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2008 Outlook for U.S. Construction Activity Midyear Update ENR-CURT Construction Business Forum St. Charles, MO – June 11, 2008 Robert Murray Vice President, Economic Affairs McGraw-Hill Construction U.S. Construction Market Indicators

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2008 outlook for u s construction activity midyear update

2008 Outlook forU.S. Construction ActivityMidyear Update

ENR-CURT Construction Business Forum

St. Charles, MO – June 11, 2008

Robert Murray

Vice President, Economic Affairs

McGraw-Hill Construction

u s construction market indicators
U.S. Construction Market Indicators

Total construction fell in 2007 – first decline in current dollarssince 1991.

major u s construction sectors starts
Major U.S. Construction Sectors (Starts)

Single Family Housing down sharply; Commercial Bldg. turning;

Institutional Bldg. , Public Works still have some upward potential.

u s macroeconomic picture
U.S. Macroeconomic Picture

The economy has slowed – and is close to recession.

u s macroeconomic picture5
U.S. Macroeconomic Picture

The pressure on prices has picked up.

u s macroeconomic picture6
U.S. Macroeconomic Picture

Both short-term and long-term rates have moved down.

Also, Federal Reserve took

aggressive steps in March to deal

with latest stage of financial crisis.

Stimulus Package includes:.

Tax rebates

Incentives for equipment purchases

Steps to increase the funds

available for mortgage lending.

Aside from monetary policy,

a $168 billion stimulus package

was enacted on February 13.

Pattern of GDP Annual Growth

2006 20072008 2009

+2.9 +2.2% +1.2% +2.5% (?)

u s macroeconomic picture7
U.S. Macroeconomic Picture

Tighter lending standards are a major constraint for 2008.

More instances of tight credit conditions

affecting large projects, such as

Cosmopolitan Resort in Las Vegas

Atlantic Yards in Brooklyn

Other New York City projects

Seattle development (Clise property)

u s macroeconomic picture8
U.S. Macroeconomic Picture

Federal budget restraint – ok for ’08, tougher climate in 2009.

Supplemental Spending Bill for 2007

  • Additional funding for Corps of Engineers, base realignments, homeland security,

rail and transit systems.

Federal Spending for Fiscal 2008

  • Federal-aid highway program, up 5%
  • Mass transit, up 5%
  • Airport Improve. Grants, flat
  • Corps of Engineers, down 2%
  • EPA Water Infrastructure down 7%

-- Clean Water SRF’s, down 35%

  • GSA Construction, down 33%
  • GSA renovations, down 16%
  • DOD base realignment, up 29%

Renewed focus on infrastructure following

I-35 W bridge collapse in Minneapolis

Fiscal 2009 – Bush Admin. Proposals

  • Federal-aid highway program, down 4%
  • Mass transit, up 7%
  • Airport Improve. Grants, down 22%
  • Corps of Engineers, down 18%
  • EPA Water Infrastructure down 12%

-- Clean Water SRF’s, down 21%

  • DOD base realignment, up 26%
u s macroeconomic picture9
U.S. Macroeconomic Picture

State fiscal health now weakening.

Current Status

  • New York State – as example,

funding boost still coming from

$2.9 bil. bond measure passed in 2005.

Also – ambitious capital programs of

NY-NJ Port Authority, MTA

But – budget picture has changed

  • 21 States with Projected Budget Gaps

for Fiscal Year 2009, including:

Shortfall

California $16.0 bil.

New York 4.7 bil.

New Jersey 3.5 bil.

Florida 2.0 bil.

Ohio 1.9 bil.

November 2006 Elections

  • California -- voters approved

Prop. 1B -- $19.9 bil. for transportation,

also $10.4 bil. for school facilities

November 2007 Elections

  • Texas – school const. measures passed.
  • Washington State – voters rejected
  • Proposition 1, which would have used
  • tax hikes to fund transportation projects.
u s macroeconomic picture10
U.S. Macroeconomic Picture

Materials prices in 2007 had varied pattern. Shift from 2004-2006.

  • Is there more capacity

coming on line? Yes.

  • Is slower U.S. economy

leading to less pressure on

commodity prices?

In some cases, yes.

But, in 2008 investors

are pushing commodity

prices upward.

u s macroeconomic picture11
U.S. Macroeconomic Picture

Other building materials -- renewed concern over steel prices.

u s single family housing
U.S. Single Family Housing

Construction fell sharply in 2006 and 2007 after 2005 peak.

Single Family Housing Starts

2005 1.626 million units +5%

2006 1.331 million units -18%

2007 .936 million units -30%

u s single family housing14
U.S. Single Family Housing

Major negatives – falling prices, high inventories, tighter lending.

Bank regulators have issued

guidelines to banks for

unconventional mortgages.

Subprime lending turmoil is now

affecting more traditional mortgage

lending. (Fed. Res. Jan.’08 survey)

Steps taken to improve funds available

for mortgages -- will they help?

