April Construction Slides 5% May 31, 2007
New York, N.Y. – May 23, 2007 – The value of new construction starts fell 5% in April to a seasonally adjusted annual rate of $565.1 billion, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies.  Both nonresidential building and residential building experienced a slight loss of momentum, while the public works sector dropped sharply after its heightened amount in March.  For the first four months of 2007, total construction on an unadjusted basis came in at $184.6 billion, down 17% from the same period a year ago.  The year-to-date decline for construction starts reflects the comparison to the elevated activity in the first four months of 2006, which was just prior to the time when the single family correction grew pronounced.  Excluding residential building from the year-to-date statistics, new construction starts in the first four months of 2007 were down 3% from last year.

The April statistics lowered the Dodge Index to 120 (2000=100), compared to a revised 126 for March.  “The weak residential sector continues to shape the pattern for overall construction activity,” stated Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction.  “The rate of decline for single family housing is not as severe as what took place earlier, but the level of activity is down substantially from the initial months of last year, and renewed expansion is not anticipated any time soon.  The nonresidential building and public works sectors in early 2007 have been volatile on a month-to-month basis, but in a broad sense both have been able to hold fairly close to last year’s pace.”

Nonresidential building in April slipped 3% to $191.8 billion (annual rate).  For the commercial structure types, moderate declines were reported for stores, down 4%; and offices, down 9%.  The slower rate of contracting for offices was cushioned by the start of several large projects, including $183 million related to renovation work at the Pentagon in Arlington VA and $166 million for a new office building in the Los Angeles CA area.  On the plus side, April showed stronger activity for warehouses, up 8%; and hotels, up 17%.  The hotel gain was aided by such large projects as the $194 million hotel portion of the $450 million Mandarin Oriental hotel/condo tower in Chicago IL, plus the start of two large hotels in Orlando FL valued respectively at $172 million and $129 million.  Murray indicated, “While the steep rise for hotel construction in 2006 was led by a surge of hotel/casino projects, the current year is seeing broader strength across the lodging spectrum.”  Reflecting this, the top two metropolitan areas for hotel construction starts in 2006 were Las Vegas NV and Atlantic City NJ; so far in 2007 the top two metropolitan areas for hotel projects are Chicago IL and Orlando FL.  The manufacturing plant category in April receded 7%, with the large projects for the month including groundbreaking for a $170 million ethanol plant in Indiana and an $80 million pharmaceutical plant in Massachusetts.

For the institutional side of the nonresidential market, weaker activity was reported for three of the smaller categories – churches, down 6%; transportation terminals, down 48%; and dormitories, down 60% from an exceptionally strong March.  The educational building category in April held steady, at a level 6% higher than the average monthly rate for 2006.  Helping to keep the educational building category moving at a brisk pace was a strong volume of public school construction in such states as Texas, California, Pennsylvania, Ohio, and Minnesota, as well as the start of a $175 million museum expansion in Boston MA.  Healthcare facilities in April grew 1%, with large hospital projects started in West Virginia ($169 million) and Alabama ($116 million).  The public building category increased 11%, helped by the April start of a $150 million detention facility in West Virginia, while the amusement category (arenas, convention centers) advanced 20%.

Residential building, at $273.4 billion (annual rate), retreated 1% in April.  Single family housing registered a 3% decline in dollar volume, due to this performance by major region – the South Atlantic and West, each down 6%; the Midwest, down 3%; the Northeast, down 2%; while the South Central ran counter with a 5% gain.  The sharp pullback by investor-led demand over the past year continues to dampen the housing market, keeping the inventory of unsold homes at a high level.  At the same time, the cost of financing remains low, as the 30-year fixed mortgage rate for April averaged 6.2%, essentially the same reading that was reported for the first three months of 2007.  Multifamily housing in April improved 5%, in what’s likely a brief departure from the downward trend that’s been present for this structure type during the latter half of 2006 and the initial months of 2007.  Boosting the multifamily category in April was the $216 million condo portion of the Mandarin Oriental hotel/condo tower in Chicago IL, plus major multifamily projects in Honolulu HI ($197 million) and Boston MA ($100 million).  Murray noted, “Recent years witnessed a substantial number of high-rise condominium projects that reached groundbreaking.  Such projects are still being started in 2007, but to a lesser degree than before, as the condo boom winds down.”

Nonbuilding construction in April plunged 19% to $99.9 billion (annual rate), dropping from the elevated volume that had been reported for March.  In mid-February, Congress had agreed on fiscal 2007 funding for the federal-aid highway program, and this contributed to a huge 53% jump for highway and bridge projects in March.  The amount of highway and bridge construction that reached the start stage in April retreated 30%, as activity returned to a more typical pace.  Through the first four months of 2007, highway and bridge construction was reported to be up 1% compared to last year.  Also retreating from a very strong March were water supply systems, down 9%; and sewers, down 38%.  River/harbor development work in April jumped 22%, aided by the start of a $189 million dredging and terminal project in Jacksonville FL.  The “miscellaneous nonbuilding” category in April was essentially flat, but it did include the start of one huge project – $337 million related to work on the Second Avenue subway in New York NY.  Electric utility construction in April registered expansion, climbing 36% with the push coming from the start of a $212 million wind energy project in Iowa.

The decreased volume for total construction during the first four months of 2007 was the result of this performance by major sector – residential building, down 29%; nonresidential building, down 3%; and nonbuilding construction, down 2%.  In coming months, it’s expected that the decline for residential building will moderate, exerting less of a downward pull on the year-to-date amount for total construction.  For the five major regions, total construction during the first four months of 2007 relative to last year was the following – the South Central, down 9%; the Northeast, down 14%; the Midwest, down 15%; the South Atlantic, down 18%; and the West, down 25%.

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Source:  McGraw Hill Construction

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