Is there Hope in Commercial Construction?

Louis Centorcelli, MSDr. Bernie Markstein, PhDReed Construction Datalouis.centorcelli@reedbusiness.comOctober 2011

Hope:Grounds for believing that something good will happen

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Google on-line dictionary

Today’s Agenda

Current Macroeconomic ConditionsCurrent Construction Economic ConditionsFuture of commercial construction?

Today’s Agenda

Current Macroeconomic ConditionsCurrent Construction Economic ConditionsFuture of commercial construction?

US Real GDP Growth

What, me worry?

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Source: Federal Reserve Bank of Philadelphia

Job Losses Are Easing. . .

Source: US Bureau of Labor Statistics

8.7 million jobs lost …BUT…

…Since Jan 2010 the economy has

added 2 million jobs

…But growth is slowing…

Source: US Bureau of Labor Statistics

…And State Unemployment Rates Remain High

Source: US Bureau of Labor Statistics

State Economic Growth—August 2011

versus May 2011

Philadelphia FRB Economic Activity Index

Latest 3 Months (annualized)

Regional Economic Trends Have Declined

*The four state-level variables in each coincident index are non-farm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average).

National Population Changes…

REGION 2010 1980 1990 2000 2010

Northeast 55,317,240 0.2 3.4 5.5 3.2

Midwest 66,927,001 4.1 1.4 7.9 3.9

South 114,555,744 20.0 13.4 17.3 14.3

West 71,945,553 24.0 22.3 19.7 13.8

United States 308,745,538 11.5 9.8 13.2 9.7

…Show us where we can expect future construction growth

Today’s Agenda

Current Macroeconomic ConditionsCurrent Construction Economic ConditionsFuture of commercial construction?

How is the construction market defined?

Over 5.5 million employed (from highs of over 8 million)

Over 800,000 establishments

Number of records found: 7323 Construction236 Construction of Buildings2361 Residential Building Construction23611 Residential Building Construction236115 New Single-Family Housing Construction (except Operative Builders)236116 New Multifamily Housing Construction (except Operative Builders)236117 New Housing Operative Builders236118 Residential Remodelers2362 Nonresidential Building Construction23621 Industrial Building Construction236210 Industrial Building Construction23622 Commercial and Institutional Building Construction236220 Commercial and Institutional Building Construction237 Heavy and Civil Engineering Construction

Search results for: 545413 Architectural, Engineering, and Related Services54131 Architectural Services541310 Architectural Services54132 Landscape Architectural Services541320 Landscape Architectural Services54133 Engineering Services541330 Engineering Services54134 Drafting Services541340 Drafting Services54135 Building Inspection Services541350 Building Inspection Services54136 Geophysical Surveying and Mapping Services541360 Geophysical Surveying and Mapping Services54137 Surveying and Mapping (except Geophysical) Services541370 Surveying and Mapping (except Geophysical) Services54138 Testing Laboratories

Construction and the Overall US Economy

Source: US Bureau of Economic Analysis

2010 Construction Spending = $814.5 billion-10.3% versus 2009

Economic Impact of Nonresidential Construction

Jobs: 28,500 per $1 billion 1/3 direct, onsite construction 1/6 indirect (quarries, mfg., services) 1/2 “induced” by spending from higher earnings of

construction, indirect workers and owners GDP: $3.4 billion Multiplier effect of 3.4

Personal Earnings: $1.1 billion

Source: Prof. Stephen Fuller, George Mason University

Huge surplus of homes has declined and stabilized The current supply is approximately 7-8 months based on the

current rate of sales—6 months’ supply is considered healthy But foreclosures continue to plague the economy

“Shadow Inventory” and continued declines in home prices Investor activity in the market? Jump in “all cash” sales

Housing prices stabilizing? 31.8% peak to trough decline Recent data show fragility of the market with declines throughout

Q3 and Q4 of 2010 Tightening credit standards contribute to the on-going problems

Recently rates have been creeping up Commercial space surplus likely to last into 2012

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2011 Economic Environment for Construction

Source: US Bureau of Labor Statistics

Almost 1.9 million jobs lost since January 2008

Accounting for 23% of allnon-farm job losses

Construction Job Outlook Improves?

