earthmoving or reclamation; residential or apartment buildings; stone, sand and gravel production; water andsewer; and concrete or asphalt paving.

Interviews are conducted with over 900 U.S. construction industry executives across nine U.S. regions, including New England.

Most construction contractors expect at least as many chances to bid on projects in 2008, and equipment distributors expect improvement in the commercial and industrial sectors. Overall, the industry anticipates opportunities to become less reliant on the highly cyclical residential construction segment.

The Optimism Quotient

The Construction Industry Forecast employs a bellwether Optimism Quotient (OQ) — a measurement of executives' perceptions of local construction activity for the coming year versus the current year — in its analyses of interviews. An OQ score above 100 signals high optimism, above 75 indicates cautious optimism, and below 75 points to a more pessimistic point of view.

After three consecutive years of decline, the Optimism Quotient for the New England region improved by 11 points, which means that more executives in New England are looking for a better year ahead. However, New England is again the least optimistic region in this year's survey. The five-year average is 70.

Significantly, New England contractors are much more positive than distributors this year. Two-thirds of contractors expect construction activity to increase or stay the same in 2008, a huge improvement compared with the 2007, when half projected a downturn. Most New England contractors expect to have at least as many bidding opportunities in 2008 and 84 percent, up from 70 percent in the last forecast, think 2008 will be as good as or better than 2007 overall.

More than 60 percent of distributors expect nonresidential construction activity to stay the same or increase in 2008, but more than half (52 percent) project a decline in residential activity. Nineteen percent of distributors see a better year ahead overall and 48 percent think it will be about the same as 2007.

Buying More Equipment

New England contractors continue to invest in their companies by purchasing new and used construction equipment. About one-fourth plan to buy new equipment in 2008, spending about 45-percent more than the national average on their acquisitions. Thirteen percent plan to buy pre-owned equipment.

Almost three-fourths of New England distributors and 88 percent of contractors said their net income will increase or stay the same in 2008; those expecting income to grow said it will be up about 15 percent on average.

Even so, more New England distributors are concerned about their company's profit margins and cash flow than the national average of their counterparts. Seventy-eight percent of distributors, compared to 71 percent nationally, consider insurance costs to be a serious problem for their industry. More than half of New England contractors said lack of work is a serious problem, compared to a national contractor average of 44 percent.

About one-fourth of contractors said commercial projects are their best opportunity for 2008; 54 percent said residential construction is the most promising area. Forty-eight percent of distributors see their best opportunities in general construction, which is the highest figure for any region in this year's survey. Fifteen percent of distributors said commercial construction holds the most potential for the coming year.