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Non-residential construction levels expected to increase in 2007

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In 2006, the nonresidential building sector of the U.S. construction industry experienced an increase in spending, even as the volume and value of residential construction has declined.

Looking forward into 2007, it appears a similar trend is likely to continue, according to several panelists who participated in a recent Associated General Contractors of America (AGC) audio conference.

National construction spending in 2007, including residential and nonresidential projects, is anticipated to increase 3 percent to 3.5 percent in 2007, according to Jim Haughey, director of research and analytics for Reed Construction Data.

"This is the bottom of a mini construction cycle," Haughey said.

Spending on new residential construction is predicted to decline by 8 percent next year, while the remodeling industry will experience the opposite. This will equate to an overall decline in residential construction spending of 1 percent to 2 percent.

Outside of residential sector the news is better. It is expected to be a positive year in 2007 for nonresidential construction, although not as strong as this year, according to Ken Simonson, chief economist for the AGC.

The non-building construction sector, which includes sewer, water and highway projects, will experience an increase of 10 percent to 11 percent in spending, which mostly will come from the state and local levels, according to Haughey.

Spending in the water/sewer sector is anticipated to increase 15 percent, while highway spending will enlarge by 9 percent.

In California, construction on levies and highways will be big, Simonson commented.

Both the commercial and institutional building sectors will also experience an increase in spending in 2007, expected to be around 12 percent.

Within the institutional sector, spending on educational construction will increase by 10 percent, and spending in the health care sector should rise by 15 percent to 16 percent.

"Health care construction will be very durable," Simonson explained, adding that in California hospital construction will be driven by seismic retrofit requirements, which hospitals must comply with in a short time frame. This will keep that sector active in the state.

Other potential areas in non-residential construction in which spending could increase include the energy and power markets, where there is plenty of activity currently in the planning stage.

"On the whole, the potential for energy-related investment is tremendous," Simonson stated.

In commercial construction, the key drivers are rent increases, which have been solid, a small decline in vacancy rates and a boost in the number of office projects coming to bid, Haughey said.

While non-residential construction spending will increase in 2007, an issue facing the entire construction industry is the potential for future increases in material costs, which can be caused by worldwide demand for materials from areas such as Asia, according Jack Basso, COO and business development director for the American Association of State Highway and Transportation Officials.

According to Simonson, lumber and gypsum will remain in the negative range in regards to price increases in 2007, but overall construction materials will experience a 6 percent to 8 percent boost in prices.

"Longer term, we'll expect to see a return to some of those cost increases (experienced in early 2006)," Basso said.

Another issue facing the industry is employment. The question remains: Will there be enough skilled workers to complete the volume of upcoming construction projects?

"This depends on the degree of specialization and skill required," according to Simonson, who added residential workers usually don't have the sophistication to move into nonresidential projects.

"There's a lot of people available at the low-skill labor level," Haughey agreed, adding there is a lack of skilled labor on the high end.

Simonson concluded it's going to be a scramble to find people (tradesmen, supervisors and engineers) with enough experience when considering non-residential jobs.

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