Construction outlook for 1990
Patrick MacAuley
Construction Outlook for 1990
The inflation-adjusted value of new construction put in place declined slightly in 1989 from the all-time record set in 1988. (The 1989 current-dollar value of about $418 billion did set a new record.) Small increases in public works construction were more than offset by declines in private construction. although the number of housing starts declined by 6 percent, to 1.4 million units, the value of residential construction only decreased by 1 percent because of a marked gain in average house size and an increase in home improvement spending. Public works construction increased slightly, led by strong spending for schools. The decline in private nonresidential construction largely reflected high vacancy rates for commercial buildings in most cities, as well as the repeal of various tax benefits by the 1986 tax reform act.
In 1989, the value of new construction put in place was equal to approximately 8.3 percent of GNP. This represents a substantial recovery from the cyclical low of 7.7 percent of GNP in 1982, but it remains well below the postwar (World War II) peak of 11.9 percent attained in 1966. The construction share of GNP is expected to decline in 1990 (see Figure 5-1). During the past decade, several types of construction activity that are not included in new construction data have grown rapidly. these include maintenance and repair, commercial/industrial renovation, and hazardous waste clean-up.
Construction costs increased by about 4.5 percent between the summer of 1988 and the summer of 1989, as measured by the Census Bureau’s comosite construction cost index. This is a much higher annual rate of increase than the average for the past 5 years, 2.7 percent. Building materials prices rose an average of 3.4 percent in 1989 (see Chapter 6, “Building Materials”). Land prices (which are not included in the construction cost index) have risen dramatically in some of the strongest construction markets because of market forces and development restrictions. Insurance and bonding costs have been stable, and the availability of insurance appears to be better. Overall labor costs have been relatively steady, with average hourly earnings of construction workers increasing by about 2 percent in 1989. Labor costs have run up faster in some of the strongest construction markets, where labor shortages have reduced efficiency, increased overtime, and raised wage rates.
Construction industry employment rose 3 percent in 1989 to set an all-time record of 5.3 million employees. The increase probably would have been greater if labor shortages had not occurred in some of the strongest construction markets. In addition to the employees, nearly 1.5 million people were self-employed proprietors and working partners. Despite the recent moderation in construction wage increases, construction remained one of the highest paying industries, as measured by average hourly earnings and average weekly earnings.
International Construction and Investment
The construction business has become increasingly internationalized during the past 15 years. U.S. contractors continue to be leaders in international contracting, winning $25.9 billion in international construction contracts in 1988, an increase from 1987. The U.S. market share abroad has declined during the 1980s, however, and foreign construction contractors are beginning to make significant inroads into the U.S. construction market. These trends are expected to continue into the early 1990s because of improving capability of foreign competitors, declining prospects in Third World markets, and increasing foreign interest in the U.S. market.
Many of the world’s largest foreign construction contractors have entered the U.S. construction market during the past decade, and they are becoming a significant factor in nonresidential construction. Most of these contractors have entered the U.S. market by buying American construction companies, but some of the largest foreign contractors have established branch operations in the United States. Foreign-owned construction firms won approximately $12.7 billion in U.S. construction contracts in 1988, up from $3.6 billion in 1982. They accounted for approximately 5 percent of all construction contracts awarded in the United States during 1988. Most of these foreign entrants are based in Japan, Germany, the United Kingdom, and France, although nearly a dozen additional nations are represented.
International trade and capital flows are having an increasing effect on the domestic construction market. Because of record levels of foreign investment in the United States, an increasing share of U.S. construction projects is being built for foreign owners. foreign direct investment in the United States is chiefly in manufacturing facilities, warehouses, office buildings, and hotels. Recently, foreign developers and builders have tested the U.S. housing market. Foreign financial investments in such instruments as U.S. Government bonds and mortgage-backed securities have greatly benefited U.S. construction demand by keeping interest rates lower than they would have been otherwise. On the other hand, the large foreign trade deficit reduced the need for new U.S. manufacturing facilities by as much as $2 billion in 1988.
Outlook for 1990
The constant dollar value of construction in 1990 will decline slightly from the 1989 value, but certain categories of construction will increase solidly (see Table 1). The most promising markets appear to be home improvement, manufacturing facilities, hospitals, schools, water supply, and public service buildings. The weaker construction markets will be office buildings, hotels, other commercial buildings, military facilities, conservation and development, large power plants, and sewer systems. The homebuilding market will be fairly stable.
The following broad economic factors will affect construction demand in 1990.
* Interest rates are expected to decline slightly;
* Economic growth is expected to continue to be slow through 1990;
* Plant and equipment expenditures are expected to increase because of surging export demand and the need for plant modernization;
* Vacancy rates for apartments and commercial buildings will continue to be high, depressing the demand for new construction;
* Government investment in public works is expected to increase slightly slower than inflation in 1990;
* The 1986 tax reform law will continue to affect construction demand in many ways; and
* Demographic factors are bullish for construction of single-family homes, schools, and hospitals but are bearish fro apartments.
Although the number of housing starts will be about the same in 1990 as in 1989, about 1.4 million units, the value of residential construction will increase slightly because of continued gains in average house size and growth in home improvement expenditures. Private nonresidential construction will continue to decline, primarily because of high vacancy rates for commercial buildings and the elimination of major tax benefits for commercial real estate investment. Public works construction will level off or decline slightly in 1990, as modest increases in state and local spending offset small declines in federal construction expenditures.
Construction activity is likely to hold up better in the Midwest and the South than in the Northeast and the West. The Midwest may even buck the national pattern and enjoy an increase in construction, as plant investment responds to the revival of manufacturing output. The South has received a disproportionate share of industrial construction during the past two decades and will probably benefit from the narrowing trade deficit. Many jurisdictions, however, especially in the Northeast and California, have adopted antidevelopment policies that raise costs and otherwise inhibit new construction.
The year 1989 was the decade’s worst for natural disasters. Property damage from Hurricane Hugo and the California earthquake exceeded $10 billion and will add $2 billion to $5 billion to construction spending in 1990. Although some of this spending will be on new construction to replace homes, bridges, and buildings that were destroyed, the majority of the construction will probably be repair work on surviving structures.
Long-Term Prospects
During the 1990-94 period, new construction is expected to remain near the current record levels, while remodeling and repair construction will increase steadily (see Table 3). The macroeconomic forecast predicts conditions that are favorable for construction–continued economic growth, fairly stable interest rates, slow inflation, declining federal budget deficits, and declining trade deficits. Given this macroeconomic scenario, the overall constant-dollar value of construction put in place should decline slightly in 1990 and 1991 and then set new records in the mid-1990s.
The growth rates for new construction will probably be significantly lower than overall GNP growth rates during the next 5 years. In part, the slower rate will be an adjustment to the current oversupply of commercial buildings, which will be gradually absorbed by agrowing economy. High “real” (inflation-adjusted) interest rates will also inhibit construction, especially of single-family homes. The federal budget deficit will limit spending for public works, despite the well-publicized need for additional infrastructure investment.