Single Family Housing Starts

2008 .650 million units -31%

u s multifamily housing
U.S. Multifamily Housing

Construction relatively stable in 2006, weakened in 2007..

  • Comprised of both apartments

and condominiums.

  • Helped by push for
  • downtown redevelopment. Demographics supportive, especially from empty-nesters.
  • Mid-decade strength has

come from condominium

development.

  • Was attractive investment

target, less so now –

due to mounting concern

about over-building of condos

and diminished credit availability.

Multifamily Housing

2006 516,000 units -3%

2007 442,000 units -14%

2008 345,000 units -22%

u s multifamily housing16
U.S. Multifamily Housing

Major metropolitan areas

Multifamily Housing

Top 10 Metros -- ranked by new dwelling units

Year 2007, %ch 07/06

1. New York -23%

2. Chicago -23%

3. Washington DC +3%

4. Atlanta +5%

5. Seattle +19%

6. Houston +40%

7. Miami -50%

8. Los Angeles -34%

9. Orlando Fl -7%

10. Phoenix +14%

12. Las Vegas -3%

Year 2006, %ch 06/05

1. New York -0-

2. Miami -23%

3. Chicago +33%

4. Los Angeles +21%

5. Dallas-Ft.Worth +26%

6. Washington DC -21%

7. Atlanta -22%

8. Orlando FL +20%

9. Seattle +39%

10.Houston -6%

12. Las Vegas +16%

u s commercial bldgs stores
U.S. Commercial Bldgs. -- Stores

Construction in 2006 and 2007 still at very high level.

  • Derived demand from housing

market – definitely going up;

but is it also true going down?

  • Substantial building

from five major players:

Wal-Mart,

Home Depot, Lowe’s

Target, Kohl’s

  • Impact of slowing retail sales;

still, competitive retail landscape.

  • Wal-Mart announcement on plans to scale back expansion.
  • Move to smaller venues e.g., “lifestyle centers”.

Store Construction

2006 308 msf -1%

2007 311 msf +1%

2008 253 msf -19%

(msf = million of sq. ft.)

u s commercial bldgs hotels
U.S. Commercial Bldgs.-- Hotels

Construction soared in 2006, more growth in 2007, down in 2008.

  • Industry financials had strengthened:

Occupancies in 2006 at 63.3%,

vs. 63.1% in 2005.

Revpar in 2006 up 7.5%.

almost as strong as 8.5% in 2005.

(Smith Travel Research)

2007 Revpar up 5.7%.

  • In 2005:

hotel/casino projects, and

convention center- related hotels.

  • In 2006 and 2007:

broader expansion,

more Las Vegas projects,

convention center hotels,

“condo” hotels

  • Shorter “upcycle” this time?

Hotels

2006 82 msf +67%

2007 86 msf +5%

2008 77 msf -10%

u s commercial bldgs offices
U.S. Commercial Bldgs. -- Offices

Construction upturn has been measured this time …

  • Recovery re-established in 2006:

activity stalled in 2005 as projects reassessed due to higher costs.

  • Market fundamentals still

relatively healthy, but now turning.

office employment

vacancy rates –

suburban in 2008 Q1 up to 14.9%;

downtown in 2008 Q1 eased to 10.2%

  • In 2006 and 2007: several major

high-rise projects reached

groundbreaking, including:

Goldman Sachs headquarters

Freedom Tower

11 Times Square

Early 2008: more NYC WTC –

Towers 2, 3, 4

Office construction

2006 208 msf +24%

2007 215 msf +4%

2008 192 msf -11%

u s commercial bldgs offices20
U.S. Commercial Bldgs. -- Offices

Office Building Factors

  • No extensive overbuilding –

Means downturn likely to be

Measured, not precipitous.

u s institutional educational bldgs
U.S. Institutional -- Educational Bldgs.

School construction still strong, but losing some momentum.

20062007

Primary, Jr. Highs +1% -6%

High Schools +15% -8%

Colleges/Univ. +7% +10%

Libraries -0- -6%

Laboratories -22% +8%

Museums +5% -26%

Comm. Colleges +43% -2%

Vocational Schools +37% -43%

Educational Buildings

2006 230 msf +5%

2007 220 msf -5%

2008 217 msf -1%

  • Numerous states in recent years

have passed school construction

bond measures, especially

California.

  • Major universities have increased

capital spending plans.

u s institutional educational bldgs22
U.S. Institutional – Educational Bldgs.

College/University construction remains on upward track.

Dormitories

2006 24.1 msf -11%

2007 26.0 msf +8%

2008 26.6 msf +3%

Colleges, Univ.,Comm.Col.

2006 29.3 msf +12%

2007 31.6 msf +8%

2008 32.8 msf +4%

slide23

U.S. Institutional -- Educational Bldgs.

