By John Fulmer

FOCUS

Construction
Last year’s ELECTRICAL CONTRACTOR’s Construction Forecast
went halfway out on a limb to prognosticate that 2005
“may be a big year all around.” It’s easy—and wise—to be
tentative in predicting this year’s economy, and some in-
dustry gurus have done just that, sticking with “maybe.”
A group of these gurus assembled at the Reed Con- and said that sector should drop 3 percent in 2005 after
struction Data’s North American Construction Forecast achieving double-digit dollar growth the previous three
conference and the McGraw-Hill Outlook 2005 Executive years. McGraw-Hill’s estimate reflects construction starts
Conference in Washington, D.C., last fall. At Reed, the and varies significantly from Reed’s figure for 2005’s es-
consensus was the current economic downturn is tempo- timated U.S. total construction spending (or put-in-place
rary, but the experts there were cautiously optimistic. They construction), which tops the trillion mark, a 4 percent
felt a recovery would begin this year and gain momentum jump from 2004. But, again, the growth rate weakened
through 2007 in the face of higher interest rates and slow when compared to 2004’s estimated 7 percent increase.
job growth. Several industry sectors, such as industrial Reed also includes renovation construction, which isn’t
with 14 percent growth and public works with 2 percent, listed in McGraw-Hill’s estimate. Here’s the breakdown
will have a good two-year run. from Reed:
With the Federal Reserve expected to raise the federal ® $384 billion in new residential spending; down 4 per-
fund rates above 3 percent in the last half of 2005 and cent from 2004
worries over oil and building-supply prices, the McGraw- ® $138 billion in residential improvements; up 7 per-
Hill group thinks the economy’s expansion will idle down cent
to 3.5 percent, down one-half percent from 2004. They ® $317 billion in nonresidential; a 13 percent hike
also spotted some general trends: ® $181 billion in nonbuilding a 7 percent jump
® Moderate job growth will fuel demand for offices and In general, the economy may “decelerate significantly
multifamily housing, though residential building may scale in 2005” according to Merrill Lynch chief North Ameri-
back from 2004’s record pace because of higher interest can economist David Rosenberg. He sees a growth rate
rates of just 2.5 percent in the first quarter of next year. And
® Looser lending standards will offset higher interest rates according to Peter Morici, a University of Maryland busi-
and free up construction funding ness professor:
® An improved economy will ease the states’ fiscal woes ® Gross domestic product, the value of all goods and ser-
and pump up the institutional building sector vices produced, will grow at a 3.5 percent annual rate,
® Bridge and highway construction will rise while electric down 3/10 to ½ percent from 2004
utilities will decline 8 percent. In the latter area, a loss ® The economy will create 144,000 jobs per month and
in plant construction will be partly balanced by transmis- the unemployment rate will fall only modestly
sion-line work ® Inflation, influenced by international commodity mar-
kets, will register at 2.4 percent in 2005, down 1 percent
The big picture from 2004.
So how does this translate into cold, hard cash? Robert However, Morici projects the consumer price index will
Murray, vice president of economic affairs at McGraw-Hill, “settle down” as gas prices continue to fall.
said the contract value of total U.S. construction should “That pulls a lot of prices with it,” he said.
reach $585.5 billion in 2005, a 2 percent jump over last
year’s figure, but a rather disappointing number considering Single- and multifamily housing
construction spending rose 9 percent between 2003 and David Seiders, the National Association of Home Build-
2004. (See chart on page 41.) ers’ chief economist, also called housing volume a key to
Murray noted this “all hinges on single-family housing” the economy and thinks, as Murray does, housing starts

40 ELECTRICAL CONTRACTOR JAN.05 www.ecmag.com

 2005
Forecast
will recede. Still, single-family starts will
remain positive—though unable to match
the phenomenal growth of the past two
U.S. Total Construction for 2001–2005
8.1 24.1
years—and multifamily will keep a steady 2001 186.9 103.1 90.8 83.6
pace. The national homeownership rate
5.4 12.0
will continue to grow—albeit more slowly

