| Midwest Outlook
Contractors Convinced About Mixed 2006 by Craig
Barner Construction starts are smooth, the economy is steady and Midwest construction executives are buoyant about their prospects for 2006.
But some rough water is on the construction
horizon. Start volumes are projected to decline in a few states, and materials
prices are rising rapidly as the Gulf Coast rebuilds.
"We see things
picking up a little bit," said Joseph Krusinski Sr., president of Oak Brook-based
Krusinski Construction Co., a general contractor. "Things are a little bit
better, but it is also competitive."
A Look at
Starts Construction start increases are projected in some Midwest states but
declines in others, according to forecasts from McGraw-Hill Construction, publisher
of Midwest Construction.
Illinois is expected to have a 2 percent
increase in construction starts in 2006 to about $23.6 billion.
If this
outlook is accurate, the trend of growth would be continuing but flattening in
the Land of Lincoln. Illinois is expected to close out 2005 with $23.2 billion
in starts, up 8 percent from 2004's $21.4 billion. And, 2004 rose a robust 12
percent over 2003's $19.1 billion.
Confirming the positive footing is the
University of Illinois Flash Index, a weighted average of economic growth. The
dividing line between growth and contraction is 100, and the index was at 106.9
in October, the latest reading available, the same level as September.
All
three components of the Flash Index - consumer spending, corporate earnings and
personal income - were up in inflation-adjusted terms in October from the same
month a year ago. Corporate receipts were especially strong.
Indiana
is projected to be essentially flat in construction starts
with $13.4 billion
in starts.
The Hoosier State has recently experienced modest construction
fortunes. It is projected to finish 2005 with $13.3 billion in starts, up 1 percent
from 2004's $13.2 billion.
Missouri is forecasted to have an 7.3 percent
decline to about $10.9 billion in starts.
Context shows that the Show Me State's
decline is not as dramatic as it appears.
The state is projected to finish
2005 with $11.8 billion in starts, an impressive 15.7 percent increase over 2004's
$10.2 billion. Projects like Busch Stadium and the MetroLink boosted the construction
scene in 2005.
As a result, when comparing 2006's projection with 2004's
actual starts, the state is doing relatively well.
Construction executives
who recently met in St. Louis were unanimous about a prosperous new year, said
Leonard Toenjes, president of the Associated General Contractors of St. Louis.
"We
got 20 folks in a room, and they all went around a table to give their outlook,"
he said. "The consensus was that there would be increases in the 5 percent
to 7 percent range."
Finally, Wisconsin is expected to have a
1 percent decline to $11 billion in starts.
The Badger State has been on
a downward trend because of major previous starts, such as the $810 million Marquette
Interchange rebuild in Millwaukee and the $650 million Port Washington Generating
Station. The state is projected to end 2005 with $11.1 billion in starts, down
10 percent from 2004's $12.4 billion.
Nevertheless, construction executives
are upbeat.
"For 2006, we're very optimistic about the outlook, not
only in Wisconsin but throughout the upper Midwest," said Tripp Ahern, president
and CEO of Fond du Lac-based J.F. Ahern Co., a mechanical contractor. "We're
seeing health care and some public spending - particularly at the University of
Wisconsin - and some industrial clients appear to be spending some significant
money for the first time in a number of years."
A major negative is
the price of construction materials. Throughout the Midwest, contractors say materials
prices are through the roof partly due to the demand in the Gulf Coast where rebuilding
efforts are under way in the wake of hurricanes Katrina and Rita.
Rebuilding
is only in the earliest stages, yet the producer price index for construction
materials in September, the latest data available, was already up 2 percent, according
to the U.S. Commerce Department. Increases were being reported in diesel fuel,
iron and steel products and scrap, lumber, gypsum and cement.
"It's
a very big challenge to lock in pricing now," Ahern said.
Midwest
contractors say fees remain flat due to intense competition.
On the upside,
contractors say backlogs are increasing and expect to hire staff for the office,
field or both.
"We've been hiring for the past year and continue to
do so," said Bruce Watts, a vice president in Chicago for New York-based
Bovis Lend Lease, a general contractor.Engineering
is Hot Certain trends are emerging that will have an impact on the Midwest
construction market, including positive ones.
Spending on engineering construction
projects is expected to increase, and it will be significant in some cases.
The
big bonanza is the start of the $15 billion expansion of Chicago's O'Hare International
Airport - a project that involves more construction than entire states experience
in a year. Bulldozers started moving dirt in late October.
Though the Federal
Aviation Administration approved the city's plan to expand O'Hare, the controversial
project is dogged by rancor. Bensenville, Elk Grove Village and the relatives
of people buried in St. Johannes Cemetery, which would have to be moved to make
room for a runway, are fighting to prevent the project from happening. By early
November, federal judges had issued two stays, halting work temporarily.
Illinois
hit the pork jackpot under the recently approved federal transportation bill,
formally known as the Safe, Accountable, Flexible, Efficient Transportation Equity
Act: A Legacy for Users, or SAFETEA-LU.
The state will get about $1.2 billion
a year for highway construction through 2009, an increase of approximately $310
million annually over the previous six-year funding package. In addition, the
state will get about $2.5 billion for rail and mass transit construction.
"Illinois
is one of the top-five beneficiaries of the federal highway program," said
Geoffrey Heekin, executive managing director in the Construction Services Group
of Chicago-based Aon, a financial services provider. "That, coupled with
the city's commitment to restore bridges and infrastructure, means it looks better
in 2006 than it has in the last couple years."
