The Commercial Sector: An oasis on the bumpy construction road?

Mining through the mid-year economic outlooks for this article was a grueling task. We saw the usual players ― rising energy prices, increased global demand, credit crunch ― all contributing to economists’ forecasts, but none could really pinpoint where we’ll be in 2009.

With each new release of federal data, it seemed the bumpy construction market would continue to pound away at contractors’ bottom lines with no sense of when the road would smooth out.

However, one shining beacon of the past years has been commercial new construction. From schools to lodging to hospitals to infrastructure, the commercial sector has buoyed the building industry. In this month’s Plumbing Trends, we’ll discuss where commercial construction stands mid-year, where it (may) end up in 2009, and what trends to watch out for that could impact the way you do business.

Half Way There

The U.S. Department of Commerce reported July 1 that private non-residential construction spending hit an all-time high of $405.3 billion in May. According to Associated Builders and Contractors’ Chief EconomistAniban Basu, “The slumping U.S. economy has yet to become apparent in non-residential construction spending.”

Oddly enough, several of the forces that have produced a weaker U.S. economy are actuallystimulatingcommercial construction, namely power and manufacturing sectors, ABC says.

“A weaker U.S. dollar has produced a new demand for the construction of manufacturing facilities among goods producers in America’s domestic market,” Basu reported in early-July.

Also, the high and continually rising energy prices that are slamming businesses and homeowners is now creating a growing number of opportunities for industrial contractors. “Several massive power generating facility projects are now underway in various parts of the United States, and, as a result, the non-residential construction spending level may remain steady,” Basu noted.

Prices Crisis?

While commercial construction has experienced sustained strength in this economy, be prepared: tighter supplies, commodity price increases and even higher transportation fees will continue to drive up building costs for the remainder of the year and into the next.

Construction input prices surged 2.6 percent in May, according to a June 17 report of the producer price index (PPI) by the Bureau of Labor Statistics. From the same time last year, aggregate construction prices have increased 8.4 percent.

Steel, gypsum, copper, asphalt, wood, drywall, and more all increased significantly in price this year. However, price indices for plumbing fixtures and brass fittings grew at a much slower pace, BLS reported ― only 0.2 percent.

The Federal Reserve’s Federal Open Market Committee announced it expects inflation to moderate “later this year and next year.”

“However, in light of the continued increase in the prices of energy and other commodities ― and the elevated state of some indicators of inflation expectations ― uncertainty about the inflation outlook remains high,” the Committee said.

ABC believes this year’s construction market has yet to mirror the impressive increases experienced in the non-residential construction market that it did during inflation’s recent peak in 2004-2005.

But this is only a small comfort, the group noted, since industry players are heavily susceptible to increases in the price of non-core components, especially energy.

“In a flowing economic environment characterized by ongoing credit issues, this makes economic life difficult since contractors must request higher producer price costs in bids submitted to developers. These developers must, in turn, supply cost information to wary lenders who are not necessarily inclined toward commercial construction lending at this time,” ABC summarized.

Building Trends

So which way is the wind blowing? Where should construction contractors invest their time, money and talent?

The Associated General Contractors’ Chief EconomistKen Simonsonwrote recently in hisDataDIGestthat, in the longterm, healthcare, lodging, transportation and public safety projects could be hot-ticket ventures.

Expect governmental bodies to be cautious with revenues, due to the residential housing slump. So school construction, which relies heavily on property tax receipts, will be carefully evaluated, Simonson is quoted as saying inContractor Tools & Suppliesmagazine recently.

Growth of big box stores, too, are vulnerable to what’s happening in the housing market. And suburban office space may dwindle due to rising fuel costs.

However, Class A office space may increase due to buyouts and mergers, and a resurgence of urban dwelling.

FMI, a management consultant and investment banker for the construction industry, reported in its “Construction Outlook: The Second Quarter of 2008” that aging infrastructure, population growth and net migration are fueling demand for new and replacement construction, especially in the Sunbelt and Rustbelt regions. “Water supply and sewage and waste disposal construction will increase by 2-3 percent in 2008, and by 2-4 percent in 2009, despite a decrease in state and federal revenues,” the group forecasted.

Also according to FMI (and just about everyone else), construction industry stakeholders are increasingly recognizing green building capabilities as “good” ― and being a necessary part of a firm’s best practices.

Green building is projected to hit $20 billion by 2015. The National Association of Home Builders revealed that green building and remodeling is “experiencing a level of demand that exceeds the current supply of qualified firms.”

“Green building will continue to grow. It is not a question of whether your firmshouldinvest in understanding the green sustainable trend and how to produce sustainable projects, it’show muchshould you invest andhow fast,” saidRick Dutmer, consulting group manager for FMI.

Besides going green, builders can take advantage of current design technology to cut costs and increase productivity. Lean activities remain in high demand, as well as the use of building information modeling (BIM).

BIM integrates the design and building process for increased communication as well as efficiency. This type of “virtual information” design can help the industry meet regulations facing new buildings.

According to a leading BIM software carrier, Autodesk Inc., “It is anticipated by proponents that BIM can be utilized to bridge the information loss associated with handing a project from design team, to construction team and to building owner/operator, by allowing each group to add to and reference back all information they acquire during their period of contribution to the BIM model.”

In short, each part of the detailed computer visualization relates to the total building. Make a change, and the entire design adjusts intuitively. Through real-world simulation, building performance could be predicted before ground is ever broken.

Wait Until Next Year

It’s mid-August as you read this article. According to the U.S. Department of Energy, gas prices should have peaked (at a national average of $4.15) and the Presidential election should be in full-swing.

While economists agree that 2009 should be more of the same, it was clear that no one was chiseling their forecasts into stone.

So if “one-day-at-a-time” is the mantra, construction contractors should take comfort that the industry is responding to the market with advancing technology, emerging niche opportunities and a public increasingly aware of economic conditions.

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