SOURCE: McGRAW-HILL CONSTRUCTION

than in the recent past—and will hit a re-
markable 70 percent by the decade’s end,
Seiders said.
New and existing home prices, accord-
ing McGraw-Hill’s Murray, should increase
by 11 percent, and he envisions burgeoning
specialty markets for single-family housing,
including home theater, Internet alcoves
and separate male/female offices. Reed
forecasters expect mortgage rates to climb
a bit from a 5.94 percent annual average
in 2004 for 30-year fixed rates to 6.43 per-
cent in 2005.
In raw numbers, 1,425,000 new single-
family starts are expected this year, accord-
ing to McGraw-Hill, down from 1,530,000
in 2004, which translates into a 7 percent
loss. Multifamily will have 445,000 starts,
a 2 percent gain from 2004’s estimate of
435,000. The contract value of single-
family will drop to $267.6 billion, a 3
percent loss from 2004’s total of $276.6
billion, while the 2005 multifamily num-
ber is $48.8 billion, a 7 percent gain over
2004’s $45.4 billion figure. (See charts
page 42.)
McGraw-Hill expects the Midwest to be
up 1 percent in single-family starts, the
only region with an increase. The South At-
lantic and West will be big losers at minus
5 percent. The Northeast at minus 7 per-
cent is the only region facing a decline in
multifamily starts, while the Midwest and
West should see double-digit expansion. In
fact, western states can expect a whopping
19 percent growth rate spurred by building
in cities such as Las Vegas.
“The metro markets will be amazing,”
said Murray.
2002 214.2
2003 242.3
2004 276.6
2005 267.6
0 50 100 150 200 250 300 350 400 450 500 550 600
BILLIONS OF DOLLARS
<Single Family Housing <Income Properties <Institutional Bldgs. <Manufacturing Bldgs. <Public Works <Electric Utilities
The commercial side
McGraw-Hill lumps stores, offices, lodging,
manufacturing, educational and healthcare
into nonresidential and sees $176.3 billion
spent in those areas, an 8 percent jump
from last year. All of these building sec-
tors will have an increase, led by hotels
and motels at $6.9 billion (a 15 percent
gain), manufacturing at $8 billion (14 per-
cent) and office buildings at $23 billion
(12 percent).
Nonbuilding or public works, will find a
modest 1 percent uptick in 2005. Bridges
and highways ($43 billion) are the big
gainers with a 5 percent increase; however,
electric utilities will total $5.5 billion, an 8
percent drop from last year.
But why does nonresidential fare so well
and residential seem so ho-hum? Murray
said the lodging sector, especially, is “get-
ting primed for expansion.” This could be a
direct result of the tourist industry shaking
off the slump after the Sept. 11 terrorist
attacks, coupled with a quick end to hos-
tilities Iraq, a somewhat dubious explana-
tion. McGraw-Hill found occupancy and
94.0 90.0 87.9
6.5 8.9
99.5 89.9 82.8
7.0 6.0
110.0 91.2 85.9
8.0 5.5
119.7 97.4 87.4
room rates had gone up and noted several
large projects, including the $297 million
Caesar’s Palace Hotel South Tower and the
$154 million South Coast Hotel/Casino in
Las Vegas, are driving this sector.
Jim Haughey, director for economics
for Reed Business Research Group—writ-
ing about the 2004 spring growth spurt
for nonresidential, a period in which
building projects “jumped at a 21 percent
annualized pace” after three quarters of
decline—said 2004’s spring showing was
a harbinger of more good things to come.
Expect several years of double-digit growth,
Haughey wrote. With some caveats. Market
activity declined slightly in the summer of
2004, and he expected little, if any, in-
flation-adjusted growth in fourth-quarter
2004. He blamed poor weather, concrete
and steel shortages, work delays caused by
material-pricing sticker shock, anxiety over
reports of economic weakness, and Fed ac-
tions to raise credit costs. But he thinks
2005 will show a rebound.
“Expect growth to resume in the fall
and extend through 2005 because most
of the key market drivers are improving,”

