The Big Squeeze: Midyear Business Update By Robert Murray, McGraw Hill Construction
Article Date: 08-01-2008
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Weakening economy, tight financing put most construction sectors in a vice grip - yet public works still defies the pinch so many are feeling.
New construction starts in 2007 fell 9 percent to $628.3 billion, marking the first current dollar decline for total construction since 1991. Last year, the correction for single-family housing went from bad to worse, as the turmoil in the subprime mortgage market provided another hit to homebuyer demand. Not only were loans less available to subprime borrowers, but other homebuyers on firmer financial footing felt the pinch coming from diminished loan availability. Multifamily housing also lost momentum in 2007, one year after the start of the single-family downturn, as the condo boom came to a halt in numerous markets around the nation. With both sides of the housing market in retrenchment, residential building in 2007 plunged 23 percent in dollar terms and 25 percent in dwelling units.
The nonhousing segment of the construction industry still showed expansion in 2007, with dollar volume up 6 percent. While smaller than the 21 percent jump in 2006, it does stand in contrast to the housing correction. More to the point, nonresidential building in 2007 advanced 6 percent, with further growth for the commercial structure types. School construction also climbed in dollar terms, although its square footage amount eased back slightly. For the nonbuilding sector, contracting in 2007 rose 4 percent, lifted by gains for highways, bridges, sewers, and water supply systems.Last October’s Outlook focused on the tough environment facing construction in 2008, namely the slowing economy and tight credit conditions. That environment has proven to be even more difficult than expected, with the impact already shown this year by single-family and multifamily housing, and soon to be shown by commercial building. As a result, the 2008 forecast has been lowered, and it’s now predicted that total construction starts will drop another 11 percent this year to $558.5 billion.Economic Environment
The fear of recession mounted in early 2008, based on a variety of weak readings for the economy. The payroll employment statistics showed that the economy lost jobs during the first half of the year at a pace of 73,000 per month. These are the first monthly job declines in five years, and compare unfavorably to job growth of 175,000 per month in 2006 and 91,000 per month in 2007. The GDP statistics also depict a slowing economy. Real GDP growth in the fourth quarter of 2007 slipped to just 0.6 percent, down sharply from the 4.9 percent expansion in last year’s third quarter.
Rising inflation has been a major worry in early 2008. From November through March, the consumer price index showed a year-over-year increase at 4 percent or higher, and the increase in April (3.9 percent) and May (4.2 percent) essentially maintained this pace. Much of the pickup in inflation can be attributed to higher fuel costs – during the first four months of 2008 the energy component of the consumer price index was up 18 percent versus a year ago. Faced with the opposing pressures of a slowing economy and rising prices, the Federal Reserve in early 2008 directed its efforts toward averting recession. After cutting the federal funds rate last fall from 5.25 percent down to 4.25 percent, the Fed took aggressive action on Jan. 22, cutting rates by 75 basis points, at a time when foreign financial markets were exhibiting volatile behavior. This was followed by a 50 basis point cut on Jan. 30, a 75 basis point cut on March 18, and a 25 basis point cut on April 30, which brought the federal funds rate down to 2.0 percent. At its June 25 policy meeting, the Fed voted to hold the federal funds rate at 2.0 percent. In its statement, the Fed took note of the rate reductions already implemented which should help to cushion the economic slowdown. Furthermore, the focus has shifted toward fighting inflation, as the Fed’s policy statement indicated that “uncertainty about the inflation outlook remains high.” From the fiscal side, steps were taken to cushion the economic slowdown. In early February, Congress and the Bush Administration reached agreement on a $168 billion stimulus package, providing tax rebates to lift consumer spending, incentives to boost equipment purchases, plus steps to increase funds available for mortgages. To encourage the purchase of new equipment, the stimulus bill allows firms to deduct 50 percent of the value of new investment expenditures in 2008, for items subject to depreciation over a 20-year period or less. The bill also allows small businesses to write off the entire cost of new investment expenditures in 2008, up to a ceiling of $250,000 