After several years of slowing down, the Midwest construction market appears to be on a steady gait and poised to attain a brisk pace.

Most 2004 forecasts suggest either a stable market or a small decline in the value of new construction. Despite these middling prognostications, the level of construction is still at a historically high level.

This year the construction market is "like a plane on a taxiway," said Jeff Arfsten, president of central operations in Chicago for Bovis Lend Lease Inc., a general contractor. "We're still taxiing and looking for the clearance for takeoff."

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1 Percent Decline?

Contracting for new construction in Illinois, Indiana and Wisconsin is expected to decline 1 percent, to $40.5 billion, according to Robert Murray, vice president of economic affairs for McGraw-Hill Construction. Murray made his projections in his 2004 Outlook for U.S. Construction Activity.

Richard Tilghman, senior vice president of Chicago-based Pepper Construction Group, a holding company for general contractor Pepper Construction Co., added: "Our industry lags the economy, so I think you'll see our industry be flat or in a slight decline through the middle of 2004. But if the economy continues its upswing, I think you're going to see the second half of 2004 and 2005 be good."

Some major construction categories are expected to drop. Electric utilities are projected to decrease 20 percent to $1 billion; public works 3 percent to $5.8 billion; and single-family housing, also 3 percent to $17.5 billion. Institutional construction is projected to go down 1 percent to $7.2 billion, according to Outlook.

Within these categories, some selected Midwest market segments are forecasted to drop, including environmental public works, hotels and education.

The economic slowdown has impacted education construction through reduced tax revenues and the reluctance of voters to approve referenda, Arfsten added.

Outlook predicted that major-category bright spots include manufacturing construction, projected to increase 21 percent to $630 million, and income properties, 8 percent to $8.4 billion.

Some selected market segments expected to grow include highways/bridges, airport runways/terminals and hospitals.

"Medical is really where the action is," said Mike Fabishak, executive director of the Associated General Contractors of Greater Milwaukee Inc. "We anticipate hospitals to remain very strong in relation to other segments of the market."

Other construction industry executives cited higher education - a traditional Midwest construction stronghold - office and retail as bullish areas locally.

Other forecasts concur in seeing ups and downs in the Midwest.

Livingston, N.J.-based CIT Group Inc. announced that the Optimism Quotient, a key component of its 28th annual CIT Construction Industry Forecast, fell one point to 90 for East North Central states, which comprise Illinois, Indiana and Wisconsin, as well as Michigan and Ohio. Generally, a number of 100 or higher indicates strong optimism, while a number below 100 points to caution.

Contractors and distributors in the region expressed differing opinions of the market for the next year, CIT found. Distributors are fairly optimistic, posting an Optimism Quotient of 99, up 17 points, while contractors reported an OQ of 80 - less optimistic compared with last year's 100.

Nationally, overall construction volume is projected to increase 1 percent, to $508.9 billion, according to McGraw-Hill's Outlook.

Mirroring the Midwest, manufacturing and income properties are expected to experience the greatest jump, 9 percent each. Also echoing the Midwest, electric utilities are projected to have the biggest drop, 19 percent.

Other Economic Factors

An issue causing worry is the projected state budget deficits, such as Illinois' $4.8 billion and Wisconsin's $3.2 billion, and the trillion-dollar federal shortfall.

On an upbeat note, some buoyant economic news on the national level gives reason for simmering confidence.

The national economy's output, or gross domestic product, surged 7.2 percent in the third quarter of 2003, the latest data available, possibly getting a boost from the President Bush-inspired tax cuts. Moreover, the U.S. economy added more than twice the number of jobs than expected in October, the third straight monthly gain. And, interest rates remain at all-time lows, pointing to growing investment activity.

Home sales continue to fortify consumer confidence. And holiday gifts sales - always a top indicator of consumer confidence and economic health - were projected in November to be up in December.

Sizzling Milwaukee, Indianapolis

Some geographic markets in the Midwest are already showing strong signs of picking up.

Construction starts in the Milwaukee-Waukesha metropolitan area through the third quarter of 2003 soared 23.9 percent to $2.3 billion, according to McGraw-Hill Construction Dodge. The increase is mostly attributable to the launch of elements of We Energies' $7 billion Power the Future Initiative, a project that includes new power plants and transmission systems in southeast Wisconsin.

"That project is going to portend some significant activity," Fabishak added.

Starts during the same period in the Indianapolis metropolitan were strong, increasing 13 percent, to $4.0 billion, data show. Driving the increase were the inception of the $118 million Clarian North Hospital and Medical Office Complex in Carmel, $38 million in bridge projects on Interstate 70 and a couple of larger-than-normal warehouse projects.

"The construction market looks really strong and appears to be getting stronger in 2004 for central Indiana," said Rob Palmer, executive vice president of the Indianapolis-based Associated General Contractors of Indiana.

He cited a recent study commissioned by the Indiana Construction Roundtable Inc., a nonprofit organization, which projects a shortage of construction workers in the Hoosier State's largest city.

Driving the expected need for labor are the $1 billion Midfield Terminal Development Project at Indianapolis International Airport, the $800 million to $1.2 billion overhaul of the Indianapolis sewer system, a 10-year program of construction and renovation in the Indianapolis Public Schools and a "significant" number of projects at Indiana University-Purdue University Indianapolis.

The potential for a labor shortage will likely draw construction-trades professionals from other parts of the Midwest, Palmer said.

Starts in the Chicago area were not as rosy as they were in its sister Midwest cities, but the metropolis has unquestionably the biggest impact on regional construction.
Starts through the third quarter of 2003 dropped 9.9 percent, to $10.5 billion, data show.

Bridges were up 90 percent to $306 million, thanks to activity on Metra's Southwest Service commuter rail line and other projects. Offices increased 23 percent to $489.7 million, due to the 111 S. Wacker Drive and Chicago Transit Authority headquarters projects; and "miscellaneous nonresidential" surged 254 percent to $199 million because of the Terminal Facade and Circulation Enhancement Project at O'Hare International Airport.

High-rise residential construction, a dominant Chicago market through the late 1990s and early 2000s, might have finally peaked, said Gail Lissner, president of Chicago-based Appraisal Research Counselors Ltd. The estimated number of deliveries in 2004 is expected to drop more than 40 percent, to 3,061 units.

"Deliveries are expected to be down because projects were started a few years ago and 2003 was the peak year," she added.

The Illinois economy is holding steady, said J. Fred Giertz, professor of economics in the Institute of Government and Public Affairs at the University of Illinois at Urbana-Champaign. The Flash Economic Index is still below 100, the dividing line between economic growth and reduction, but the measure rebounded in October, the latest reading available, to 96.8 from its 96.2 level in September.

This lifts the index to the highest level since May, he added. The uptick is likely attributed to rises in corporate receipts and sales-tax revenues.

Other Concerns

A couple of issues are foremost in the minds of local executives.

Liability and employee health insurance expenses are the No. 1 cost concern, and construction firms have been forced to pass them on.

"Because so many of our members are union contractors, rising health-care costs are pressing the unions, too," the AGC of Indiana's Palmer added.

Despite the expected jump in manufacturing construction, the transfer of factory jobs to overseas markets where labor costs are low is a concern in the Midwest, the nation's former manufacturing heart.

"That's been tough for us," said Tarry Erickson, vice president of Park Ridge, Ill.-based Ragnar Benson Inc., a general contractor. "A good part is that they're going to need distribution facilities here to distribute the products."

Some business consolidation continues, such as with the Chicago area's Motorola Inc.

"They want to add new buildings, but for the time being they're moving people into existing facilities," Erickson added.