September Construction Slips 3 Percent

At a seasonally adjusted annual rate of $564.5 billion, new construction starts in September were down three percent from August, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies.

Residential building held steady with the previous month, but nonresidential building and public works showed reduced activity. During the first nine months of 2004, total construction on an unadjusted basis was reported at $444.7 billion, up 10 percent from the same period last year.

September's data lowered the Dodge Index to 170 (1996=100), compared to a revised 175 for August. After heightened readings from May through July - when the Dodge Index averaged 179 - contracting has returned to levels closer to the 172 average for the first nine months of the year.

"While August and September have seen a slower pace, new construction starts are still on track to post the strongest annual gain in five years," said Robert Murray, vice president of economic affairs for McGraw-Hill Construction. "Single-family housing continues to be the main source of expansion for the construction industry, and this year an improving trend for commercial building has taken hold. In addition, there have been a few unexpected gains in 2004, reported by several institutional structure types and environmental public works."

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Residential Building

Residential building in September was $325 billion annually, essentially unchanged from August. Single-family housing was down three percent while multifamily housing jumped 14 percent.

The September level for single-family construction was still robust, up 14 percent in dollar terms compared to the full-year 2003 average. Single-family housing during the first nine months of 2004 showed a dollar volume gain of 19 percent relative to last year.
The cost of financing has stayed supportive - the 30-year fixed mortgage rate averaged 5.8 percent in September, down slightly from 5.9 percent in August, as long-term interest rates have not yet seen the upward movement experienced by short-term rates.

"Single-family housing will show growth for the fourth straight year," Murray said. "But this torrid structure type is expected to finally cool down in 2005 as mortgage rates edge upward and homebuyer demand recedes in some of the overpriced markets on the coasts."

The September multifamily total was aided by the start of large projects in Honolulu ($93 million); Wanaque, N.J. ($92 million); Las Vegas ($90 million); Hallandale, Fla. ($75 million); and Washington, D.C. ($75 million).

In 2004, a growing volume of condominium projects has helped to boost multifamily construction, which through the first nine months was up 13 percent in dollar terms compared to last year.

Nonresidential Building

At $148.5 billion annually, nonresidential building was down four percent in September.

Health care facilities fell 26 percent while office construction retreated 21 percent from an August that included the start of the $400 million New York Times headquarters in midtown Manhattan.

School construction in September dropped 12 percent, as tight fiscal conditions for states and localities continue to outweigh the demand for classroom space caused by rising enrollments.

Hotel construction was down one percent - although September did include the start of a $90 million convention center-related hotel project in Schaumburg, Ill.

On the plus side, manufacturing buildings surged 89 percent in September, boosted by a $300 billion expansion of a biotech facility in California and the start of a $200 million truck manufacturing plant in Texas.

Stores and warehouses in September registered respective gains of five percent and 18 percent. Growth was also shown by the smaller institutional structure types, including churches, up three percent; amusement-related projects, up four percent; public buildings, up 10 percent; and transportation terminals, up 21 percent.

"While nonresidential building was down slightly due to a mixed performance by structure type, this sector [has begun] to turn upward," Murray said. "This is the result of emerging improvement for the commercial structure types and manufacturing plant construction, plus the initial signs of renewed strengthening for several institutional categories."

Nonbuilding Construction

Nonbuilding construction in September fell eight percent to $91 billion annually.

New construction starts for highways and bridges were down 23 percent from August, continuing this year's lackluster performance. Through the first nine months of 2004, highway and bridge construction starts were down five percent compared to last year.

"Several reasons can be cited for this year's slower pace for highways and bridges - the delay in getting the multiyear federal transportation bill passed, tight fiscal conditions for state governments and the dislocations caused by higher steel prices," Murray said.

September also showed reduced contracting for water supply systems, down four percent; and sewers, down two percent.

Two public works categories registered gains in September - river/harbor development, up six percent; and mass transit and site development, up 23 percent. In the latter case, the boost was provided by the start of a $400 million light rail transit project in Los Angeles.

September included a 74 percent gain for electric utility construction after a weak August. Even so, the general trend for electric utilities remains downward.

The 10 percent increase for total construction during the first nine months of 2004 was the result of the following performance by sector - residential building, up 18 percent; nonresidential building, up three percent; and nonbuilding construction, unchanged.

By geography, total construction reflected this pattern - the South Atlantic, up 14 percent; the West, up 13 percent; the South Central, up nine percent; the Northeast, up nine percent; and the Midwest, up five percent.

To learn more about Dodge Analytics, contact Tracey McKinney at 303-584-6713 or via e-mail at tracey_mckinney@mcgraw-hill.com.

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