The recovery of the U.S. manufacturing sector is expected to continue into the long term, and one result will be strong demand for industrial construction. Hospital construction will continue to gain because of demographic and institutional factors. Maintenance and repair work, both residential and nonresidential, are expected to increase more rapidly than the overall economy as the U.S. stock of structures becomes older and more extensive.
Construction demand is sensitive to tax law revisions that affect real estate investments. The complex effects of the 1986 tax reform law will affect construction demand well into the 1990s. For the most part, the initial depressing effects of this law have been absorbed during the late 1980s, and the stimulative effects will steadily increase. Thus, by 1990, construction activity may well be higher than it would have been under the tax law existing in 1985. Major tax code revisions have occurred every two years, on average, since World War II, however, so further changes in the present law are certainly possible during the next 5 years.
The U.S. construction industry will face a number of supply-side challenges during the next 5 years. Among these are foreign competition, a scarcity of workers, and the high cost of liability insurance. Most of the foreign construction contractors who are entering the U.S. market are extremely well financed, and many possess construction expertise equal or superior to that of most U.S. builders. The supply of young workers available to the construction industry will dwindle because of demographic trends and low unemployment rates. Unless productivity gains are substantial, labor shortages and labor quality could become major problems. The cost of liabiity insurance has stabilized, but long-run trends in liability insurance largely depend on legislative and judiciary developments in tort reform.–Patrick MacAuley, Office of Forest Products and Domestic Construction, (202) 377-0132, September 1989.
Additional References
America’s Infrastructure: Effects of Construction spending, Associated General Contractors, 1957 E Street, N.W., Washington, DC 20006.
Cahners Building & Construction Market Forecast, (monthly) Cahners Publishing Co., 275 Washington Street, Newton, MA 02158-1630.
Census of Construction, 1987, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233.
Construction Review (bimonthly), International Trade Administration, Room H4045, U.S. Department of Commerce, Washington, DC 20230.
Decisions for the 1990s, NAHB Publications, National Association of Homebuilders, 15th & M Streets, N.W., Washington, DC 20233.
Dodge/Sweet’s Construction Outlook, McGraw-Hill Information Systems Company, 1221 Avenue of the americas, New York, NY 10020.
Engineering News Record (weekly), P.O. Box 2026, Mahopac, NY 10541.
Expenditures for Nonresidential Improvements and Upkeep: 1986, Bureau of the Census, U.S. Department of Commerce, Washington, D.C. 20233.
Foreign Construction Contractors Target the U.S.: Trends and Implications, International Trade administration, U.S. Department of Commerce, Washington, DC 20230.
Housing Starts (Construction Reports, Series C-20), Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233.
Value of New Construction Put in Place (Construction Reports, Series C-30), Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233.
PRIVATE RESIDENTIAL CONSTRUCTION
The constant-dollar value of private residential construction decreased by about 1 percent in 1989. Of the $202 billion (current dollar) total, 59 percent was for new single-unit homes, 11 percent ws for multiunit homes, and 30 percent was for improvements to existing homes. Residential construction accounted for 4.1 percent of the gross national product in 1989. Housing starts fell 6 percent, from 1.49 million in 1988 to 1.40 million in 1989, with declines in both single and multiunit structures.
Interest rates increased during the first part of 1989 continuing the trend established in 1988. by mid-year, however, the Federal Reserve Board, responding to early indications of a slowing economy, began to create downward pressure on interest rates. As a result, mortgage interest rates declined to near 10 percent during the third quarter, where they remained through the end of 1989. For the year, mortgage interest rates averaged 10.3 percent.
The rise in interest rates in early 1989 kept new home sales 6.4 percent below 1988 levels, although the sales volume of existing homes increased slightly. Sales of existing homes tend to stimulate residential construction by providing equity for trade-up homebuyers and by occasioning a large amount of home improvement expenditures.
The affordability of housing will continue to have major implications for the size and design of housing in the future. A 1989 study by the Joint Economic Committee of Congress points out that homeownership in the United States had peaked at 65.6 percent of the population by 1980 and had fallen to 63.9 percent by 1988. The most dramatic declines are in the youngest age groups. In 1973, 23.4 percent of people younger than 25 owned a home; by 1988, the ownership rate in this sector was 15.5 percent. In other age groups, the situation is similar: 43.6 percent of the 25-29 age group were homeowners in 1973, falling to 36.2 percent in 1988; for the 30-34 group, 60.2 percent owned homes in 1973, dropping to 52.6 percent in 1988; and in the 35-39 bracket, the rate fell from 68.5 percent in 1973 to 63.2 percent in 1988. The study also shows that the average age of first time home buyers increased from 28 in 1980 to 32 in 1988.
Income levels and housing prices are two of the most important factors in housing affordability. Between 1982 and 1989, median new home prices rose by 81 percent, while disposable income per capita (in current dollars) increased by only about 50 percent. Declining interest rates more than offset rising home prices between 1983 and 1987, but in 1988 and early 1989, both housing prices and interest rates rose.
Outlook for 1990
The number of private housing starts in 1990 is expected to be similar to the 1989 level, about 1.4 million units. Mortgage interest rates are expected to decrease by about 0.25 percentage point in 1990, to a weighted average effective rate of 10.0 percent (see Table 4). Home improvement expenditures will rise about 3 percent, continuing their modest increase, which is considerably below the rapid growth rates of the mid-1980s.
Long-Term Prospects
Homebuilding is expected to grow more slowly than the overall economy during the next 5 years as homeownership continues to decline in the face of escalating home prices and reltively high mortgage rates. Demographic factors will remain weak for multifamily housing, but new construction of this type has nearly fallen to the level that can be sustained by market demand. Expenditures for home improvement and repair are expected to remain strong throughout the 1990s as the housing stock ages and as homeowners upgrade their existing houses.
An important factor in forecasting long-term housing demand is the maturing of the baby boom generation, those born between 1946 and 1965. Those born in the earlier years of the baby boom purchased their first homes during the mid-1960s to the mid-1970s–a time of low prices, low real interest rates, and high value appreciation. This group has now entered the peak earning years and is trading up to larger homes. Those born in the later years of the baby boom and those that delayed housing purchases face a different market. They have affordability problems caused by high prices, slower real income rise, high inflation-adjusted interest rtes, and a variable economy. These affordability problems limit entry into the housing market and create strong pent-up demand for housing. Eventually, Congress will face increasing pressure for action to help remedy this situation.
Single-nit Structures
In 1989, the number of private single-unit housing starts fell to 1.02 million units, down 6 percent from 1988. The constant-dollar value of single-family home construction was down only 2 percent, however, mainly because the average size and amenities of new homes increased by about 5 percent (see Table 4). The median sales price of new single-family homes rose nearly 12 percent in 1989, to $125,700. To a large extent, the 1989 decline in single-family housing starts was caused by the continued increase in interest rates during the early part of 1989 and by the jump in home prices, which reduced even further the affordability of housing for first-time buyers.