In addition, the Illinois
State Toll Highway Authority has embarked on an aggressive construction package.
This includes the $730 million Interstate 355 South Extension, the $669 million
South Tri-State Tollway reconstruction, the $364 million multiyear conversion
of toll plazas to allow for "open-road tolling" and the repaving of
almost the entire 270-mi. system.
Indeed, the 10-year congestion-relief
plan in Illinois, Open Roads for a Faster Future, is expected to cost about $5.3
billion.
"I can't compliment enough the work Jack Hartman, the executive
director of the tollway, for pulling off the reconstruction and expansion of the
tollway," said Michael Meagher, senior vice president of Chicago-based James
McHugh Construction Co., a general contractor. He added that the South Side company
will ramp up its infrastructure division to grab its share of the contracts to
be let.
As a result of these projects, engineering construction is forecasted
to grow 7 percent in Illinois in 2006 and will likely rise still more rapidly
in subsequent years.
In Indiana, engineering construction area is expected
to grow a remarkable 12 percent in 2006 largely due to the continuing $1 billion
expansion at Indianapolis International Airport. Though the control tower is finished,
work is just commencing on a new terminal, parking apron and related infrastructure.
Moreover,
the estimated $1 billion combined sewer overflows project in the Central Indiana
city will result in underground work for more than a decade.
Wisconsin
is expected to see engineering construction rise 20 percent in 2006 as more contracts
are activated on the $7 billion Power the Future power project in the Milwaukee
suburbs of Oak Creek and Port Washington.
Partly because voters approved
Amendment 3 in November 2004, Missouri is projected to see a 14 percent increase
in engineering construction. The measure recaptured for road construction some
dollars that had been diverted to the general revenue fund.
"We have
a huge design-build project for renovation of Interstate 64 through St. Louis,"
the AGC's Toenjes said. "It's the first design-build project [the Missouri
Department of Transportation] has ever done."
Throughout the Midwest,
increases are projected in hotels, hospital and offices.
Moderating
Residential? Residential has had the most sustaining effect on the local and
national construction scene for about a half-dozen years. Indeed, in Illinois,
single-family housing is expected to close out 2005 with a 10 percent increase
in starts, to $9.7 billion.
But reliable residential is forecasted to drop
due in part to the Federal Reserve's post-recession tight-money policy. Incremental
increases in the federal funds rate to control inflation are causing lenders to
increase interest rates for mortgages, thereby putting a damper on the homebuying
market.
House prices remain high because demand had outpaced supply for
so long, also affecting the market. Houses were up 13.4 percent on June 30, the
latest data available, from the comparable date in 2004, according to the Washington,
D.C.-based Office of Federal Housing Enterprise Oversight, an independent agency
in the Department of Housing and Urban Development.
For the year 2004,
house prices were up 11.2 percent over 2003.
Consumer confidence - a reliable
barometer for the house market - is expected to dip because of the slow federal
response to three hurricanes in the Gulf Coast, the ongoing war in Iraq and federal
deficit.
As a result, Illinois is projected to drop 4 percent in residential
construction starts, and Missouri and Wisconsin are each expected to go down 3
percent. Only Indiana is forecasted to see a modest 1 percent increase.
Nevertheless,
the condominium craze in city centers as part of the ongoing trend of downtown
rebirth is not expected to abate, especially in Chicago. Gail Lissner, vice president
of Chicago-based Appraisal Research Counselors, said 3,041 condominiums are expected
to be delivered in 2005, and 4,446 deliveries are projected in 2006, nearly a
50 percent increase.
"We've seen several years of record deliveries
since 2001, and I'd say the pipeline is full of potential new development,"
she added.
The drive to put up condos is not limited to Chicago. Indianapolis
has seen record demand and occupancy levels, driving the surge in residential
development and leading to more than 1,167 new residential units in the pipeline
totaling more than $353 million in value, according to Indianapolis Downtown Inc.,
a nonprofit promoting the city.
The $175 million 31-story 1 Market Square
Tower Residences and Lofts will be the most dramatic project.
In St. Louis,
several of the brick warehouses from the city's riverfront warehouse days are
being converted into lofts. Whether it's homes, condos or lofts, residential construction
often drives other development, Toenjes said.
"Downtown loft development
is starting to get a life of its own, and now the supermarkets, hardware stores
and that sort of thing are starting to come into downtown," he added.
| Chicago Starts
(first
half each year; in billions) | |
YTD 2004 | YTD 2005 |
% Ch., 05/04 | | Nonresidential |
$3.3 | $2.6 |
-21.6% | | Residential |
$4.4 | $5.9 |
+33.6% | | Engineering |
$1.5 | $1.1 |
-24.1% | | Total Construction |
$9.2 | $9.6 |
+4.5% | | Source: McGraw-Hill
Construction | The robust residential market is giving
a strong boost to the Chicago construction market.
| Chicago Starts
(first
half each year; in billions) | |
YTD 2004 | YTD 2005 |
% Ch., 05/04 | | Nonresidential |
$3.3 | $2.6 |
-21.6% | | Residential |
$4.4 | $5.9 |
+33.6% | | Engineering |
$1.5 | $1.1 |
-24.1% | | Total Construction |
$9.2 | $9.6 |
+4.5% | | Source: McGraw-Hill
Construction | The robust residential market is giving
a strong boost to the Chicago construction market. Click
here for next 2006 Forecast Feature >>
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