www.ecmag.com JAN.05 ELECTRICAL CONTRACTOR 41

 FOCUS / CONSTRUCTION FORECAST 2005

struction Outlook,” shows this dramatic up-

Housing Starts Value of Housing Starts swing, with separate projections for spring
Millions of starts Billions of dollars and summer of 2003–2008. In an e-mail,
2.0 300 Sullivan explained: “I make three forecasts
1.8 per year. The spring forecast refers to my
1.6 250
projections made in the spring and the
1.4 200 summer [forecast], my forecasts made in
SOURCE: McGRAW-HILL CONSTRUCTION

1.2
1.0 the summer. The intent was to show what,
150
0.8 if any, changes I have made regarding my
0.6 100 outlook for each of the sectors.”
0.4 Despite good vital signs, Mueller thinks
50
0.2 hotel occupancy won’t pass the 65 percent
0.0 0 “average” until 2007. Retail is the stron-
2004 2005 2004 2005 gest, most recession-proof market, and low
<Single Family <IMultifamily <Single Family <IMultifamily interest rates and home refinancing have
given consumers a lot of spending cash.
The average retail occupancy—86 per-
Industrial Construction Outlook cent—will begin to grow in 2005.
Billions of 1996 dollars
40 Warehouses and RFID
35 In 2000, warehouse construction hit 304
30 million feet but dropped to 184 million in
25 2003, a stunning 40 percent loss. What
happened? In the 1990s, a strong retail
SOURCE: READ CONSTRUCTION DATA

20
sector and Internet sellers looking for stor-
15 age space boosted construction. But the
10 fabled dot-com bust and lukewarm retail
5 activity put speculative warehouse projects
0 on hold indefinitely and slowed build-to-
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 suit projects.
YTD Average (July): $10.0 Billion. Current Forecast $10.7 <Spring Forecast <Summer Forecast But vacancy rates, which peaked at
11.7 percent in third-quarter 2003 and fell
Haughey wrote. “In the leasing market, va- ings prices. In these cycles, sluggish expan- to 11.2 percent a year later, are turning
cancy rates for leased buildings, while still sion is followed by precipitous decline. around. Successful retailers are planning
high, are declining. Overall rents are now “We bottomed out in 1990, then peaked distribution centers, and McGraw-Hill says
stable or slightly rising. This increase in in 2000. But it only took three years to go this sector, after 5 percent growth in 2004
cash flow for building owners is prompting back to the bottom. We’ll now start climb- (193 million square feet) will leap 14 per-
more construction.” ing back up. This is a typical cycle,” he cent in 2005 to 220 million.
He outlined some other signs for nonresi- said. With warehouse construction, the Mc-
dential expansion: Rental growth, he said, is slow nearly Graw-Hill report noted the rapidly develop-
® Hotels reacting to rising room and oc- everywhere except Southern California ing use of radio frequency identification
cupancy rates and Florida, but should start moving up by (RFID) tags in tracking inventory. As Thom-
® Retailers adding space after a 7 percent 2006. Mueller believes the nation’s indus- as E. Glavinich wrote in ELECTRICAL CONTRACTOR
annual-sales jump trial sector will grow in 2005, and as the in April 2004: “Wal-Mart is requiring its
® Office expansion due to higher employ- job market improves, so will the multifamily top 100 suppliers to put RFID tags on their
ment levels and real estate. His colleague at the confer- pallets and cases by Jan. 1, 2005. Simi-
ence, Edward J. Sullivan, the Portland Ce- larly, the Department of Defense (DOD) is
Retail, industrial and real estate ment Association’s (PCA) chief economist, requiring suppliers to put RFID tags on its
At Reed, Glenn Mueller, Johns Hopkins has even higher hopes. He sees industrial shipments by 2005.”
University professor and Legg Mason Inc. climbing strong and steady, reaching $35 For electrical contractors, RFID technol-
real investment strategist, noted a “physi- billion by 2008, up from 2004’s level of ogy could mean limited opportunity in Cat
cal” real estate cycle reflects supply and just over $10 billion. It’s a height industrial 5 hard-wiring for stationary scanning sys-
demand for space and drives occupancy hasn’t reached since 1998. tems and unlimited opportunities in wire-
and vacancy. That sets rents and stimu- “It’s optimistic,” Sullivan said. “But I less network installations. But the technol-
lates construction. In the “financial” cycle, don’t know if many will agree with that.” ogy is evolving and its potential is as yet
changes in real estate capital affect build- The chart on this page, “Industrial Con- untapped.