Almost 90 ercent, of the single-family housing starts in 1989 were detached houses, and the rest were single-unit townhouses (see Table 5). Prior to 1985, rising house prices, highinterest rates, and the demand for starter homes by the first half of the baby boom generation increased the popularity, and the market share, of townhouses. Since 1985, however, detached houses have been an increasing portion of total single-family homes. This is because generally declining interest rates have made larger houses more affordable and consumer demand for space and amenities has increased. Without major shifts in consumer tastes, or unless housing affordability deteriorates substantially, the townhouse share will continue to remain low.
In 1990, the level of single-family housing starts will be similar to that in 1989, chiefly because the expected small decrease in mortgage interest rates will be offset by higher housing prices.
The supply of used starter homes should increase substanially in the 1990s as homeowners “trade up” to larger houses. As pointed out in the study by the Joint Economic Committee of Congress, however, decreasing home ownership among all age groups could make the sale of existing homes difficult. As a result, the future total value of residential construction put in place is expected to increase only slowly, and an increasing percentage of this total is likely to be in the home improvement category.
Multiunit Housing Structures
Multiunit housing consists of two-unit to four-unit structures, some townhouse-style buildings with more than five units, and apartment buildings. Apartment building units constituted 78 percent of the units in multiunit housing starts in 1989.
In 1989, multiunit residential structures containing a total of about 380,000 units were started. This number was a 6.6 percent decline from 1988 and a 43 percent decline from 1985. Multifamily housing starts will probably stay level in 1990.
Multiunit structures were an increasing portion of total housing starts from the mid-1970s until the mid-1980s, a period when favorable tax incentives stimulated investor interest in building multifamily housing. This resulted in overbuilding and high vacancy rates, particularly in the South. The 1986 tax reform law eliminated most of these tax advantages, and units in multiunit structures now account for a much smaller portion of total housing starts.
The number of condominiums constructed in 1988 (the most recent year for which data are available) accounted for nearly 23 percent of multiunit housing starts, down from 29 percent in 1984. the pace of condominium construction has abated because of the very slow appreciation in condominium prices and because of the large stock of existing condominiums.
Multiunit construction is likely to continue at 1989 levels in 1990, constrained by high vacancy rates, less attractive tax incentives, and relatively weak demand from renters. The tax law changes–lengthening depreciation schedules and eliminating limited partnership tax breaks–have reduced the profitability and overall attractiveness of investing in these structures, even though rents have risen slightly. Higher rents can result in higher vacancy rates for rental housing at the same time that lower profits are reducing investors’ incentives to build more rental housing. Condominium ownership has been made more attractie by the 1986 tax reforms, because tax deductions for homeownership survived the cutback for most other investments. Any boost in condominium construction, however, could reduce demand for rental apartments, because most condominium buyers tend to be former renters. Demographic factors are unfavorable for apartment construction because of declining numbers of people in the 20-34 age group, the group most likely to rent.
A demographically based demand for rental units exists among those who choose to rent or cannot afford to purchase. This market will probably require less than 400,000 new units annually during the next few years. A long-term decline in unsubsidized multifamily home construction is projected as the baby boom generation continues to move into single-familyt housing. The potential exists for a large increase in subsidized housing and public housing, although the funding requirements would be enormous.
Manufactured Housing
Manufactured houses (formerly, “mobile homes”) are purchased mainly by first-time home buyers, rural residents, the elderly, and nontraditional households. Although the market among first-time home buyers in the 25-44 age range is declining, the potential market among moderate- and low-income retired people is growing.
In 1989, 200,000 manufactured housing units, valued at approximately $4.1 billion dollars, were shipped, a decline of 8 percent (in units) from 1988. Manufactured housing units continued to constitute about 13 percent of new additions to the housing stock (manufactured housing shipments plus private housing starts) in 1989. This share has been fairly constant since 1981, but it is considerably below the more than 20 percent share of the late 1960s and early 1970s.
The constant-dollar value of shipments of manufactured housing increased 23 percent from 1982 to 1983, at the beginning of the economic upturn; it remained level in 1984; and since 1984, the value of shipments has declined steadily. During the same period, the mix of the single-wide and multiwide units changed. During the economic downturn, the portion of double-wide homes shipped declined, from 28 percent in 1980 to 22 percent of all shipments in 1982. After 1982, multiwide manufactured home shipments rose steadily, accounting for 44 percent of total shipments by 1988.
The downturn in total shipments of manufactured homes has several explanations. The decline in oil-related activity resulted in a 27 percent drop in shipments to the oil-producing South Central states, the second largest regional market for these units. Further, manufactured housing is a low-cost and starter-home option, and the number of first time home buyers in the 25-44 age range is declining. Finally, about four-fifths of manufactured home purchases are crdit-financed. Although manufactured homes qualify for mortgage financing, 90 percent are financed by revolving retail credit at interest rates that are typically 2 to 3 percentage points higher than mortgage rates. This differential discourages the purchase of manufactured homes.
These homes provide the major low-cost home-ownership alternative; an estimated 80 percent of this type of housing costs less than $50,000. since 1982, average new single-family home prices (including land) have appreciated 65 percent, while manufactured home prices have risen only 27 percent. The average price of a manufactured home in 1989 was $26,500, compared to $19,700 in 1982.
In 1990, manufactured home shipments are expected to total about 200,000 units, about the same as in 1989. this fore cast assumes that interest rates on both mortgages and consumer credit will decrease slightly and that first-time home buyers who can afford a conventional home will continue to favor that option.
Residential Upkeep and Improvement
Upkeep and improvement includes expenditures on maintenance and repairs as well as new construction improvements but does not include the value of do-it-yourself labor.
As is the case with new housing, 1983 through 1988 were strong growth years for home improvement. Lower interest rates and tax law changes made mortgage refinancing attractive, and many homeowners increased their mortgages or used equity loans to remodel. Stores oriented toward the do-it-yourself market experienced sizeable annual sales gains.
In 1989, homeowners spent 1.3 percent more for upkeep and improement of residential properties than in 1988. Such expenditures had grown 7.7 percent in 1988, however. The slower growth in 1989 reflected the country’s slower economic growth, higher interest rates, and weaker consumer confidence levels.
Although spending for essential maintenance and repairs showed considerable growth in 1989, spending on major replacement items maintained 1988 levels; the moe discretionary expenditures, on additions and alterations, declined sharply from 1988 levels. Maintenance and repairs are defined as property maintenance costs, including activities such as painting and appliance replacement and repair. (Maintenance and repair costs are not included with new construction put in place, as shown in Table 1, but are shown in Table 3.) Major replacement items, and additions and alterations, are classified as “construction improvements” and include major changes inside and outside of existing residential structures, as well as large individual expenditures for such items as water heaters and furnaces.
