Institutional Building Leads Nonresidential Construction To 11 Percent Surge In May

July 9, 2004
Nonresidential building in May jumped 11 percent to $164.7 billion, registering its strongest performance so far in 2004, according to a report by McGraw-Hill Construction, New York.

Nonresidential building in May jumped 11 percent to $164.7 billion, registering its strongest performance so far in 2004, according to a report by McGraw-Hill Construction, New York.

The sizeable increase, which outweighed a modest retreat for housing and a more substantial decline for nonbuilding construction, contributed in part to a surge in construction.

At a seasonally adjusted annual rate of $556.1 billion, new construction starts in May were up 1 percent compared to the previous month.

“The construction industry has picked up the pace in recent months,” said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “Single-family housing continues to be very strong, and now nonresidential building is beginning to see more sustained improvement, marking a change from its weakening trend over the past three years.

The stronger economy is helping the nonresidential structure types, but at the same time there’s concern that rising prices for building materials — steel, lumber, and now cement — will dampen the emerging nonresidential expansion.”

Nonresidential building. Much of the upward push came from the institutional structure types, which had generally lost momentum over the previous two years. School construction edged up 3 percent, while health-care facilities and public buildings (courthouses and detention facilities) reported gains of 15 percent. Transportation terminal work increased 19 percent, boosted by the start of a $181 million terminal renovation at Dulles International Airport in the Washington, D.C., area. The amusement and recreational category jumped 101 percent, aided by the start of a $145 million convention center addition and renovation project in Cincinnati.

Murray said, “The institutional sector has been dampened by the diminished fiscal health of state and local governments, and now fiscal conditions are beginning to improve in some, although not all, states. The institutional structure types will probably settle back over the next couple of months, but May’s upturn does suggest that this sector is beginning to stabilize after the declining trend for construction starts during 2002 and 2003.”

The commercial side of the nonresidential market in May included reduced activity for stores (down 2 percent), warehouses (down 6 percent), and hotels (down 12 percent). Office construction posted a slight 1 percent gain, providing growing evidence that this structure type is at least leveling off during 2004, following its steep downturn witnessed during the previous three years. Construction of manufacturing-related buildings, while still at a low volume, jumped 27 percent in May.

Residential building. At $312.7 billion, residential building settled back 1 percent in May. Single-family housing was down 4 percent in dollar volume, although the amount was still very high by recent standards — 10 percent above the average pace in 2003. Mortgage rates moved upward in May, with the 30-year fixed rate reaching 6.3 percent (up from 5.4 percent in March), but the continued strength of new home sales indicates that home-buyer demand has yet to see any negative impact.

Multifamily housing in May grew 14 percent, aided by large projects in Chicago ($80 million); Clayton, Mo., ($66 million); and New York City ($65 million). Murray said, “The shift toward condominium projects, plus the continued focus on downtown redevelopment work, is helping to keep multifamily construction at a healthy volume in 2004.”

By geography, residential building in May performed as follows: South Atlantic, up 1 percent; South Central, down 2 percent; and the Northeast, Midwest, and West, each down 3 percent.

Nonbuilding construction. In May, nonbuilding construction dropped 9 percent to $78.6 billion. Much of the nonbuilding retreat was the result of an 88 percent plunge for electric utilities, following the strong amount of new power plant starts reported during March and April. On a month-by-month basis, the electric utility category is subject to considerable volatility, and May’s decline returns contracting to the broader downward trend that has been present over the past two years.

The public works categories in May registered a mixed pattern — on the plus side, highways and bridges increased 12 percent after a weak April, and water supply systems were up 4 percent. On the down side, sewers and river/harbor development work showed respective declines of 5 percent and 9 percent. While May’s level for highways and bridges was the strongest so far in 2004, it was still 12 percent below the average pace for these project types during 2003.

During the first five months of 2004, total construction on an unadjusted basis was up 10 percent relative to the same period in 2003. Residential building led the way with a 21 percent gain, continuing to benefit from the comparison to its more subdued performance in the early months of 2003. Nonresidential building January-to-May was down 2 percent from a year ago, while nonbuilding construction was down 5 percent. On a regional basis, total construction in the first five months of 2004 performed as follows: South Atlantic, up 20 percent; Midwest, up 8 percent; West, up 7 percent; South Central, up 5 percent; and the Northeast, up 3 percent.