42 ELECTRICAL CONTRACTOR JAN.05 www.ecmag.com

FOCUS / CONSTRUCTION FORECAST 2005

“To what extent the use of RFIDs will af-
fect warehouse demand is uncertain,” the
report stated, “but at the least it will increase
our need for new warehouse designs to be
able to accommodate new technology.”
The institutional sector
Normally a steady performer, institutional
building has stumbled since 2002 and re-
corded its third straight decline in 2004
with minus 4 percent. McGraw-Hill blames
state and local governments’ poor health
and their taxing structure, which is, in turn,
tied to the economy. The states’ fiscal for-
tunes are irregular, but, in general, condi-
tions are improving, the bad times having
peaked. The report said: “This should set
the stage for an improved performance by
institutional building in 2005,” and the
“broader forces affecting the pattern of in-
stitutional building are generally positive.”
These forces are the following:
® Rising student enrollments
® A growing elderly population
® The population shift to the Sunbelt
® A large number of bond issues passed
recently
® The residential sector’s strength in
2001–2004 will introduce need for insti-
tutional facilities
In short, the report stated institutional
will have a 3 percent gain to 518 million
square feet with slight improvement in
schools, healthcare facilities and trans-
portation terminals. Public buildings, such
as courthouses and churches, will suffer a
decline.
Building in education
In response to escalating student enroll-
ments and heavy state and local funding,
education construction hit a peak with
273 million square feet in 2001. But in
two years, it slid 12 percent to 241 million
square feet with the biggest losers being
Midwestern and Northeastern states. Cali-
fornia was the exception to the trend, rack-
ing up an increase of 3.2 million square
feet in 2001–2003.
In 2004, the pattern continued. Uni-
versity-related construction fell 19 percent,
triggering an 11 percent drop in high school
construction, a 13 percent decline in el-
ementary schools and a 14 percent skid in
junior high school construction. Community
colleges had a slight increase, but museums,
libraries and labs were down. At the time
of the report, educational construction was
a facing a possible 10 percent across-the-
board drop to 217 million square feet, the
skimpiest total since 1998’s 203 million.
McGraw-Hill predicts that though in re-
treat, this sector will bounce back. Growing
enrollments in 2005 will continue through
2013. The bulk of this activity will happen
in the West, with an 11 percent gain, and in
the South, with a 5 percent increase.
Healthcare and other institutional
Healthcare construction in 2003 took a step
backward, dropping 5 percent to 92 million
square feet, according to the McGraw-Hill
report, and dropped 1 percent in 2004 to
91 million. Though this sector has seen de-
clines recently, it has grown considerably
in the past seven years. In 1997 through
2003, new construction averaged 93 mil-
lion square feet, up 28 percent from 1990–
1997’s 73 million-square-feet average.
Several factors will help this area grow an
estimated 3 percent to finish 2005 with 94
million square feet in new construction:
® Medicare reform and corresponding big-
ger reimbursements
® Hospitals are investing in new technology
and replacing older facilities in the face of
competition from specialty outpatient clin-
ics
® Bigger demand for healthcare exists as
baby boomers grow older
The fiscal woes of governments have
squeezed financing of prisons, police sta-
tions, courthouses, and post offices. Steady
at 44 million square feet in 2000–2001,
this building type took a cut to 35 million
in 2003 but was expected to rebound 10