Residential upkeep expenditures for owner-occupied units will continue to increase only modestly in 1990, reflecting continued consumer caution even in the face of the marginally lower interest rates that are forecast for 1990. As the economy strengthens and consumer confidence increases, home improvement spending should accelerate.
In the long run, expenditures in all categories of home improvement should grow steadily because of the increasing size and age of the housing stock. In addition, the increasing numbers of single parents and two-income families, who usually have less time to devote to do-it-yourself remodeling, may boost contract renovation work. Increased demand for energy-efficient structures and building modifications to accommodate high-technology innovations will also buoy the renovation market. Landlords must maintain rental properties to attract new renters, particularly in markets with high vacancy rates. Also, homeowners wishing to increase the value of their housing investment find that some renovations–bathrooms and fireplaces, for example–offer resale value gains that exceed the cost of the improvement.–Patrick D. Cosslett, Office of Forest Products and Domestic Construction, (202) 377-0132, september 1989.
PRIVATE NONRESIDENTIAL
CONSTRUCTION
In 1989, the constant-dollar value of new private nonresidential construction was about equal to the 1988 value but was nearly 10 percent below the record set in 1985. The 1989 current-dollar total of $132 billion comprised $94 billion for buildings and $38 billion for other structures. some types of private nonresidential construction declined in 1989, particularly office buildings and other commercial buildings. About two-thirds of all nonresidential construction was in the South and West; the Northeast and Midwest increased their shares slightly during 1988.
The weakness in nonresidential construction reflects a down-turn in the phenomenal commercial building boom that peaked in 1985. The unprecedented amount of commercial construction since 1983 has in recnt years resulted in record vacancy rates for office buildings, stores, hotels, and warehouses. These high vacancy rates will depress demand for new construction for several yearS, until supply and demand for commercial space are brought into balance. An important positive factor for commercial construction is the strong demand for commercial real estate from investors, such as pension funds and foreign interests, that are less concerned about current profitability than about long-term appreciation.
Outlook for 1990
Private nonresidential construction will decline by about 3 percent in 1990, despite the growth expected in GNP and total business investment. although business plant and equipment expenditures are expected to increase in 1990, all of the increase is likely to be in capital equipment rather than in buildings and other structures (see Figure 5-2). This is primarily because of overcapacity in some of the most structure-intensive sectors of the economy such as commercial real estate and electric utilities. The largest declines will be in commercial construction–especially office buildings and hotels, the ectors with the greatest capacity surpluses. Investment in several types of nonresidential construction–notably manufacturing plants and hospitals–will increase in 1990.
Long-term Prospects
Given the 5-year macroeconomic forecast for continued economic growth and slowly declining interest rates, the expected correction in private nonresidential construction could be relatively mild. The downturn is likely to last for 2 or 3 years, but a recovery is likely during the early 1990s. Although office onstruction will probably be the last category to recover, shopping center construction will rebound fairly quickly. Industrial construction will gain during most of the period, especially if the trade deficit continues to drop. The correction in hospital construction that was caused by cost containment initiatives is largely over, and spending for this purpose will resume its long-term uptrend. electric utility construction will remain weak for most of the period, although it too will probably turn around during the early 1990s.
The need to modernize the existing U.S. capital stock will provide strong underlying demand for both new construction and commercial remodeling. Although modernization expendeitures tend to be for new capital equipment rather than (or buildings and other structures, the amount invested in replacing and modernizing structures will also be large. This renovation market has grown rapidly during the 1980s and is likely to be stronger than the new construction market during the next 5 years (see Table 3).
Manufacturing Facilities
The constant-dollar value of industrial construction put in place increased more than 5 percent in 1989, although it is still at low levels by historical standards. Further gains in industrial construction are expected in 1990 because many manufacturing industries are operating at high capacity-utilization rates.
International trade competition has been constraining the need for U.S. industries to construct new plants. The 1990 estimated trade deficit in manufactured goods, about $95 billion, will keep the annual amount of construction of U.S. manufacturing facilities about $2 billion below the level that might otherwise have occurred. If the trade deficit continues to be reduced by strong U.S. exports, industrial construction will benefit from the easing of this depressant.
Although the long-term outlook for industrial construction is subject to many uncertainties, it is likely to be one of the stronger construction markets during the next 5 years. Because the U.S. exonomy and U.S. exports are expected to improve steadily during the period, the economic climate should be very favorable for industrial construction.
The need to modernize the stock of existing buildings and other structures will help support higher levels of industrial construction. since the 1970s, the tendency has been to defer replacement of manufacturing plants. The cost of replacing the manufacturing structures that existed in 1983 is estimated at $490 billion, in 1989 dollars, which indicates a potentially huge demand. The extent to which manufacturing plants will be modernized or replaced, however, depends on a host of factors, including U.S. international competitiveness, interest rates, business profitability, technological developments, and economy growth.
Office Buildings
The constant-dollar value of new office construction continued to decline in 1989 from the unsustainable levels of the mid-1980s. Further declines are expected in 1990 and for several years thereafter because of high vacancy rates and the elimination of many of the tax benefits of commercial building. Nevertheless, a sizable amount of office construction will continue because of sustained demand in a small number of cities and market niches, as well as continued interest on the supply side from institutional and foreign investors.
Demand for office space continued to be strong in 1989, as 1.3 million additional office workers were employed. Nevertheless, office vacancy rates have continued to climb in most cities because of the rcord amounts of new space becoming available. Office rents have generally been falling in response to these supply/demand conditions. Even if the rate of increase in white-collar employment is sustained in 1990, vacancy rates will probably remain high as new office space reaches completion.
During the next 5 years, the demand for office construction will be heavily influenced by the need to absorb vacant office space and the need to raise rents to profitable levels. One of the most important demand factors for office construction will be long-run investment in real estate by pension funds and foreign interests. Strong investor interest may keep commercial construction at fairly high levels despite high vacancy rates.
Hotels and Other Commerical Buildings
Construction of hotels and motels increased in 1989, reflecting an international hotel-building boom that has probably peaked in the United States. A 10 percent decline is likely in 1990, and an additional decline in 1991, in order to bring capacity more in line with market demand. Fortunately, the underlying demand for hotel lodging is expected to grow steadily for the nest several years, helping to support construction at historically high levels beyond 1991. (See Chapter 59, “Hotels,” for a discussion of the hotel industry’s prospects.)
The category “other commercial buildings” comprises commercial buildings other than office buildings and hotels; these structures include warehouses, grain elevators, shopping centers, parking garages, banks, fast-food restaurants, and gas stations. In recent years, shopping centers have accounted for about half of the value of construction work in this category and warehouses for about a fourth.