Educational Buildings

Top 10 States -- ranked by sq. ft. of new starts

Year 2007, %ch 07/06

1. Texas +9%

2. Florida -16%

3. Georgia +46%

4. California -28%

5. Pennsylvania -24%

6. Ohio -32%

7. North Carolina -8%

8. New York +19%

9. Illinois -17%

10. Arizona -6%

Year 2006, %ch 06/05

1. Texas +6%

2. Florida +22%

3. California +12%

4. Ohio +19%

5. Pennsylvania +61%

6. Georgia -4%

7. North Carolina +8%

8. Illinois +2%

9. Virginia +31%

10. Arizona +63%

u s institutional healthcare buildings
U.S. Institutional -- Healthcare Buildings

Healthcare facilities reached new high in 2006, now settling back.

20062007

Clinics/

Nursing Homes +1% -0-

Hospitals +1% -18%

  • Ongoing need to replace

aging facilities

  • Hospital vs. outpatient clinic dynamic
  • Closer scrutiny of finances
  • Growth of the elderly

population

Healthcare Facilities

2006 110 msf +1%

2007 101 msf -8%

2008 96 msf -5%

u s institutional buildings
U.S. Institutional Buildings

Public Buildings had strong 2007; Amusement category weakening again.

2007

Detention Facilities +51%

Armories/Military +80%

Courthouses +59%

Police/Fire Stations -2%

Post Offices +111%

Total Public 2006 +1%

Total Public 2007 +44%

Total Public 2008 -9%

2007

Convention Centers -24%

Sports Arenas -32%

Theaters -23%

Other (inc. theme parks) -3%

Total Amuse. & Rec. 2006 +8%

Total Amuse. & Rec. 2007 -9%

Total Amuse. & Rec. 2008 -2%

u s manufacturing buildings
U.S. Manufacturing Buildings

Plant construction in sq. ft. lackluster, yet growth in dollar terms.

Manufacturing Buildings

2006 83 msf +4%

2007 83 msf -0-

2008 78 msf -6%

Manufacturing Buildings

2006 $13.5 bil. +33%

2007 $16.8 bil. +25%

2008 $18.0 bil. +7%

Surge of ethanol plants in 2006-2007

u s public works highways bridges
U.S. Public Works -- Highways & Bridges

Highways and bridges advanced in ’06 and ‘07, with more growth ahead.

  • SAFETEA-LU, with 2004 added,

up 38% compared to TEA-21.

  • Passage of SAFETEA-LU reduced uncertainty regarding long-term funding.
  • Key concerns – higher costs

reduced benefits of more funds;

FHA price index up 21% in 2006.

  • Renewed focus on infrastructure

following I-35W bridge collapse in

Minneapolis.

  • Fiscal 2008 appropriations –

federal-aid highway program up 5%,

including added funding for bridge

maintenance.

  • Concern for 2009 –

Highway Trust Fund shortfall.

Highways, Bridges

2006 $50.9 billion +15%

2007 $53.4 billion +5%

2008 $56.3 billion +5%

u s public works environmental
U.S. Public Works -- Environmental

Environmental public works growing more slowly after recent surge.

  • Fiscal 2008 –

Bush proposals call for funding cuts; to be modified by Congress.

  • Water Resources Bill –

passed over Bush veto

  • Various “gap” analyses point

to aging infrastructure, and how

current funding is coming up short.

Environmental Public Works

2006 $33.4 billion +6%

2007 $36.8 billion +10%

2008 $38.4 billion +4%

u s electric utilities
U.S. Electric Utilities

New electric utility starts holding close to level reached in 2006.

  • Glut of power generation absorbed
    • Projects started in 1999-2001

have become operational

    • Capacity utilization dropped

from 95% in 2000 down to 85%

in 2003. By summer of 2006

cap. utilization back up to 91%.

  • Energy Bill -- tax incentives for

oil and gas production, electric

utilities, transmission lines, etc.

Electric Utilities

2006$16.2 billion+106%

2007$13.6 billion-16%

2008$15.6 billion +15%

u s total construction starts for 2008
U.S. Total Construction Starts for 2008

Billions of Dollars

2004200520062007 2008

Total Construction593.2 670.3 687.5 628.3 558.5+12% +13% +3% -9% -11%

Single Family Housing 282.7 315.5 272.4 201.2 144.0+17% +12% -14% -26% -28%

Multifamily Housing 50.5 68.6 69.8 62.4 49.9+23% +36% +2% -11% -20%

Commercial Bldgs. 67.3 72.3 92.7 98.5 91.0

+14% +7% +28% +6% -8%

Institutional Bldgs. 89.1 100.0 110.5 115.5 117.3

-1% +12% +11% +4% +2%

Manufacturing Bldgs. 8.0 10.1 13.5 16.8 18.0

+17% +26% +33% +25% +7%

Public Works 88.2 95.9 112.4 120.4 122.8

+6% +9% +17% +7% +2%

Electric Utilities 7.3 7.9 16.2 13.6 15.6

-18% +8% +106% -16% +15%