The China, oil, green axis
IF A THEME DEVELOPED at McGraw-
Hill and Reed, it was a concern over
fuel prices, China’s emergence as
an economic giant, and the impor-
tance of “green” building, which
was especially apparent by frequent
mention of the Leadership in Energy
and Environmental Design (LEED) ac-
creditation. A voluntary, consensus-
based national standard for develop-
ing high-performance, sustainable
buildings, LEED seemed to be on
everyone’s mind. During a McGraw-
Hill panel discussion with three of
the country’s leading architects,
Carl Roehling, president and CEO
of SmithGroup, said many younger
architects see a LEED accreditation
as an essential resume-builder and
“half of our clients ask for a LEED
building.” (For more visit www.us-
gbc.org/leed/leed_main.asp)
At the time of the conferences,
oil prices were hovering at $55 a
barrel, yet Jim Haughey, in Reed
Construction Forecast Monthly,
said high energy prices, reduced
consumer confidence and lower
capital spending were mere bumps
in the road to continued economic
development. Job losses such as
those that occurred in previous oil
crises should not be a factor, his
report said.
“As oil price-shocks go, this one is
minimal. Prices are higher but sup-
plies are readily available without
waiting or searching. Gasoline prices
would have to rise more than 60
cents—to above $2.50 per U.S.
gallon—to match the impact on the
economy of the 1991 oil shock. This
is very unlikely to happen,” Haughey
reported.
China and commodities
Though China’s commodity gobbling
caused building-material shortages
here, Haughey asaid China’s oil
thirst was slaking “and an absence
of lineups at the gas station would
seem to indicate the price of oil is
headed down soon.”
He supposed the price per bar-
rel would drop $5 in the next few
months, which proved to be pre-
scient. On Dec. 10, 2004, the price
of light, sweet crude for January
delivery had fallen to $42.53.
Also in late 2004, the oil market’s
continued volatility—the tensions
and troubles in Iraq, Russia and
other production areas—had Edward
J. Sullivan’s Portland Cement Asso-
ciation adjusting its 2004 gross do-
mestic product projection, dropping
it from 4.4 percent to 3.9 percent,
and lowering 2005’s GDP estimate
from 3.8 percent to 3.4 percent.
“The downward adjustment to the
current forecast primarily reflects
significantly higher oil price as-
sumptions,” the PCA reported in a
revised forecast. “PCA fully incor-
porates the likelihood of continued
oil supply disruptions in the context
of strong global demand conditions,
resulting in a downward rigidity in
current oil price levels. The higher
oil price scenario will weaken over-
all economic growth. With higher
oil prices, consumer spending will
be partially compromised, inflation
will run stronger, job gains will be
smaller, and sentiment in both the
consumer and business areas will
be more sedate. Combined, these
factors lead to roughly a 50 basis
point reduction in PCA’s previous
forecast for real GDP growth.”

