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July Construction Declines 10 Percent

By Mark S. Kuhar

New construction starts fell 10 percent in July to a seasonally adjusted annual rate of $401.2 billion, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies. After showing improvement during the spring, the pace of construction starts retreated over the past three months, with July coming in at the lower end of the recent range of activity.

Highway construction in July improved 6 percent from a lackluster June, although July’s amount was still 8 percent below this category’s average pace during 2011. Bridge construction in July was down 19 percent.

Nonbuilding construction, comprised of public works and electric utilities, fell sharply in July, while both nonresidential building and housing lost some of their earlier momentum. For the first seven months of 2012, the volume of total construction starts on an unadjusted basis was reported at $262.9 billion, holding on to a 4 percent gain compared to the same period a year ago.

The current year began on a weak note, and July brings the pace of total construction starts back to the lackluster activity reported at the outset of 2012. “The construction industry is still struggling to gain upward traction, as construction starts continue to exhibit an up-and-down pattern,” said Robert A. Murray, vice president of economic affairs for McGraw- Hill Construction. “The public works and institutional building sectors are still being adversely affected by the tough fiscal climate facing the federal, state and local levels of government. Commercial building, which seemed to be in the very early stages of recovery, is seeing its faint upturn become more tenuous with the sluggish employment picture. The upward potential for housing in the near term is also being dampened by the persistently hesitant U.S. economy. Overall, the construction industry remains stuck for now in an extended process of turning the corner.”

Nonbuilding Construction
Nonbuilding construction in July dropped 18 percent to $109.1 billion (annual rate). The electric utility category plunged 36 percent, falling for the third month in a row after the exceptional activity that was reported during March and April. July did include the start of a few noteworthy projects, such as a $535 million gas-fired power plant and a $75 million biomass plant, both in Texas, but the July pace of new electric utility starts was down 84 percent from this category’s average for the first six months of 2012.

The public works sector in July fell 16 percent, sliding back after a brief upturn in June. The “other public works category,” comprised of such diverse project types as site work, mass transit, pipelines and outdoor sports stadiums, plummeted 61 percent from June which had been lifted by $1.0 billion estimated for work on a new football stadium for the San Francisco 49ers in Santa Clara, Calif. The largest “other public works” project reported as a July start was a $75 million stadium expansion for Kansas State University in Manhattan, Kan.

Bridge construction in July was down 19 percent even with the start of a $261 million bridge replacement project in Oregon, and sewer construction dropped 11 percent. Water supply construction in July grew 20 percent, aided by a $100 million expansion to a water reclamation facility in Arizona, while water resource construction jumped 57 percent, reflecting the start of a $97 million dam rehabilitation project in Tennessee.

Nonresidential Building
Nonresidential building, at $138.1 billion (annual rate), decreased 7 percent in July, with weaker activity reported for the majority of the institutional categories. Educational facilities in July dropped 12 percent, after showing some improvement during the previous two months. July included a few noteworthy education-related projects, led by a $93 million high school in Mountain House, Calif., which is being financed via a leaseback arrangement, as well as a $65 million science building at Ohio State University in Columbus, Ohio.

However, these projects were not enough to avert a decline for the educational building category in July. Healthcare construction in July dropped 10 percent, even with the start of a $156 million replacement hospital at Fort Irwin, Calif., and a $113 million hospital expansion in Silver Spring, Md. Also showing declines in July were amusement-related construction, down 13 percent; and churches, down 10 percent.

The public buildings category, comprised of courthouses and detention facilities, edged up 1 percent in July. Transportation terminal work rebounded 50 percent from a weak June, helped by the start of a $96 million terminal expansion at Dulles International Airport in Virginia. The commercial categories in July were able to show modest growth.

Hotel construction in July climbed 13 percent, lifted by the start of a $50 million hotel and casino in Wilkes Barre, Pa., and a $29 million hotel addition/renovation in Denver. Store construction in July advanced 6 percent, led by the start of a $70 million retail project in Las Vegas and a $49 million retail project in El Paso, Texas. Office construction in July grew 4 percent, following a steep 30 percent drop in June, helped by the start of such projects as a $101 million office complex in Eden Prairie, Minn., and a $50 million office renovation in Las Vegas. Warehouse construction in July maintained the same volume of activity that was reported in June. The manufacturing plant category in July dropped 31 percent, retreating for the second month in a row after the heightened activity back in May.

Residential Building
Residential building in July slipped 6 percent to $154.0 billion (annual rate). The decline was due to a 25 percent pullback for multifamily housing, following strengthening activity in May (up 32 percent) and June (up 7 percent). Cushioning the multifamily decline in July were the start of such projects as a $95 million apartment building in Boston, a $94 million apartment building in Jersey City, N.J., a $78 million apartment building in Los Angeles, and a $61 million senior living facility in Pleasanton, Calif.

The July pace for multifamily housing, while down 6 percent from the first six months of 2012, was still 10 percent above the average pace for this project type during 2011. Single family housing in July edged up 1 percent, not as strong as some of the gains shown earlier in 2012, but essentially maintaining the improved amount reported in May and June.

The July pace for single-family housing was up 6 percent from the first six months of 2012, and up 27 percent from the average pace for this project type during 2011. The 4 percent increase for total construction starts on an unadjusted basis during the first seven months of 2012 was due to greater activity for two of the three main construction sectors.

Residential building climbed 25 percent year-to-date, with similar gains for single family housing, up 24 percent; and multifamily housing, up 26 percent. Nonbuilding construction grew 7 percent year-to-date, reflecting a 19 percent jump for electric utilities and a 1 percent pickup for public works.

Nonresidential building continued to be the one major sector to report a year-to-date decline, falling 15 percent, as the result of this pattern by segment – commercial building, down 1 percent; institutional building, down 18 percent; and manufacturing building, down 35 percent.

By geography, total construction starts during the first seven months of 2012 featured a large gain for the South Atlantic, up 42 percent, with much of the lift coming from the start of the two massive nuclear power projects in Georgia and South Carolina. Total construction in the Midwest during the January-July period was up 5 percent, while reduced activity was reported in the South Central, down 7 percent; the West, down 8 percent; and the Northeast, down 11 percent.

Housing Permits Rise

Nationwide housing production edged down 1.1 percent to a seasonally adjusted annual rate of 746,000 units in July, according to newly released figures from HUD and the U.S. Census Bureau. However, builders pulled more permits for plannednew-home projects than they have in any month since August of 2008.

“While many builders believe that the outlook for housing is considerably brighterthan it has been in years, we are being very careful about keeping inventories tight and not building ahead of demand,” noted Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. “At the same time, builders are drawing more permits for new construction so we can accommodate buyers and renters as they return to the marketplace.”

“Our latest surveys confirm builders’ increased confidence about future home buyer demand, and that’s reflected in today’s permit numbers,” agreed NAHB Chief Economist David Crowe. “Increasingly, housing is re-emerging as a traditional and much-needed source of strength in local economies as builders are able to put more of their crews back to work. But two things that are slowing this process considerably are the challenges that builders continue to face in accessing credit for viable new projects and the difficulty of obtaining accurate appraisals on new homes.”

Issuance of new building permits, which can be an indicator of future building activity, rose 6.8 percent to a seasonally adjusted annual rate of 812,000 units in July – the fastest pace in nearly four years. Single-family permits rose 4.5 percent to 513,000 units (their best pace since March of 2010) while multifamily permits rose 11.2 percent to 299,000 units.

Permit issuance rose in three out of four regions in July, with the Northeast registering a 12.2 percent gain, the South a 5.8 percent gain and the West a 14.0 percent gain. The Midwest posted a 4.2 percent decline.