Speaking at an investment banking conference last week, Harvard economist Kermit Baker predicted a “modest” decline in non-residential market activity that would begin later this year that could last through 2009.
Noting that architectural billings have been falling since January 2008, Baker said that indicator of future activity would translate into a drop of one or two percent in non-residential construction later this year. He predicted an additional decline of six to eight percent in 2009.
Baker, speaking at Zelman & Associates’ 2008 Housing Summit, said that virtually all the decline would come from commercial construction. In fact, he predicted flat to modest growth on the institutional (education, hospitals, etc.) side, which would mean that commercial could fall 10 to 12 percent all told.
Baker, who is also the chief economist for the American Institute of Architects, said design activity typically leads non-residential construction by nine to 12 months, which translates into a construction slowdown by the end of the year. His view of impending weakness in the commercial market is shared by a panel of economists that he assembles for a mid-year Consensus Nonresidential Construction Forecast Panel.
Historically, non-residential activity follows the residential cycle by approximately 9 to 18 months, though this time around it has lagged by much more. Through the second quarter of this year, Baker said that non-residential construction was growing at a 10 percent clip, half of that from real construction gains, half from material price increases.
A panel of building product suppliers shared Baker’s view of impending weakness in non-residential construction. One distributor commented that several big projects had been pushed out or cancelled recently, either because funding had dried up or rising energy costs had undone the economics of the deal.
Baker works with the AIA to compile a monthly Architectural Billings Index derived from a monthly “Work-on-the-Boards” survey. The data is compared to data from the Department of Commerce’s survey of Construction Put in Place to provide a leading economic indicator.
The most recent data from the Department of Commerce survey showed a small decline, of 0.6 percent, in private non-residential spending in July 2008 compared to the month before. It was the first decline in seven months. Anirban Basu, chief economist of Associated Builders and Contractors, said in a statement that the decline had long been predicted. The ABC keeps close tabs on non-residential activity by sector--click here to see it.