Since January 2010, NO Growth:

Lost another 96,000 jobs

Construction Jobs Unemployment

Source: US Bureau of Labor Statistics

Construction Materials Prices Rise

Source: US Bureau of Labor Statistics

12-month percent change; Jan 2008 to Aug 2011

Commodity Price Surge Ends?

Inputs to Construction Industries PPI 2009 versus 2008: -3.9% 2010 versus 2009: 4.3%

Slowing world economy caused temporary price declines for metals and plastics.

As the global economy has begun to recover, upward price pressure is being seen again for steel, cooper and other commodities.

Continued instability in the Middle East creates uncertainty about the supply of crude oil.

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2011 Construction Environment

Jan 2010 to Aug 2010: 2.2%Jan 2011 to Aug 2011: 5.0%

Housing: A Glimmer of Hope?

Source: S&P/Case Schiller

31.7% decline from April 2006 peak to May 2009 trough

0.2% Change since Bottom

Recent trends identified in the Reed construction starts data: The average new construction project size has declined from

69,000 square feet in 2007 to 56,000 square feet

The proportion of dollars spent on new construction projects has declined from 69% in 2007 to 52% in 2010

WHILE… The share of alteration dollars has increased from 16% to 31%

The same is true for new construction project counts that have fallen from 34% in 2007 to 18% in 2010

WHILE… The share of alteration projects has climbed from 54% to 73%

Non Residential Construction Starts

Today’s Agenda

Current Macroeconomic ConditionsCurrent Construction Economic ConditionsFuture of commercial construction?

“Lies, damned lies, and statistics”

Benjamin Disraeli: 19th Century British statesman and Prime MinisterThis phrase was popularized in the United States by Mark Twain

FORECASTS!

When Is ^ the Bottom?

US Macro Economy: Q2 2009

Total Construction spending: Q1 2010

Single Family starts: Q1 2009 Residential spending: Q1 2010

Nonresidential starts: Q2 2009 Nonresidential spending: Q1 2010

WAS

US Real GDP Growth

Source: History = US Bureau of Economic AnalysisForecast = Reed Construction Data

Non residential construction starts total contract value increased 11.1% versus January-August 2010

AND Since March 2011 contract value figures all increased from year

earlier figuresAND

The most recent 12 months are up 3% versus year ago figures Non residential construction starts total area increased 10.6% versus

January-August 2010 AND

Since March 2011 square feet area figures all increased from year earlier figuresBUT

The most recent 12 months are down 2% versus year ago figures

YTD Non Residential Construction Starts Trends

Reed Nonresidential Starts: 12 month moving total

Source: Reed Construction Data

Architectural Activity Picking Up?