from the current $128,000. To provide relief to the housing sector, the bill allows Fannie Mae and Freddie Mac for a one-year period to purchase loans to as much as 125 percent of an area’s median home price, up to a cap of $729,750 per loan. The previous limit was $417,000, and a higher cap for “jumbo loans” would be a particular help toward increasing mortgage availability in regions with high housing costs, such as California and the Northeast. How much of a benefit will this stimulus bill provide? There should be some benefit, although this year’s soaring cost of energy will cut into the stimulus coming from the government’s rebate checks. Increasing the funds available for mortgages may help some homebuyers get financing, but this will make only a slight dent in the huge inventory of homes that remain unsold. As for the benefits of lower short-term interest rates, there’s been immediate help to homeowners with adjustable-rate mortgages facing resets this year. On a broader level, though, shifts in monetary policy take about six to nine months to have an impact, meaning the lift to the economy probably won’t be felt until the latter half of this year. As a result, growth for the U.S. economy in the near term will continue to be sluggish, at best. Overall, it’s projected that the U.S. economy will expand just 1.5 percent for full year 2008.Since August 2007, the financial markets have been shaken by the fallout from the subprime mortgage crisis. The Federal Reserve has taken aggressive steps to ensure that credit markets don’t freeze up, such as increasing the funds available to the investment banking community and brokering the sale of Bear Stearns to JP Morgan Chase, as Bear Stearns was about to declare bankruptcy in March. Yet even prior to the current turmoil in the financial markets, lending standards have been getting tighter. As shown by the Federal Reserve’s quarterly survey of bank loan officers, lending standards on commercial real estate loans began to tighten very slightly at the start of 2006, following a full two-year period in which lending standards had eased. From the July 2006 survey through the August 2007 survey, the percentage of respondents reporting more restrictive lending moved up to 30 percent, and then shot up to 50 percent in the October 2007 survey. The large increase with the October report was consistent with heightened concerns about the health of the U.S. financial sector. In the January 2008 survey of bank loan officers, the results were striking – 80 percent of the respondents said that they had tightened standards on commercial real estate loans, the highest percentage since this survey question was introduced in 1990. That figure was essentially matched in the April 2008 survey, when 79 percent of the respondents said they had tightened standards. The April survey found that 38 percent of the respondents reported weaker demand for commercial real estate loans, the seventh quarter in a row in which at least 25 percent of the respondents cited diminished loan demand. Clearly, the tough financing environment affecting residential lending in 2007 has now broadened to include the commercial building sector, which is expected to dampen the level of commercial building starts during the latter half of 2008 and into 2009. The more restrictive climate means that in some cases owners and developers are having trouble refinancing short-term loans that were obtained during the mid-decade boom. In January the developer of the Cosmopolitan Resort and Casino in Las Vegas defaulted on a $760 million loan from Deutsche Bank after he was not able to get refinancing. In March the developer of the $4 billion Atlantic Yards project in Brooklyn, N.Y., said that the tough credit environment is likely to delay the project’s signature office tower and three residential buildings. Other projects around the nation are facing delays, including the postponement of the sale of a 13-acre property in Seattle that would have set the stage for a $7 billion downtown development. The public financing of construction projects is now moving from a supportive stance to one that could be described as mixed. With regard to money coming from the federal government, Congress finalized fiscal 2008 appropriations levels in December, with continued emphasis on transportation work. For state finances, the latest Fiscal Survey of the States (June 2008), issued by the National Association of State Budget Officers, noted that “fiscal 2008 marked a turning point for state finances with a significant increase in states seeing fiscal difficulties, in stark contrast to the preceding several years.” For fiscal 2009, about half the states are currently looking at budget shortfalls, including California ($16.0 billion), New York ($4.7 billion), New Jersey ($3.5 billion), Florida ($2.0 billion), and Ohio ($1.9 billion).
