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October 20, 2003 02:00 AM

Residential building to slow as commercial market grows

Steve Toloken
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    For those trying to predict the U.S. construction market in 2004, there's good news and bad news.

    The bad news - the red-hot new-home market, which helped sustain the economy, probably will soften. The good news - the dormant commercial side of the business should start to show some signs of life.

    At least that's the consensus that came from economists at the North American Construction Forecast, sponsored by Reed Construction Data. The annual crystal-ball-gazing session was held Oct. 15 in Washington.

    ``What we're suggesting is that the baton is going to be passed in 2004 from residential being the leader to nonresidential being the leader,'' said Edward Sullivan, chief economist of the Portland Cement Association in Skokie, Ill. ``As the economy starts to gain traction, you're going to start to see the emergence of a nonresidential recovery.''

    As with many gatherings of economists, there were caveats aplenty: several said that one key caveat is that the country will need to start adding jobs, boosting consumer spending as higher mortgage rates begin to dampen consumer purchases.

    And while there are many bullish forecasts of strong gross domestic product growth of 5 percent this quarter, Clinton administration economic adviser Gene Sperling struck a less optimistic note. He told the conference that uncertainty and overcapacity are making corporate executives cautious about spending money.

    In construction, Sullivan predicts the overall market will rise a little less than 1 percent in 2004, in inflation-adjusted dollars, after declining about 1 percent this year. But conditions are right for a stronger rebound in 2005, he said.

    ``There seems to be a convergence of factors that will develop in 2005 that suggest rather robust growth,'' Sullivan said.

    The housing market, which remained strong during the economic slowdown, is likely to cool a bit but will continue at historically high levels, said David Seiders, chief economist with the National Association of Home Builders in Washington.

    ``I think we can retain very close to the levels of home sales and housing production we've had in recent times, which have been absolutely dynamite,'' Seiders said. However, he added, ``I'd be surprised if we can continue to post growth in housing production and homes sales.''

    NAHB figures indicate that single-family housing starts will hit about 1.4 million this year, and then drop slightly, hitting about 1.3 million units by 2006. The story is similar for multifamily units - numbers will decline slightly, but remain at about 300,000 units a year, NAHB said.

    Seiders, too, predicts that nonresidential construction will grow. Measured in constant 1996 dollars, he predicts that the value of new building in that sector will bottom at about $125 billion this year, and rise to $140 billion by 2006.

    Within the commercial side, one financial analyst said that demand for office space will rise faster than supply for 2004 through 2007, reversing market conditions since 2001.

    Glenn Mueller, managing director of real estate investment for Baltimore-based Legg Mason Inc., said GDP growth will have to outstrip efficiency gains if employers are going to boost hiring and in turn need more space for office and manufacturing.

    Mueller said the hotel sector is not doing well, with the exception of resort properties, while retail is the strongest commercial market.

    Shifting gears, the conference also covered Canada and Mexico.

    Roger Grant, vice president of product management at construction information service RSMeans, predicts that housing starts in Canada will drop in 2004 to 180,000, from 205,000 in 2003. RSMeans is part of Norcross, Ga.-based Reed.

    He predicts commercial building space will rise to 40 million square feet in 2004, and 46 million in 2005, from 36.5 million this year, with retail and industrial both growing.

    Canadian manufacturing capacity utilization was 81.5 percent in the first quarter of the year, well above the U.S. figure, but still not high enough to push industrial space growth up to levels seen in the late 1990s, he said. Canada's recession has been milder than the United States', he said.

    Mexico is emerging from a sharp cyclical recession, one that was more severe than in the United States, Grant said. Pent-up demand for housing and new government programs should push residential construction up 3.5 percent in 2004, he said.

    While the country's maquiladora manufacturing region along the U.S. border is depressed, the Mexican construction industry forecasts between 3.7 percent and 4.7 percent growth in 2004, and 4.7 percent to 6.7 percent growth in 2005, Grant said.

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