Source: AIA Economics & Market Research Group

Current Nonresidential Projects—Working Drawings

Title County City State/Province ValueHEARTLAND TOWN CENTER PHASE 1 Suffolk Brentwood NY $4,000,000,000ONE BAYFRONT PLAZA Dade Miami FL $275,000,000UPTOWN WORTHINGTON Chester Malvern PA $275,000,000MAUI REGIONAL PUBLIC SAFETY COMPLEX Maui Wailuku HI $235,000,000KING MILL DISTRIBUTION CENTER BUILDING 2 Henry McDonough GA $150,000,000LAMBEAU FIELD EXPANSION-SOUTH END ZONE EXPANSION Brown Green Bay WI $143,000,000PRASADA CACTUS POWER CENTER PH1 Maricopa Surprise AZ $120,000,000UNC HOSPITAL BED TOWER AT HILLSBOROUGH Orange Hillsborough NC $119,000,000900 FOLSOM STREET MIXED USE DEVELOPMENT San Francisco San Francisco CA $102,000,000HIGH STREET SHOPS AT CITCENTER Maricopa Phoenix AZ $94,200,000NATIONAL AIRPORT BAGGAGE TERMINAL B/C District of Columbia Washington DC $90,000,000UGA VETERINARY MEDICINE LEARNING CENTER Clarke Athens GA $87,000,000WASHINGTON GATEWAY MIXED USE District of Columbia Washington DC $66,604,500FRANKLIN INSTITUTE SCIENCE MUSEUM Philadelphia Philadelphia PA $64,700,000GOOD SAMARITAN HOSPITAL INTERIOR FINISHES Buffalo Kearney NE $63,400,000BRIDGEPORT ARMED FORCES RESERVE CENTER Jefferson Louisville KY $62,500,000WHEELER ARMY AIRFIELD COMBAT AVIATION BRIGADE COMPLEX Honolulu Oahu HI $62,500,000

Source: Reed Construction Data “Project News Database”

Reading the “Tea Leaves” for 2011

Subpar GDP growth through 2012 Unemployment rate spikes at 11% in 2012 Spending confidence up but still at depressed levels Consumer spending stabilizes and has shown small gains

throughout the year Commodity prices increase as global demand begins to recover Tighter credit approval standards Interest rates to remain low through 2012 Space surplus for all types of building remains high Public construction increasingly restrained by largest decline in state

tax receipts in over 50 years and cutbacks in federal funding Crisis financial conditions for many state, local and municipal

governments

Total Construction Spending

Source: History = Census Bureau, US Department of CommerceForecast = Reed Construction Data

Total Construction Spending

Source: History = Census Bureau, US Department of CommerceForecast = Reed Construction Data

Construction Spending: Nonresidential

Source: History = Census Bureau, US Department of CommerceForecast = Reed Construction Data

Construction Spending: Nonresidential

Source: History = Census Bureau, US Department of CommerceForecast = Reed Construction Data

2008 2009 2010 2011 2012 2013New Residential 185.8 141.2 136.2 128.1 130.8 140.4 Year-over-year % Change -39.1% -24.0% -3.5% -6.0% 2.1% 7.3%Residential Improvements* 120.7 112.7 112.5 118.6 122.3 127.7 Year-over-year % Change -13.5% -6.6% -0.2% 5.5% 3.1% 4.5%Nonresidential Building 437.7 375.7 288.9 275.8 289.5 314.0 Year-over-year % Change 8.4% -14.2% -23.1% -4.5% 5.0% 8.5%Heavy Engineering (Non-Building) 272.1 273.5 266.0 263.7 281.3 300.9 Year-over-year % Change 9.7% 0.5% -2.8% -0.8% 6.6% 7.0%Total 1,016.3 903.2 803.6 786.3 823.9 883.1 Year-over-year % Change -7.3% -11.1% -11.0% -2.2% 4.8% 7.2%

U.S. Total Construction Spending(Billions of Current Dollars)

Actual Forecast

*Residential Improvements include remodeling, renovation and replacement work. Number also includes RCD estimate of improvements to public housing. Source: History: Census Bureau, US Department of CommerceForecast: Reed Construction Data

Summary Construction Spending Outlook

Is there Hope?

Yes, There is hope, for at least a modest rebound in

the commercial construction market in 2012.

But,

The economy and construction industry still face significant headwinds as 2011 comes to an end.

“An economist is an expert who will know tomorrow why the

things he predicted yesterday didn’t happen.”

Dr. Laurence J. Peter (1919-1990)

Thank You!

Thank You!

Louis CentorcelliDirector of Business Development—Market Analytics2000 Clearwater DriveOak Brook, IL 60523(V) 630-288-7913(M) 630-453-0182

louis.centorcelli@reedbusiness.comhttp:/www.reedconstructiondata.com/market-insights