As the nationwide economy transitions from robust, recovery-like growth of about 4.5 percent in 2004 to more moderate, expansionary growth of about 3 percent in 2005, we expect a leadership change to take place in construction markets. In contrast to the last three years, in which markets and builders alike have become accustomed to residential housing markets dominating construction efforts, 2005 is likely to be the year that commercial construction starts to shine.
RESIDENTIAL SPENDING TO DECLINE. After two consecutive record years for residential housing markets, we expect rising interest rates to cap spending and price appreciation in residential housing next year at a more moderate pace of growth than witnessed through the first few years of the 21st century. Just as falling rates provided a boost to housing markets from 2001 to 2004, rising rates will temper gains going forward. On the heels of our forecast for the benchmark 10-year Treasury rate to rise throughout 2005, our estimate for new housing starts includes a slowed pace of growth. We anticipate 1.89 million new housing starts in 2005, down from 1.94 million this year, and residential construction growth of 4 percent, down from a growth rate of 10 percent in 2004. The first few months of 2005 may surprise forecasters to the positive, however, for despite the Federal Reserve's committed stance to increasing short-term interest rates in the face of rising inflation, longer-term rates remain stubbornly low as the year comes to a close.
LONG-TERM TRENDS FAVOR THE SOUTH. New residential construction is likely to be strongest in the Southern region next year due to a couple of factors. First, the demographics support a continued migration of the population to the South as baby boomers nearing retirement age relocate or purchase second homes in more livable climates. This trend is not only expected to continue through the next year, but through the next several years. Starts of new homes in the South now make up more than 40 percent of starts for the nation, and are likely to continue to gain share of builders' attention. Recovery and rebuilding activity after the four hurricanes that battered the Southeast in the fall of this year will continue throughout the next year, also providing a boost to construction activity in the region.
NONRESIDENTIAL CONSTRUCTION ON TRACK. After falling 10 percent in 2003, nonresidential construction spending appears on track to squeeze out a positive gain this year. We expect spending on nonresidential structures to continue to gain ground in 2005 with growth of about 8 percent, taking the leadership position from residential spending gains toward the middle of the year.
Several categories of nonresidential spending have shown steady progress in digging out of the recessionary trenches this year. Construction of lodging buildings, office structures and commercial facilities has shown steady progress since the middle of the year, for example. These categories should continue their ascent in 2005 as employment and earnings conditions continue to improve. Health care construction arguably never went into recession as surging demand for facilities to service the aging population has kept rates of growth afloat through the downturn in the economy. The need for more health care buildings is likely to continue through the next few years. The largest category of construction, appending on highways and streets, should get a little help through the passage of relatively accommodative legislation in 2005. In December, President Bush signed into law funding for highway and transit programs in fiscal year 2005. The omnibus includes $34.4 billion for road construction projects, up 2.4 percent from program funding of $33.6 billion last year.
While several of the remaining categories of construction have struggled to post gains this year, we anticipate 2005 will prove to be the year that growth resumes. Several macroeconomic themes support the climb out of "red" for the remainder of the nonresidential industry segments. First, businesses are flush with cash. Thanks to taxation policies through the recession and recovery years, businesses continue to depreciate assets at a quicker pace than they are spending money, allowing a build-up of cash on corporate balance sheets, and thus, a reserve for spending on new projects. Employment is showing steady gains this year, and we anticipate the trend to continue, which will not only boost needs for office space, but also increase employee wages. More income translates into higher spending on hospitality and leisure services, which will increase spending on amusement, recreation and lodging construction.