The value of other commercial construction declined in 1989 and will decline again in 1990. The primary caues of the downturn are overcapacity and the effects of tax reform. The overbuilding problem is not as serious for stores and shopping centers as it is for office buildings and hotels, however. Other commercial construction will probably become a growing market during the early 1990s because of solid economic growth, stable interest rates, investor interest, and fairly high levels of homebuilding.
Construction of service stations and auto repair garages has declined slightly from the record set in 1987 but will remain at current levels or even increase in the early 1990s. The auto service business has benefited from the increasing complexity of automobiles and the increasing proportion of older cars, which need more maintenance. Although the number of gasoline stations will probably continue to decline, many of the remaining stations are investing large amounts in construction to become high-volume sales outlets, convenience shops, or specialized service stations. The continued economic growth forecast for the next 5 years should lead to further increases in the number of vehicle-miles driven, which should bolster the demand for auto service and repair.
Private Electric Utilities
This category of construction includes new power plants transmission lines, pollution control facilities, conversion of existing power plants from oil and gas to coal, and modernization of existing power plants and other buildings. The inflation adjusted value of electric utility construction dropped by 45 percent during the 1980s, but the decline appears to have leveled off. electric utility construction will probably remain level until the mid-1990s, when it should begin to grow again. The weakness in this category is attributable to declines in new power plant construction; construction of transmission systems and modernization of existing plants have increased rapidly.
Very few new power plants were started during the 1980s, and this trend will probably continue into the early 1990s. The two principal easons for this are the fairly widespread surplus of generating capacity and the utilities’ reluctance to undertake the financial risk of a new construction program, even where a shortage of generating capacity is forseeable. During the 1990s, the surplus capacity will steadily disappear and shortages are likely in some areas, but utilities are unlikely to repeat the massive construction expansion that occurred during the 1970s.
The financial risks involved in constructing new power plants have grown dramatically during the past decade because of changing regulations, nuclear power disasters, lawsuits, Wall Street disfavor, and recent rulings by state regulators against passing on to consumers the costs of canceled construction projects. the 1986 tax reform act has further discouraged power plant construction by requiring that interest costs incurred during construction be capitalized rather than expensed.
The declines in construction of new power plants will be partially offset by growth in the retrofit and transmission facilities markets. Retrofit of existing power plants to improve efficiency and extend generating life involves much less risk and requires fewer permits than does “greenfield” construction. Utilities will continue to invest heavily in transmission systems, in order to accommodate growth and make optimum use of existing power plants.
Hospital and Institutional
Hospital and institutional construction includes hospitals, outpatient clinics, nursing homes, convalescent homes, orphanages, and similar institutions for prolonged care. Buildings that are primarily used as doctors’ offices are classified as office buildings, Approximately 70 percent of the value of this construction is for hospitals and clinics, while the remaining 30 percent is for nursing homes and similar facilities. A noteworthy feature of hospital and institutional construction is that 70 percent of the value is for additions and modernizations at existing facilities, while only 30 percent is for new facilities. About 75 percent of this construction is for privately owned facilites and 25 percent for publicly owned facilities.
Construction of health care facilities has increased substantially since 1986 and will continue to gain in the 1990s. The mid-1980s slump in health care construction was largely attributable to a major effort by government and industry to contain health insurance costs. Although this cost-containment effort continues, most of the effects on construction were one-time reductions in the level of infrastructure needed. The current upswing in construction reflects the return to the long-term upward trend in the health care sector.
The most important factor in the longer term outlook for hospital and institutional construction is the rapid increase in the number of elderly Americans, who require far more hospital and nursing home care than younger people on the average. Additional factors that will support health care construction are increasing use of new, sophisticated medical treatments, the need for additional clinics for drug addicts; the increasing number of AIDS patients; and the need to modernize in order to attract paying patients and scarce health care personnel. Negative factors in the otherwise bullish outlook for health care construction include the poor fiscal condition of those hospitals with large proportions of charity patients, as well as the possibility that shortages of nurses may lead many hospitals to defer expansion plans.–Patrick H. MacAuley, Office of Forest Products and Domestic Construction, (202) 377-0132, September 1989.
PUBLICLY OWNED CONSTRUCTION
The constant-dollar value of publicly owned construction put in place rose by 1 percent in 1989, led by gains in schools, water and sewer facilities, and urban redevelopment. Public works construction had everal weak areas, however, notably highways, military facilities, and federal industrial construction. The total value of publicly owned construction, in current dollars, was about $83 billion, of which $27 billion was for highways and bridges.
Public works construction has increased substantially since 1983. The long-term downtrend in public works investment, which began in 1968 appears to have ended in 1983, at least temporarily. Whether this recovery represents a reversal in long-term trends or whether it is only a cyclical phenomenon is not yet clear. Part of the recent increase in public construction is attributable to the general economic recovery, which has improved the ability of state and local governments to finance construction. the fairly rapid pace of residential and commercial construction has also required building a considerable amount of related infrastructure such as roads, water and sewer lines, schools, and fire stations. In addition, the public appears to be more willing now to pay for infrastructure improvements.
There infrastructure-related laws will have significant long-term effects on public works construction. The Water Resources Act of 1986 authorized 181 new water resources construction projects–the first since 1977–and provided for cost-sharing reforms. As a result, construction of dams, canals, harbors, navigation improvements, irrigation systems, and flood control projects will remain at high levels for the next decade. The Clean Water Act of 1987 will provide up to $3 billion annually for sewage system construction during the next 4 years. The Surface Transportation Assistance Act of 1987 extends the Federal aid Highways program for 5 more years, at approximately the 1986 level. This program is funded from the highway trust fund at approximately $13 billion annually and is by far the largest public works program in the United Staes.
Outlook for 1990
The inflation-adjusted value of publicly owned construction will decline slightly in 1990. The biggest gains will probably be in schools, water supply, hospitals, and “other public buildings.” Highway construction will ease off slightly, but the sharest declines will be in military construction and sewerage systems.
The decrease in public works construction will occur largely because of cuts in Federal Government expenditures for construction. Continued economic growth will provide enough incremental tax revenues to enable state and local governments to finance a greater share of infrastructure improvements but not enough to fully offset cuts in Federal spending. Developer-contributed public works construction will remain high, despite the expectd declines in housing starts and commercial construction, because of greater infrastructure inpact fees. Although municipal bond sales have declined since the record levels of 1984 to 1986, they are still at high enough levels to sustain substantial amounts of construction.
Long-Term Prospects
Public works construction will increase modestly during the 1990-94 period, given the macroeconomic forecast of continued economic growth and fairly stable interest rates. Under these conditions, state and local governments could increase their expenditures enough to offset the expected declines in federal construction expenditures. Although several state and local governments are undertaking dramatic new infrastructure initiatives, most appear unlikely to undertake massive increases in construction spending.
Maintenance and repair spending will probably increase faster than new construction spending, as the public works infrastructure steadily becomes older and larger. Although increased maintenance and repair will provide work for certain types of contractors, many of these expenditures will reduce the funds available for new construction.