Single-family housing has yet to show firm evidence that its steep correction is near an end. In 2006, construction dropped 18 percent to 1.331 million units (McGraw-Hill Construction basis), to be followed by another 30 percent decline in 2007 to 936,000 units. Since the peak year of 2005, the U.S. total for single-family housing starts has fallen by 42 percent, with the steepest declines by region in the West, down 49 percent; and the South Atlantic, down 48 percent. The West is being pulled down in particular by California, sliding 57 percent over the two years, while the South Atlantic is being pulled down by Florida, plummeting a huge 67 percent over the two years. Not far behind is the Midwest, with a two-year decline of 46 percent. Lesser reductions were reported in the Northeast, down 39 percent; and the South Central, down 25 percent. The record volume of single-family starts in 2004 and 2005 reflected the strength of investor-led homebuyer demand. According to the National Association of Realtors, homes purchased for investment purposes comprised 28 percent of sales in 2005. However, as overheated markets witnessed slower price appreciation and in some cases price declines, investor-led demand took a hit. It’s estimated that home sales for investment purposes plunged 29 percent in 2006 and another 18 percent in 2007.Guidelines issued by federal bank regulators at the end of June 2007 required lenders to underwrite loans based on a borrower’s ability to make payments on a loan’s adjusted rate (not just the low introductory rate). In addition, the lending restraint shown by the banking industry is now covering a wider range of mortgages and homebuyers. According to the Federal Reserve’s April survey of bank loan officers, the percentage of those reporting tighter standards was expectedly very high for subprime mortgages (78 percent) and nontraditional mortgages (76 percent). For prime mortgages, the percentage reporting tighter standards climbed to 63 percent in the April survey, up substantially from just 14 percent last August. The mounting glut of unsold homes is substantial, reflecting weak home sales. The months’ supply of new homes for sale rose steadily over the course of 2007, reaching 9.8 months in December. A further rise to 11.4 months took place in March, the highest reading in over 40 years, before easing back to 10.9 months in May. For existing home sales, the months’ supply reached 11.2 months in April, the highest reading ever for this series (which has a relatively short history, beginning in 1999.) The decline in home prices is further dampening the investment component of homebuyer demand, as well as causing potential homebuyers to sit on the sidelines in anticipation of further price reductions. According to the S&P/Case-Shiller national home price index, home prices in fourth quarter 2007 were down 8.9 percent from a year ago, followed by a 14.1 percent plunge in first quarter 2008. Given the backlog of unsold homes and tight lending standards for mortgages, there’s little chance that demand for single-family housing will show much improvement during 2008. The rate of descent for construction on a quarter-by-quarter basis won’t be as severe as last year, and the bottom is expected to be reached some time during the latter half of 2008. But due to the poor start to the year, single-family housing for all of 2008 is now forecast to drop another 31 percent to 650,000 units. Multifamily housing in 2006 avoided the double-digit decline witnessed by single-family housing, as starts slipped 3 percent to 516,000 units. Despite a notable slowdown in the sale of condos and townhouses, multifamily construction did not weaken much, as large condo towers continued to reach groundbreaking. The construction start statistics show that in 2006 there were a total of 50 multifamily projects (primarily condominiums) with valuations of $100 million or more. In 2007, there were 44 multifamily projects with a valuation of $100 million or more reported as construction starts, down modestly from 2006. With construction schedules for large condo towers extending over many months, a number of projects that were started over the past few years have yet to reach the market. As these projects are completed, they will add to the unsold inventory, and multifamily construction is likely to see further downward pressure from the added supply. In addition, proposed multifamily projects are now receiving greater scrutiny from lenders, as the result of more stringent lending standards. In this climate, it’s forecast that multifamily housing in 2008 will decline another 22 percent to 345,000 units.Commercial Buildings