NEW LEADERSHIP IN 2005. The last two years have witnessed a dramatic shift in construction markets. In 2002, nonresidential spending garnered 55 percent of total construction spending. This figure dropped to approximately 45 percent this year. In 2005, we anticipate this trend to reverse course. While the overall spending distribution is unlikely to revert to 2002 levels, nonresidential construction should gain some ground once again. We expect overall construction spending to grow 8 percent for the year, as a slowing to 4-percent growth in residential spending is slightly offset by about 8-percent growth in spending on nonresidential structures. – Gina Martin, Wachovia Bank
No more results found. RESIDENTIAL SPENDING TO DECLINE. After two consecutive record years for residential housing markets, we expect rising interest rates to cap spending and price appreciation in residential housing next year at a more moderate pace of growth than witnessed through the first few years of the 21st century. Just as falling rates provided a boost to housing markets from 2001 to 2004, rising rates will temper gains going forward. On the heels of our forecast for the benchmark 10-year Treasury rate to rise throughout 2005, our estimate for new housing starts includes a slowed pace of growth. We anticipate 1.89 million new housing starts in 2005, down from 1.94 million this year, and residential construction growth of 4 percent, down from a growth rate of 10 percent in 2004. The first few months of 2005 may surprise forecasters to the positive, however, for despite the Federal Reserve's committed stance to increasing short-term interest rates in the face of rising inflation, longer-term rates remain stubbornly low as the year comes to a close.
LONG-TERM TRENDS FAVOR THE SOUTH. New residential construction is likely to be strongest in the Southern region next year due to a couple of factors. First, the demographics support a continued migration of the population to the South as baby boomers nearing retirement age relocate or purchase second homes in more livable climates. This trend is not only expected to continue through the next year, but through the next several years. Starts of new homes in the South now make up more than 40 percent of starts for the nation, and are likely to continue to gain share of builders' attention. Recovery and rebuilding activity after the four hurricanes that battered the Southeast in the fall of this year will continue throughout the next year, also providing a boost to construction activity in the region.
NONRESIDENTIAL CONSTRUCTION ON TRACK. After falling 10 percent in 2003, nonresidential construction spending appears on track to squeeze out a positive gain this year. We expect spending on nonresidential structures to continue to gain ground in 2005 with growth of about 8 percent, taking the leadership position from residential spending gains toward the middle of the year.
Several categories of nonresidential spending have shown steady progress in digging out of the recessionary trenches this year. Construction of lodging buildings, office structures and commercial facilities has shown steady progress since the middle of the year, for example. These categories should continue their ascent in 2005 as employment and earnings conditions continue to improve. Health care construction arguably never went into recession as surging demand for facilities to service the aging population has kept rates of growth afloat through the downturn in the economy. The need for more health care buildings is likely to continue through the next few years. The largest category of construction, appending on highways and streets, should get a little help through the passage of relatively accommodative legislation in 2005. In December, President Bush signed into law funding for highway and transit programs in fiscal year 2005. The omnibus includes $34.4 billion for road construction projects, up 2.4 percent from program funding of $33.6 billion last year.
While several of the remaining categories of construction have struggled to post gains this year, we anticipate 2005 will prove to be the year that growth resumes. Several macroeconomic themes support the climb out of "red" for the remainder of the nonresidential industry segments. First, businesses are flush with cash. Thanks to taxation policies through the recession and recovery years, businesses continue to depreciate assets at a quicker pace than they are spending money, allowing a build-up of cash on corporate balance sheets, and thus, a reserve for spending on new projects. Employment is showing steady gains this year, and we anticipate the trend to continue, which will not only boost needs for office space, but also increase employee wages. More income translates into higher spending on hospitality and leisure services, which will increase spending on amusement, recreation and lodging construction.
NEW LEADERSHIP IN 2005. The last two years have witnessed a dramatic shift in construction markets. In 2002, nonresidential spending garnered 55 percent of total construction spending. This figure dropped to approximately 45 percent this year. In 2005, we anticipate this trend to reverse course. While the overall spending distribution is unlikely to revert to 2002 levels, nonresidential construction should gain some ground once again. We expect overall construction spending to grow 8 percent for the year, as a slowing to 4-percent growth in residential spending is slightly offset by about 8-percent growth in spending on nonresidential structures. – Gina Martin, Wachovia Bank