Probably the most important infrastructure decision of the early 1990s will be related to renewal of the Federal aid Highways program in 1992. The 42,000 mile highway system will be completed by then and the Federal Government’s role in highway construction will need to be reevaluated. Options range from a withdrawal of the Federal Government from this area to a further increase in federal gasoline taxes and an expanded federal role in road construction and repair. This issue is complicated by proposals to use gasoline taxes as a means of reducing the federal budget deficit.
Efforts to control the federal budget deficit will probably prevent the government from undertaking massive infrastructure renewal initiatives. The 5-year federal budget calls for federal inflation-adjusted capital spending to decline substantially. In contrast, the Office of Management and Budget’s “current services” estimate indicates a more modest decline in real investment spending by the Federal Government (see Table 6). Nevertheless, recent congressional actions have shown that strong support exists for the remaining federal public works programs. By the mid-1990s, construction could receive substantial amounts of new federal funds, financed by innovative techniques, increased user fees, or diversion of spending from nonconstruction programs.
Highway cosntruction will probably decline during the early 1990s, unless federal motor fuel taxes increase again or a decision is reached to draw down the highway trust fund. Water resources and marine construction are expected to increase substantially because of the Water Resources Act of 1986, which authorized 181 new construction projects. Water supply and sewer system construction will remain at high levels but will not increase much after 1989. Construction of schools and other public buildings will probably increase throughout the period. Military construction probably peaked in 1987 and will likely decline for several years. The level of federal industrial construction will depend in large part on prospects for the $4.4 billion Superconducting Supercollider (SSC).
Highways and Bridges
New road and bridge construction declined in 1989 and will probably decline again in 1990 (see Table 1). Public spending for highway construction has been flat since 1988, and increasing costs have reduced the actual amount of construction that can be purchased. Expenditures for highway maintenance have continued to increase, partly at the expense of new construction. This trend will probably continue into the mid-1990s.
The surface Transportation Assistance and Uniform Relocation Act of 1987 renewed the Federal-aid Highways program until 1992, providing a total of about $80 billion for highway construction over 5 years. The Act increases federal outlays by raising the obligation ciling slightly, by partially funding 152 new demonstration projects, and by providing a more generous minimum allocation formula. Unlike the landmark 1982 Surface Transportation Assitance Act, the 1987 Act does not provide a massive increase in construction funding, and the real value of federal highway spending may actually decline during the 1988-92 period, unless obligational ceilings are raised during the annual budget process.
In the longer term, highway construction expenditures will probably continue to increase in order to prevent further deterioration of the nation’s highway infrastructure. Any increase in federal funds would require an act of Congress but the large balance in the highway trust fund can accommodate a substantial increase in expenditures. Although only a few states have committed themselves to massive road building programs, a substantial number are considering more modest undertakings such as toll roads.
In 1989, approximately 25 percent of the value of highway construction put in place consisted of bridges, overpasses, and tunnels, while flatwork accounted for 7k percent. Bridge work is expected to grow faster than flatwork during the next several years because of the need to replace obsolete or unsafe bridges. According to the Federal Highway Administration, 23 percent of the highway bridges in the United States were structurally deficient and an additional 21 percent were functionally or structurally obsolete.
Highway maintenance and repair expenditures have grown during the past 2 decades as the road network has become larger and older. The 1989 current-dollar cost of highway maintenance and repair was about $22 billion, compared to $29 billion for new highway construction. Although some of this work was routine maintenance, such as mowing grass, much of it was typical construction activity such as repaving roads and paintig bridges. Highway maintenance and repair expenditures will probably grow more rapidly than new construction throughout the next decade.
Sewer Systems
The constant-dollar value of sewer system construction put in place increased slightly in 1989 and was about 48 percent greater than in 1983. Sewer construction will probably decline in the early 1990s, however, as a lagged effect of the slower pace of housing starts and commercial construction. Other important factors are the decline in inflation-adjusted federal funding for new sewage treatment plant construction and conversion of the EPA Construction Grants Program to a loan program.
This category of construction includes solid waste disposal facilities, including resource-recovery facilities, which are a small but rapidly growing market. Resource-recovery facilities will become increasingly common because of improved efficiency, risin land prices, and environmentalist objections to landfills.
The Clean Water Act of 1987 provides $18 billion for sewage collection and treatment between 1987 and 1994. This Act has checked the decline in the EPA Construction Grants program and increased obligations by about 12 percent in fiscal year 1988. Because of lags in this program, however, the actual outlays may not increase until 1990. The Act provides for major changes in this program after 1989, when direct grams to communities will be replaced with grants to states to establish low-interest revolving loans to communities for construction of sewerage facilities.
After 1990, sewer construction will probably decline further, because of reductions in federal spending and slightly lower levels of total housing starts. The major uncertainty in the long-range outlook for sewer system construction is the extent to which state and local governments will support the new loan program established by the Clean Water Act. If states augment federal loan funds with their own funds, construction might increase substantially. If the loan program should turn out to be much less popular with local governments than the grant-in-aid program is, the result would be less sewage system construction.
Water Supply Systems
Waterworks construction increased sharply during the last half of the 1980s, recovering from its slump early in the decade. Two of the most important factors in this upturnare the recovery in housing starts and the record amounts of municipal bonds issued for water supply systems. Waterworks construction will continue to increase in 1990 because of the improved financial condition of most local governments, the moderately high level of homebuilding, and the need to upgrade existing infrastructure.
In the longer term, waterworks will probably be one of the more rapidly growing categories of public construction. The fairly high level of single-family housing starts expected for the next 5 years will provide substantial underlying support for new water supply facilities. Further, the aqueduct systems of most older cities are so ancient that extensive replacement work must be done each year. For the United States as a whole, the current level of construction is much less than that needed to replace the waterworks every 50 years, as recommended by engineers. Most water utilities are in a good position to raise the capital needed, so a steady increase in replacement construction is likely for the rest of the century. The Water Resources authorization Act of 1986 has expanded the role of the Federal Government in municipal water supply. Although this Act does not directly provide major funding for water supply construction, it may evenntually facilitate major federal funding for this purpose.
Educational Buildings
New construction expenditures for schools, libraries, and museums increased by about 12 percent (in 1982) dollars) in 1989. About 70 percent of these expenditures went for primary and secondary schools, while colleges and other higher eduction facilities accounted for about a quarter of the total. Nearly 80 percent of educational construction expenditure was for publicly owned buildings, and 20 percent was for privately-owned buildings.
School-related construction will probably increase about 5 percent in 1990, although expenditures will probably level off during the early 1990s. The number of births in the U.S. rose between 1976 and 1982, and enrollment in the lower grades has increased, but high school enrollment has been declining. In the early 1990s, high school enrollment will increase, thus helping to sustain shcool construction. Universities are likely to increase their construction spending substantially during the next 5 years to rebuild deteriorating campuses, according to a recent survey by the society for College and University Planning. Other factors favoring further school construction are the generally favorable fiscal condition of state and local governments, moderately high levels of new housing construction, and increasing emphasis on the quality of education.
