2001 looks like it will mark the point of low growth for this portion of the business cycle.

The national economy continues to send mixed signals, with some parameters up and some down and very few moving in only one direction for more than a month or two.

That's good because it is consistent with an economy that is gradually slowing from an unsustainable pace. Real GDP (the value of all production in the United States, corrected for inflation) grew at an annualized rate of only 2.75 percent in the third quarter of 2000, slightly more than half the rate of the first six months of the year. Personal expenditures for durable goods - such as autos and furniture, which are usually postponable and are, therefore, a good measure of consumer confidence - were particularly depressed in recent months.

No one really knows for sure, but the Fed probably believes growth around 3 percent per year can be sustained indefinitely without increasing inflation.

Fixed investment in residential property - both new and existing dwellings, single and multifamily, including improvements - was the lowest in the third quarter (after removing inflation) since 1998.

FMI estimates that total construction put in place will increase 5 percent in 2001, less than a percentage point ahead of inflation. That compares to 6 percent growth in 2000, almost 2 points higher than inflation. In dollars, the 2001 growth will be $43 billion, composed of $9 billion in residential construction, $23 billion in nonresidential buildings, and $11 billion in nonbuilding structures.

Residential Construction

The modest increase in mortgage rates in the past year has indeed made homes a little less affordable. More important, so far as home purchases are concerned, has been a decline in confidence as the economy slows. And probably most important of all has been a decline in the total asset value of many families as the stock market searches for a reasonable valuation.

Single-family housing starts will drop 5 percent in 2001, to 1.21 million. Because the value per start will increase, and because of mild inflation, the dollar value of that construction will increase by 2 percent, or $5 billion, from the 2000 level, to $240 billion. Single-family construction in 2000 grew 6 percent, or $13 billion, from 1999.

Multifamily construction marches to a slightly different drummer, responding to the demographics of housing demand and also to the economics of commercial investment. Multifamily housing starts will drop 4 percent in 2001, to 315,000, while construction volume rises 4 percent to $33 billion, a growth of $1.3 billion. In 2000, this segment grew 2 percent, or $0.5 billion, from 1999.

The major driver of residential improvements is perfecting a recently purchased home. A second motivation, more important in 2001 than in some other years, is improving the current home in lieu of buying another. Residential improvements will grow 3 percent, or $2 billion, to $98 billion in 2001. In 2000 this segment was flat at $96 billion.

Nonresidential Construction

Although the number of school-age children is not growing as it once did, immigration and our mobile population are severely straining many school districts. Add to that the need to provide facilities to educate for the electronic age, and the crumbling condition of many superannuated school buildings, and you have a boom in school construction.

Construction of new educational buildings will grow $4 billion, or 10 percent, in 2001, to $43 billion. In 2000 it grew 17 percent, or $5 billion. About $36 billion of the construction in 2001 will be in publicly owned institutions. Furthermore, improvements to existing school buildings will grow $1.9 billion (10 percent) in 2001, adding another $20 billion to the total school construction market.

Vacancy rates in both suburban and downtown offices continue to fall, although the suburban rates are not quite as low as they were in 1998. In the second quarter of 2000, the 49 metropolitan areas surveyed by CBRE averaged 6.3 percent vacancy in downtown areas and 8.9 percent vacancy in the suburbs, both levels quite low by historical standards. The suburban rate is 1.2 points lower that a year ago, and the downtown one is 2.6 points lower. Growth in new privately owned office construction will cool a bit in 2001, to 9 percent ($4 billion), down from a torrid 12 percent ($5 billion) growth in 2000. That construction in 2001 will amount to $48 billion. Improvements to existing privately owned offices will grow 8 percent ($0.9 billion) to $13 billion in 2001.

A wide variety of publicly owned buildings are included in the public safety, administrative, and other category, including prisons, fire stations, office buildings, terminals, and many others. New construction in this category will grow 9 percent, or $1.9 billion, in 2001, to $23 billion. In 2000 this grew 9 percent, or $1.8 billion. Improvements in this category will amount to $10 billion in 2001, with a growth of $0.8 billion, or 9 percent, from 2000.

Even though residential construction has cooled substantially, and the boom in big box construction has played out, there is still quite a bit of life in the retail category. New retail construction will grow 6 percent, or $1.8 billion, in 2001, to $30 billion. In 2000 this growth was $2.3 billion, or 9 percent. Improvements to retail buildings are still a do-or-die competitive are a necessity for many owners, and this subcategory will grow 6 percent, or $0.9 billion, to $15 billion in 2001.

Continuing growth in new retail construction and a reawakening in new industrial construction is fueling new warehouse construction. This large category will grow 2 percent, or $0.5 billion, to $20 billion in 2001. In 2000, growth was $1.8 billion, or 10 percent.

The entire category of nonresidential building improvements, including the items mentioned in the preceding paragraphs, will grow 9 percent or $9 billion, to $104 billion in 2001. This is up from a 7 percent growth of $7 billion in 2000

Nonbuilding Structures: New construction of, and improvements to, nonbuilding structures owned by utility companies (cell-phone towers, fiber optic cables, power substations, pipelines, etc.) will grow 13 percent ($5 billion) to $47 billion in 2001. Growth in 2000 was $6 billion, or 18 percent.

Highway construction will grow 3 percent, or $1.5 billion, to $55 billion in 2001. This follows a flat performance in 2000.

Construction growth of all nonbuilding structures, including the ones mentioned above, will amount to $11 billion, or 7 percent, in 2001, bringing annual construction in this category to $164 billion. In 2000, growth, also at 7 percent, was $10 billion.


It appears that 2001 will mark the low-growth point for this portion of the business cycle. ItOs time now to plan for increasing opportunities in the following years. Given that people ¡ professional and nonprofessional, skilled and unskilled, office and field ¡ are in tight supply now, will that be the thing that limits your growth in the coming years? How will you handle that? How can you get one step ahead of your competitors who also face the same situation? ItOs time now to plan for increasing challenges in the coming years.

Reprinted with the permission of FMI Corp. For more information, contact FMI at 919/787-8400.