Engineering, Construction & Real Estate

Construction and engineering: Low tide ahead

The U.S. construction and engineering industries form the bulk of the country’s infrastructure. The industry comprises of civil engineering firms and large-scale contractors, but excludes those involved in homebuilding. After posting double-digit growth over the past few years, the industry is likely to see a decline in 2009. Although a mild recovery is expected next year, a return to the high growth trajectory of the past will take some time.

The industry generated total revenues of $683.7 billion in 2008, representing a compounded annual growth rate (CAGR) of 10.9% for the period 2004-2008. This was substantially higher when compared to the European and Asia-Pacific regions, which recorded CAGR of 3.9% and 3.7%, respectively, and reached $764.1 billion and $682.3 billion in 2008.

There are also various tax provisions that can benefit commercial building owners seeking to make their facilities more energy efficient. The stimulus funding to building infrastructure is summarized below:

In the U.S., the construction of non-residential buildings was the largest segment in 2008, generating total revenue of $376 billion, which is equivalent to 55% of the industry's overall revenue. The civil engineering segment generated revenues of $307.6 billion or 45% of that industry's aggregate revenue. Going forward, the performance of the industry is expected to remain subdued, with the CAGR growth dropping to 0.9% for the period 2008-2013. This would take the industry to $713.9 billion by the end of 2013.

Spending on the construction of non-residential buildings in the U.S. is expected to rise 0.9% per annum and reach $479.5 billion in 2013, as slower economic growth casues businesses to rethink expansion plans. In the short run, the U.S. recession and the concurrent decline in employment will reduce the need for new office, commercial and industrial space. As the economy eventually moves into an expansionary phase, non-residential building construction is expected to lag in the context of the broader business cycle.

Within the non-residential building segment, institutional buildings would be the only category to see higher construction expenditures through 2013. This category may benefit from ballooning healthcare spending for an aging population. Educational buildings may also contribute to growth as increased enrollments in secondary schools, two-year colleges, and universities increased demand for new construction.

As mentioned above, expenditures on large office and commercial segment are expected to decline through 2013 after witnessing explosive growth over the past several years. Demand in the commercial segment may remain flat, as weaker consumer spending may curb the expansion plans of retail businesses and the demand for new warehouse space. The construction of office buildings may advance slowly as a lackluster employment outlook limits the need for new office space.

Non-building construction expenditures are expected to increase 2.9% annually during 2008-2013 and reach $293.0 billion in 2013. In the non-building construction segment, the transportation infrastructure shows the best prospects thanks to the impetus it has received from the stimulus package.

Data released by the Census Bureau shows that the construction industry continues to suffer from a significant decline in privately-funded construction investments. New federal figures show that private construction investment fell by 20.6% between September 2008 and September 2009. The annualized rate of private construction spending declined from $774 billion a year in September 2008 to $614 billion a year in September 2009. In the non-residential segment, construction spending declined by 37.4% for lodging, 33.3% for offices, and 36% for commercial structures over the past 12 months. Manufacturing and power construction were the only segments of the private construction market to see an increase in investments posting respective gains of 11% and 4.8%. Publicly funded investments in construction increased 6.1% over the past year, from $308 billion to $326 billion. Public spending on commercial facilities and power structures grew the most with respective gains of 28.8% and 27.2% over the past year. However, water supply and sewage investments declined by 1.9% and 1.8% respectively.

"Increased public investments in construction and infrastructure are welcome news, but this industry will continue to suffer while demand for private construction continues to plummet." Chief Executive Officer of Associated General Contractors of America, Stephen E. Sandherr .