Conservation and Development
Conservation and development construction includes water resources development and protection expenditures, as well as the electric power construction programs of the Federal Government. Federal expenditures account for about 80 percent of conservation and development construction, and three federal agencies–the Army Corps of Engineers, the Bureau of Reclamation, and the Tennessee Valley Authority (TVA)–expend most of the federal funds devoted to this purpose. (State and local government-owned electric power plants are classified under “miscellaneous construction.”)
Conservation and development construction was fairly leel in 1989, chiefly because declines in TVA power program outlays offset small increases in water resources programs. The Water Resources Act of 1986 authorized 181 new water resources construction projects, the first since 1977, which will help to keep water resources construction at current levels well into the 1990s. Federal budget pressures, however, will limit funding enough to keep these programs from growing substantially.
Military Construction
Military construction includes a wide variety of structures such as housing, airfields, incinerators, warehouses, docks, radar installations, and roads. In recent yers, the value of new military construction put in place has been less than 2 percent of the Defense Department’s budget outlays. New military construction put in place (see Table 1) differs from the annual military construction appropriation approved by Congress in that more than two-thirds of that appropriation is spent on overseas work, land acquisition, family housing, and maintenance and repair.
Military construction grew rapidly in the early 1980s, but it peaked in 1987. Expenditures declined in 1988 and 1989, and a 10 percent decline is likely in 1990. The 5-year outlook for military construction is much less bullish than it was during the last 5 years. Projections by the Office of Management and Budget indicate that defense investment spending will not increase rapidly enough to keep up with inflation (see Table 6).
Federal Industrial Construction
This category consists of federally owned manufacturing assembling, and processing buildings and related facilities. More than 60 percent of this construction is funded through one Department of Energy program–Atomic Energy Defense Activities. Most of the construction for this program is related to weapons R&D and production, but a large percentage is related to atomic waste isolation and reprocessing. Much of the remainder is for energy R&D facilities.
Federal industrial construction declined in 1989 because of budget cuts to reduce the deficit. In 1990, federal industrial construction is expected to increase slightly, and engineering work for a massive new construction project is expected to start. This megaproject is the Superconducting Supercollider (SSC), which is a $4,4 billion atom smasher that is proposed to be built over a 7-year period beginning in 1990.
The longer term outlook depends largely on the prospects for the SSC, as well as federal budget developments. The largest program in this category, Atomic Energy Defense Facilities, is largely dependent upon defense policy decisions.–Patrick H. MacAuley, Office of Forest Products and Domestic Construction, (202) 377-0132, September 1989.
INTERNATIONAL ENGINEERING AND
CONSTRUCTION
Only small number of U.S. engineering and construction firms operate on an international scale. Despite a partial comeback during 1988, the market positions of these companies in 1989 were still considerably below what they were in 1982. U.S. firms continue to face sharp and rising competition in international markets, and the number of U.S. firms in overseas markets remains at an historically low level.
New engineering and constuction firms from developing countries are continuing to enter the international market. Incresed use of joint ventures by international design and construction firms based in other countries, and the inability of U.S. firms to compete against foreign governments’ support of their domestic design and construction firms persist in impeding the success of U.S. firms. Also, many international constructors have had success using creative financing, while adequate, competitive poject financing continued to be a severe problem for U.S. contractors.
New trends are apearing however. Major constructors are integrating design-related services with their construction abilities and are winning major amounts of design-build contracts. Construction management services, although still not a dominant construction industry component, are beginning to come into their own. In addition, U.S. firms are beginning to close joint venture deals with foreign partners.
International Design
An increase of 65 percent in U.S. foreign billings in 1988 masked a decline in U.S. exports of traditional design services. The catalysts of the apparent growth in U.S. exports of design services were the 20 U.S. engineer-contractor (E-C) companies, which contributed $1.4 billion, or 55 percent of the $2.5 billion total of exported design services. Excluding the E-C firms, the remainder of exported U.S. design services dropped 2 percent.
U.S. engineering firms possess much potential for expansion of their services abroad. Engineering News-Record reports that of the 189 U.S. design firms that exported their services in 1988, 60 accounted for billings of $1.0 billion (see Table 7). One firm accounted for one-third of this amount.
Developed and developing countries compete as strategic planning targets. Some companies are focusing on Europe, where plans to bring down internal trade barriers raise both fear of exclusion and promise of opportunities. During 1988, U.S. design billings in Europe increased to more than $650 million, about three times the 1987 billings. some U.S. design companies have opened branch offices in Europe, while others plan to enter the European Community through joint ventures or the purchase of European design firms.
Other companies have targeted developing countries and have concentrated on working with local firms. Competition in the international design field is sharpening, and U.S. firms need fresh strategies to win billings. Years of technology transfer have produced indigenous design capabilities abroad. Furthermore, developing country firms have expanded their capabilities, have initiated aggressive marketing campaigns, and are using assertive financing. Japanese and South Korean design firms are closely examining opportunities in the Pacific Rim area. this increased competition requires U.S. design firms to adopt more aggressive and innovative marketing strategies.
International Construction
During 1988, the number of U.S. firms appearing in the Engineering News-Record list of the top 250 international contractors worldwide decreased to 36 from 40 the previous year. This reflected a continuing decline in the number of U.S. construction firms willing to pursue business in international markets. six companies won 83 percent of the total value of the international contracts awarded to U.S. firms. Many U.S. firms with substantial domestic business had negligible foreign sales.
Those U.S. construction companies that ventured abroad did well in 1988. While domestic business increased 17 percent, overseas awards climbed to $26 billion, 43 percent above their 1987 total. As Table 8 shows, six countries dominated the $94 billion global construction market in 1988–the United States, Italy, Japan, France, the United Kingdom, and West Germany. Despite their smaller number, U.S. firms still managed to gain the lion’s share of the market–28 percent, up 3 percent from the previous year.
Asia is the source of most new engineering and construction work. In 1988, Japanese contractors remained formidable competitors in Asia, accounting for 27 percent of international construction work. U.S. cintractors still managed to take a 22 percent slice of the highly competitive Asian international construction market.
In fact, U.S. contractors increased their business in every foreign region in 1988. As shown in Table 9, they made their strongest percentage growth in Africa, where their awards doubled during the year. Increased awards in Europe accounted for the largest absolute growth ($3.7 billion), a 72 percent increase from 1987. Other markets showed strong advances as well. Awards in 1988 to U.S. construction firms doing business in Canada increased 85 percent from 1987. the weakest growth (12 percent) was in the Middle East, which until 1988 had led all other regions in dollar value of international contracts awarded.