44 ELECTRICAL CONTRACTOR JAN.05 www.ecmag.com

percent to 38 million square feet in 2004,
before dipping to 36 million in 2005. Other
points for these institutional areas:
® In 2002, religious building reached 52
million square feet, a high not seen since
the early 1960s. It dropped to 43 million
in 2004
® Amusement-related building—conven-
tion centers, sports arenas, theaters—was
at 94 million square feet during 1995–2000
but fell sharply in recent years, landing at
65 million in 2003. It’s expected to make a
minor comeback to 73 million square feet
in 2005.
Manufacturing
For several long years in the recent past,
manufacturing was a wasteland, hitting the
skids at 67 million square feet in 2002.
There are reasons for the fall—a strong dol-
lar in the late 1990s that made U.S. exports
more expensive and manufacturers who
moved production overseas—but whatever
the case, this depressing decline has been a
sore point for many electrical contractors.
But remember the good old days? In
1997, this sector was at 191 million square
feet. A small part of that was regained in
2003 with a hike to 71 million square feet,
and 2004 saw another small increase to
73 million, spurred in part by auto plant
construction in Oklahoma, Texas and Mis-
sissippi; the $600-million conversion of
an Arizona Intel semiconductor plant; and
a $300-million expansion to a California
biotech manufacturer. These projects, and
others like them, will help manufacturing
reach 80 million square feet in 2005, a 10
percent jump, according to McGraw-Hill.
Public works, electric utilities
Moribund government spending affected
this sector, too, as public works money be-
gan drying up in 2003 after several years
of growth. But in 2004, prompted by the
need for water and sewer works, these proj-
ect types jumped 4 percent to reach $85.9
billion.
A 2004 bill by Congress set forth these
spending levels:
® Highways up 4 percent (from 2003 lev-
els) to $33.6 billion
® Mass transit increased 1 percent to $7.3
billion
® Airport grants didn’t budge, remaining
at $3.4 billion
® Army Corps of Engineers construction
funding cut 3 percent
® EPA water infrastructure grants raised
3 percent
® The EPA Superfund account received an
8 percent bump upward
But in 2005, President Bush set a 0.5
percent limit on discretionary funding and
things look tight, except for the Transpor-
tation Security Administration—homeland
security was exempt from the limit—which
received a 20 percent increase, including
$250 million slated for airport upgrades.
At the time of the report, 2005 levels were
not set by Congress, but they look similar
except for a 13 percent EPA cut and a 7
percent raise for the Corps.
Closing the books
Sullivan, who delivered the U.S. construc-
tion overview at Reed, noted many signs
of a brighter economy. After a 2001–2003
drought, investment spending has made a
strong return and will no doubt help replen-
ish funding for manufacturing construction
and other sectors that have fallen on hard
times. Job growth looks good. The fiscal cri-
sis in most states, he said, is fading. Still,
the signs portend only a modest recovery in
most sectors and slight declines in some
others. And oil prices are the most frighten-
ing bugbear, the biggest wild card for many
an economic pundit. Not a real boom year,
yet certainly not a bust. Just a time to be
cautiously optimistic. EC
FULMER is editor of ELECTRICAL
CONTRACTOR and SECURITY+LIFE SAFETY SYSTEMS.
He can be reached at 301.215.4516
or jfulmer@necanet.org.

Still China was a focal point.
Haughey said China’s decision to
cool down its blistering-hot economy
caused cuts in worldwide orders in
every sector.
“China accounted for more than 25
percent of world economic growth in
the last year, so the canceled orders
had a significant impact immedi-
ately,” Haughey wrote.
“Because China had been hoarding
inventory of many commodities, the
country’s May–July (2004) orders
were probably below their consump-
tion and will have to rise later in the
tices. During a Reed industry panel
discussion—and throughout the
conference—it was common to hear
talk such as this, which comes from
the Greenway Group Inc., whose
chairman, James P. Cramer, was the
conference moderator:
® “Green and sustainable design
Most Significant Design Trends Over Next 5 Years
% of respondents
Green architecture
Healthy buildings; mold
Smart growth/
and development are shifting
gears into increasingly high
demand.”
® “Intelligent and integrated build-
ings are becoming the norm.”
® “Some don’t have a clue about
[LEED] but it’s coming to this
industry.”
In short, contractors will be forced
into using new and unfamiliar
design criteria if they wish to com-
pete, especially for government
contracts, a sector that will most
certainly employ the most stringent
green guidelines for sustainable
buildings.
SOURCE: McGRAW-HILL CONSTRUCTION

summer” Haughey added. livable communities

Building security
The “Green” Approach
Increased use of
The oil price spike, China’s grow- technology in design
ing needs and green building are Rehabilitation vs.
related. Limited supplies of fossil new construction
Integrated international
fuels and competition from nascent building code
economic giants such as China for Other
those supplies have forced U.S.
0% 10% 20% 30% 40%
builders into innovative design prac-

www.ecmag.com JAN.05 ELECTRICAL CONTRACTOR 45