March Construction Starts Slip 1 Percent

New construction starts in March settled 1% to a seasonally adjusted annual rate of $605.1 billion, according to the latest report from McGraw-Hill Construction. Nonresidential building retreated after a surge in February while residential building edged up and the public works sector registered a strong gain.

During the first three months of 2007, total construction on an unadjusted basis was $134.8 billion, down 15% from the same time in 2006. The year-to-date decline for total construction was the result of sharply lower residential building compared to the first quarter of 2006, which was before last year’s housing correction became severe. If residential building is excluded from the year-to-date figures, new construction starts in the first three months of 2007 were up 2%.

The March statistics produced a reading of 128 for the Dodge Index (2000=100), down slightly from a revised 130 for February.

“The pattern for overall construction activity so far in 2007 is being shaped by the weak residential sector, [similar] to what occurred from spring 2006 through the end of last year,” said Robert Murray, vice president of economic affairs for McGraw-Hill Construction. “Both nonresidential building and public works picked up the slack in 2006, and it’s expected that this will also occur in 2007, but to a lesser degree.

“Nonresidential building has been volatile, and while the odds still favor more growth, there’s concern that tighter lending conditions and the slower economy could soon begin to dampen commercial construction,” Murray said. “The public works sector still appears on track for more expansion this year, given the funding support coming from the federal and state governments.”

Nonresidential Building

Nonresidential building in March dropped 10% to $200.4 billion (annual rate), coming in about halfway between this year’s weak January and robust February.

The largest March declines for nonresidential building were found in the institutional sector. Amusement-related projects fell 68%, following a February that included the start of a $1.3-billion convention center expansion project in New York City. Public buildings retreated 28%, and health care facilities fell 25% from an elevated February.

School construction held steady, helped by the start of a $151-million college building in Brooklyn, as well as numerous high school buildings that reached groundbreaking around the nation. Transportation terminal work increased 4%, and church construction rebounded 29% from a weak February.

Hotel construction increased 24%, and office construction grew 15%.

“It’s expected that another gain will be reported for 2007 [for office construction], although the level of activity is still considerably below what was registered in the late 1990s,” Murray said.

Store construction grew 1%, showing resilience despite the decline for residential development seen in the past year. By contrast, warehouse construction fell 11%, and the manufacturing plant category dropped 34%.

Residential Building

Residential building, at $279.8 billion (annual rate), was up 1% in March.

The dollar volume for single-family housing grew 3%, helped by improved activity in the Midwest, up 18% from a weak February; the West, up 3%; and the South Central, up 2%. The dollar amount for single-family construction in the Northeast was unchanged while the South Atlantic receded 2%.

Mortgage rates continue to be low, as the 30-year mortgage rate averaged 6.2% in March, down from 6.3% in February. However, the investor-led portion of homebuyer demand remains weak, and the turmoil in the subprime mortgage market is limiting loan availability.

“The depressed levels for new and existing home sales in February and March suggest that any near-term improvement for single-family home building will be sporadic at best,” Murray said.

Multifamily housing dropped 7%, as this segment’s downward trend grows more discernible after comparative stability during 2006.

Nonbuilding Construction

Nonbuilding construction advanced 10% in March to $125 billion (annual rate).

The transportation side of the public works sector soared, with highway construction climbing 50% after a subdued February, reflecting widespread strength across the nation.

“In mid-February, Congress finalized fiscal 2007 spending levels for a number of construction accounts, including a 10% increase for the federal-aid highway program,” Murray said. “This greater financing, combined with the fact that state departments of transportation now have a more certain funding horizon, contributed to the strong increase for highways.”

Bridge construction jumped 60%, with the boost coming from the start of large projects in Louisiana, $167 million; West Virginia, $108 million; and two in New York, $84 million and $78 million.

On the environmental side, sewer construction advanced 46%, with the two largest sewer-related construction starts in California, $180 million; and Massachusetts, $140 million. Water supply construction grew 16%, but both river/harbor development and miscellaneous sitework were down 6%.

Overall public works construction climbed 29%.

The nonbuilding total was pulled down to a 10% gain, thanks to an 81% drop for electric utility construction, which is prone to volatility on a month-by-month basis.

Total Construction

The 15% drop for total construction during the first three months of 2007 was due to this performance by major sector: residential building, down 29%; nonresidential building, down 1%; and nonbuilding construction, up 7%.

In the coming months, the decline for residential building isn’t expected to be as steep, exerting a smaller downward pull on the year-to-date amount for total construction.

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