During 2007 the commercial building sector continued to head upward, rising 2 percent to 1,038 million square feet. Gains were reported for stores, warehouses, offices, and hotels, with only garages/service stations showing decreased activity. The credit crunch that emerged during the summer of 2007 dampened deal-making to some extent, causing purchases of commercial property to settle back, but there was little negative impact on property development. In 2008, market fundamentals such as occupancies are not showing the same strength, given the slower economy. In addition, bank lending standards have tightened even more, making it increasingly difficult for projects to get financing. As a result, commercial building in 2008 is forecast to drop 16 percent to 875 million square feet.The main drivers of store construction have not been particularly supportive over the past couple of years – retail sales have been lackluster, and the housing sector has been in steep decline. Through 2007, however, there was only a modest negative impact on store construction. Although contracting slowed in each consecutive quarter of 2007, the incredibly strong first quarter enabled the full year 2007 to come in at 311 million square feet, up 1 percent from 2006. Major projects that reached groundbreaking in 2007 included the $310 million addition to the Carousel Center Mall in Syracuse, N.Y., the $250 million Rego Park Mall II in Elmhurst, N.Y., the $214 million retail portion of the Skyview Apartments in Flushing, N.Y., and the $99 million Pier Park Plaza in Panama City, Fla.For 2008, the prospects for store construction have shifted downward. With retail owners feeling the pressure of a weak economy, major retail chains have announced slower capital spending and fewer store openings. In fact, the International Council of Shopping Centers predicts that nearly 6,500 retail stores will close this year, the highest amount since 2001. Announcements of recent store closings include such well-known names as Ann Taylor (117 stores), Talbot’s (100 stores), and Sprint-Nextel (125 stores). Linens ’n Things filed for bankruptcy, and Borders books announced that it would put itself up for sale. Home Depot, which has been hard hit by the housing downturn, has announced plans to close 15 U.S. stores. Lowe’s is also scaling back expansion, and revealed plans to delay 20 new store openings in areas with especially weak housing activity.One pressing concern relates to how much store construction will respond to the housing decline that’s been underway for two years now. Given the close historic relationship of housing starts to store construction, the current disconnect won’t continue much longer, and the weaker economic picture of 2008 adds to the downside risk. As a result, store construction this year is forecast to decline 19 percent to 253 million square feet.Warehouse construction advanced 14 percent in 2007 to 248 million square feet, following the mild loss of momentum in 2006. Explanations for the upturn include the continued strength shown by store construction, healthy container traffic, and the expanding need for large distribution centers near major intermodal hubs. The year 2008, however, is not looking quite as upbeat. Vacancy rates as reported by CB Richard Ellis have moved upward, rising from 9.5 percent in third quarter 2006 to 10.5 percent by the first quarter 2008. As supply finally catches up with demand in such markets as Phoenix, southern California and Dallas/Fort Worth, developers will begin to rein in warehouse projects. As a result, warehouse construction will join the weakening trend for stores, as contracting falls 19 percent this year to 202 million square feet.Office construction enjoyed a healthy performance in 2007. Despite slower growth for office employment, the economy remained sturdy enough to support the start of several high-profile projects. These included the following – the $550 million 11 Times Square office tower in New York, a $550 million data center in San Antonio, Texas, the $420 million Bank of America office tower in Charlotte, N.C., the $245 million Wachovia office tower also in Charlotte, N.C., and the $200 million Nassif office building renovation in Washington, D.C. For the nation, office construction in 2007 climbed 4 percent to 215 million square feet, an increase that followed a 24 percent jump in 2006.The 2008 picture on the leasing side for offices is not quite as positive as 2007. In first quarter 2008 the suburban office vacancy rate moved up to 14.9 percent, compared to its most recent low of 13.6 percent back in fourth quarter 2006, according to CB Richard Ellis. The downtown vacancy rate continued to recede, though, reaching 10.2 percent in first quarter 2008. Office rents are now rising at a slower pace, and the weaker economy is beginning to affect levels of office employment. While tighter bank lending standards did not have much of an impact on office construction in 2007, some dampening will become apparent in 2008. As a result, office construction in 2008 is forecast to fall 11 percent to 192 million square feet.Amidst the retrenchment, there are still a few areas of strength for office construction. Both New York and Boston saw vacancies drop in the final months of last year, allowing rents in these metros to remain on their upward path. Not surprisingly, these two are among the markets where construction is expected to grow in 2008. Office construction in New