International Engineering and Construction
Progress in exporting will depend on factors both inside and outside the U.S. international engineering and construction industry. Among the more important of these factors are financing, technology and management capabilities, experience, and reputation. for construction projects that are labor intensive, and especially where local inexpensive labor is available, U.S. firms have little hope of capturing the market.
For more technologically sophisticated projects, financial packaging becomes more important than price. U.S. companies are often unable to provide financial packages that are comparable to those offered by foreign national government-assisted competition. Lack of such packages often means that the awards go abroad. In the face of these difficulties, U.S. firms hesitate to invest the money required to submit bids overseas and turn instead to the lucrative and more accessible domestic market.
U.S. design and construction firms excel and are competitive, however, in complex projects for which the overriding factors are quality of design, construction, and construction management. During 1988, U.S. firms were very successful in winning contracts for petroleum refineries and petrochemicals projects that required advanced construction technologies and special expertise.
Local subsidiaries, joint ventures, and acquisitions were very important in the U.S. design and construction firms’ 1988 international strategy. According to the 1989 “Competitive Assessment of the U.S. International Construction Industry” by the U.S. Department of Commerce, many host governments require foreign firms bidding on design and construction projects to enter into joint ventures with local firms.
Ass part of their strategy, U.S. contractors may well consider seeking out Japanese financing for their work. In 1990, Japan may be the world’s largest donor of economic assistance to developing countries. Japanese aid of about $10 billion a year could be an important source of financing for construction projects in those countries.
If, as expected, Japan gradually unties its aid program, U.S. contractors could gain export opportunities through the use of Japanese financing. To accomplish this and to develop a position in the expanding domestic Japanese construction market, U.S. contractors should consider acquiring licenses in Japan, establishing branch offices in Tokyo, and entering into partnerships and joint ventures with Japanese design and construction companies.
Japan’s developemnt spending is highest in a number of sectors in which U.S. design and construction companies are competitive suppliers. Preferred sectors now include power generation and transmission, pollution control, road and railway construction, telecommunications, manufacturing, and water resource management.
While developing world markets, U.S. design and construction firms will also face increased foreign competition in their home market. In 1988, foreign firms did $388 million of design work and $12.7 billion of construction in the United States. This was 9 percent of worldwide billings of $4.2 billion for design and about 13.5 percent of the $94.1 billion international construction market. As shown in Table 7, the largest foreign competitors in the U.S. design market were the Canadians ($241 million) and the dutch ($75 million). The largest foreign competitors in the U.S. construction market were the United Kingdom, West Germany, and Japan (Table 8). Two-thirds of the foreign firms doing construction in the United States were from these three countries.
In 1992, the European Community (EC) will become a single $4 trillion market of 320 million people. The EC will present both challenges and opportunities for U.S. contractors. Table 7 and 8 show that, as a group, European contractors are already serious competitors. When intra-European trade barriers are lowered in 1992, U.S. contractors will find competition for European business more intense. In third markets, consortia of European design and construction firms, backed by national governments, may prove to be formidable competitors.
The year 1992 is not a starting point, but a target date for completion of an ongoing European effort to reduce or eliminate technical harriers to cross-border trade in construction-related services. In large part, the Europeans have focused their efforts on hammering out common standards of acceptability for all building materials, all construction projects, and all industrial machines. In order to realize the opportunities the EC will present, U.S. constructors need to become familiar with the details of regulations affecting their business and with the activities of European competitors, and they must be prepared to respond to the changing business environment.
The recent U.S./Canadian free trade agreement (FTA) will also affect the U.S. international construction industry. The FTA safeguards the right to sell across the U.S./Canadian borrder and the right of establishment. In 1988, the U.S. contractors’ 48 percent share dominated the $6.5 billion Canadian international construction market. French contractors, in second place, won 35 percent of this market. To maintain or increase the U.S. share, U.S. contractors must fully avail themselves of the benefits FTA has to offer.
Outlook for 1990
Narrowed markets, increased competition, and inability to put together competitive financial packages will continue to hamper U.S. suppliers in 1990. Even though immediate sales results may not be forthcoming, the near term should be a period of project identification and the time for establishing client relationships and forward market planning.
Long-Term prospects
According to the 1989 U.S. Department of Commerce competitive assessment of this industry, the international design and construction market is unlikely during the remainder of this century to resume the rapid growth it experienced during the 1970s. The report attributes this outlook to a decrease in the international energy-related projects that propelled the industry during the 1970s and the unavailability of financing for large projects abroad.
In the 1990s, U.S. suppliers should be prepared to operate in a more competitive international design and construction market than prevailed in the 1980s. Many developing countries have acquired, and favor, local design and construction capabilities. During the rcent worldwide international construction recession, foreign competitors, many helped by their governments, have gained market positions and now hold a competitive advantage.
Nevertheless, opportunities clearly exist in the international construction market for firms with the ability to promote and market their services effectively overseas. Over the longer term, the success of U.S. international contractors will depend upon their ability to “package” their product with (1) innovative financing, (2) technology transfer and training, and (3) joint ventures with local partners in developing countries or with partners in developed countries.
The ability to create innovative and persuasive financial packages ranks high among the factors that will enable U.S. contractors to remain competitive in the international construction market. This means that the U.S. Government, the U.S. financial community, and the industry must systematically work together to develop aggressive and innovative financial packages to compete against foreign construction firms. In the absence of such packages, U.S. international contractors will have to work harder to retain their share of the market.
To maximize their long-term opportunities, U.S. companies must also reestablish their technological edge. Only then can they establish joint ventures with companies from the newly industrialized developing countries. A continuing and dynamic U.S. research and development program will enable U.S. suppliers to share techniques more fully with developing countries.
The international construction market will continue to expand well into the next century. The removal of European internal trade and technical barriers and the creation of a free trade zone between the United States and Canada should create dynamic and energetic economies. Japan is embarking on a $48 billion residential housing investment program. The new Soviet Union and East Bloc country approach to private-sector involvement in development projects should improve prospects for western participation in East European construction work.
Even though the export segment of the U.S. construction industry is highly concentrated among a few firms, it remains valuable to the entire industry and to the U.S. economy as an employer and export generator.–Robert L. Lurensky, Capital Goods and International Construction, Office of International Major Projects, (202) 377-4002, October 1989.
Additional References
Engineering News-Record, McGraw-Hill Publishing Co., 1221 Avenue of the Americas, New York, NY 10020.
International Construction Week, McGraw-Hill Publishing Co., 1221 Avenue of the Americas, New York, NY 10020.
World Economic Outlook, International Monetary Fund, Washington, DC 20431.
World Development Report, 1987, International Bank for Reconstruction and Development, Washington, DC 20433.
A competitive Assessment of the U.S. International Construction Industry, 1989 Edition, U.S. Department of Commerce, International Trade Administration Washington, DC 20230.
COPYRIGHT 1989 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group
