By Jim Haughey, Reed Construction Data
The value of construction starts was up 11.5% in the first quarter of 2010 from the same quarter last year. But this does not signal that a sustained rising trend is underway. March starts were only 0.7% higher than February. The usual March seasonal surge did not happen. The data is volatile enough that a weak March may have no implication for the 2010 to 2011 trend. But it is a concern.
Starts are clearly above the cyclical low point last summer but have weakened slightly since the initial rebound last July and August. The improvement in the single-family market in the last nine months has been a little more than offset by declines in heavy and non-residential building construction, especially commercial projects.
These divergent trends will continue well into the year. The improvement in the single-family market will resume during the spring although this market will remain below trend for at least two more years. The decline in other construction sectors will slow. Overall, starts are expected to stabilize during the summer, turn up in the fall and then rise progressively, but modestly, in 2011.
An improving economy will be the driver for higher construction starts. This process began nine months ago but there is a long lag between a recovery in income and a recovery in construction activity. Gradually, rising GDP absorbs the surplus in building space and facility capacity. The stimulus plan boosts construction in spite of remaining surplus space and capacity. This happened last summer and fall in the highway market and is now beginning to happen in the non-residential building market. The aggregate impact here will be larger although it will be more drawn out and less obvious.
The length of the lag varies substantially by project type and region, primarily depending on the amount of surplus space and capacity at the onset of the recession and whether the surplus has shrunk or grown since the beginning of the recession. Nationally, expect a relatively short lag for multi-family, warehouse and retail work and a relatively long lag for office and hotel construction. Many smaller single-family markets are positioned to expand quickly with an improving economy. But the housing surplus will continue to grow for many more months in most of the large 2004 to 2006 housing boom markets.