York witnessed groundbreaking in early 2008 for World Trade Center Towers 2, 3, and 4, each with a construction start cost estimated in excess of $1 billion. Boston in early 2008 has seen groundbreaking for the $150 million office portion of the Russia Wharf mixed-use project, as well as a $125 million office building at the Fan Pier site on Boston harbor. Other large office projects have been started in early 2008 in such cities as Houston ($270 million), Washington D.C. ($210 million), Baltimore ($200 million), and Atlanta ($175 million), which should help the 2008 downturn for office construction stay moderate.Hotel construction rose 5 percent in 2007 to 86 million square feet. Hotel fundamentals held up reasonably well for most of 2007, enabling construction to rise even more after surging 67 percent in 2006. That year saw the start of a number of massive projects in Las Vegas, such as the $1.3 billion Palazzo hotel tower, the $1.3 billion Encore at Wynn hotel tower, and the $1.1 billion Pelli hotel towers (as part of the huge Project City Center). In 2007 major projects that reached groundbreaking in Las Vegas included the $706 million hotel portion of the Fontainebleau hotel/casino and the $550 million hotel portion of the Cosmopolitan Resort and Casino. Aside from the continued high volume in Las Vegas, the year 2007 also showed more widespread activity, including groundbreaking for such projects as the $298 million LA Live Marriott in Los Angeles, Calif., the $237 million Cibolo Canyons J.W. Marriott in San Antonio, Texas, and the $186 million Hilton Orlando convention center hotel in Florida.The hotel construction market is beginning to look more vulnerable. Lodging industry financials are also not growing as fast – revenue per available room eased to a 5.7 percent gain in 2007, compared to 8.5 percent in 2005, according to Smith Travel Research. The increase in the number of hotel rooms that will become available this year and next means that supply will be rising at a time when demand will be falling, given the slower economy. The near term will continue to receive a boost from large projects in Las Vegas and Atlantic City. Institutional Buildings
The institutional building sector showed moderate expansion in 2005 and 2006, led by the educational building category. In 2007, institutional building experienced a slight decline in square footage, slipping 4 percent, although the dollar volume managed to rise 4 percent given healthy growth for alterations work. For 2008, another slight decline is projected for institutional square footage, down 3 percent, combined with a small dollar increase, up 2 percent.The educational building category showed renewed expansion in 2005 and 2006, reaching 230 million square feet. In 2007, the upward trend paused as contracting retreated 5 percent to 220 million square feet. On the plus side, continued growth was shown by colleges and universities (up 10 percent), with an added boost coming from special schools (up 4 percent) and laboratories (up 8 percent). By state, Texas showed further growth in 2007, rising 9 percent in square footage terms, and large gains were also reported for Georgia (up 46 percent), New York (up 19 percent), and Indiana (up 16 percent). However, a number of the leading states for educational building weakened in 2007, including Florida (down 16 percent), Illinois (down 17 percent), Pennsylvania (down 24 percent), California (down 28 percent), Ohio (down 32 percent) and New Jersey (down 32 percent).The long-term demand for classroom space remains considerable. Furthermore, recent years have seen support coming from the passage of major school construction bond measures. In the November 2007 elections, large school construction bond measures were passed in Texas and North Carolina, among other states. College and university construction should continue to strengthen, as large endowments are enabling capital expansion programs to move forward. On the negative side, the eroding fiscal health of states, in combination with rising construction costs, means that some plans for K-12 facilities will be deferred in the near term. The mix of these competing factors will contribute to a modest 1 percent slide to 217 million square feet in 2008. Construction of health care facilities achieved an all-time high in 2006 at 110 million square feet. The hospital segment provided much of the upward impetus, with very strong activity in 2005 and 2006. Projects that were deferred earlier in the decade, due to increased financial scrutiny of health care firms, were able to reach the construction start stage at mid-decade. In addition, a number of major hospital chains began capital expansion programs to become more competitive. However, an 18 percent retreat for hospital construction in 2007, after its mid-decade surge, was the reason why the overall health facilities category dropped 8 percent last year to 101 million square feet. The clinic and nursing home segment, after increasing 10 percent back in 2005, essentially held steady during 2006 and 2007.
In 2008, it is forecast that both sides of the health care facilities category will lose momentum, as contracting retreats another 5 percent to 96 million square feet. In part, this is due to the continued pullback from the exceptional amount of construction that was achieved in 2006, and in part it reflects the tougher financing climate. This is still a relatively strong amount – yearly construction averaged 92 million square feet during 2000 through 2004, and just 79 million square feet during the 1990s.Of the smaller institutional categories, the public buildings structure type witnessed the most growth in 2007. This structure type jumped 44 percent in 2007 to 48 million square feet, reflecting strong gains for detention facilities (up 50 percent), courthouses (up 61 percent), and armories/military buildings (up 79 percent). The small post office segment registered a 111 percent increase, although this was relative to an extremely low 2006. Only the police/fire station segment was unable to show growth in 2007, slipping 2 percent. The detention facility and courthouse segments benefited from greater financing at the state and federal level, while the military facility segment benefited from federal spending for base realignments. In 2008, it’s not expected that last year’s elevated pace can be sustained, as contracting slides 9 percent to 44 million square feet.The other small institutional categories weakened in 2007. The downward trend for church construction continued, with contracting falling 10 percent to 31 million square feet, to be followed by another 7 percent drop in 2008. Amusement-related work for 2007 was reported at 66 million square feet, down 9 percent, as the result of decreased activity for this category’s major segments (convention centers, theaters, and indoor sports arenas). In 2008, the amusement category will settle back an additional 2 percent. Transportation terminal work in 2007 plunged 21 percent to 26 million square feet, given a substantial decline for freight terminals and further weakness for airline terminals. At the same time, bus and rail terminals were steady. A 3 percent decline to 25 million square feet is anticipated for the transportation terminal category in 2008.Manufacturing Buildings
The manufacturing building category in recent years has seen lackluster construction in square footage terms, holding at 83 million square feet in 2007. In contrast, contracting in dollar terms has been buoyant, with these gains: 2005, up 26 percent; 2006, up 33 percent; and 2007, up 25 percent. In part, this has been due to a growing number of costly facilities, such as several large semiconductor plants that reached groundbreaking in 2005 and 2006. In 2007, the largest project was the $3.5 billion mixed oxide fuel fabrication facility in South Carolina, which will be used to process surplus weapons-grade plutonium for use in commercial nuclear power reactors. The second largest plant in 2007 was the $1 billion expansion to a petroleum refinery in Louisiana. Aside from these very large projects, a major reason for the large dollar increase for the manufacturing category has been a surge of ethanol plant construction. One provision of the Energy Policy Act of 2005 requires refiners to increase their biofuel use by 2012, which in effect guarantees a market for ethanol producers. The most recent energy legislation, the Energy Independence and Security Act of 2007, requires the production of 36 billion gallons of renewable fuels by 2022, about five times the current ethanol production levels. As a result, construction of ethanol plants surged in 2006 and 2007.
The pattern for manufacturing buildings will continue to be mixed in 2008. Some dampening will come from the slower U.S. economy, and capacity utilization has receded so far in 2008, with May reported at 77.6 percent. The weak U.S. dollar will continue to provide some benefit to the manufacturing sector, as it makes domestically produced goods more competitive in overseas markets. Public Works and Electric Utilities
The public works sector in 2007 had another year of healthy growth, advancing 7 percent to $120.4 billion, which marked the fourth straight year of expansion. The strength over the 2004 to 2007 period was the result of the improved fiscal posture of the states, environmental mandates, and the long-awaited passage of the current multiyear federal highway bill, SAFETEA-LU. The 2007 volume of public works was supported by a greater amount of transportation projects, given the increased funding called for by SAFETEA-LU, and elevated contracting for the environmental categories. Site work and miscellaneous public works projects (such as outdoor sports stadiums) also had a buoyant 2007, climbing 5 percent. In 2008 public works construction is forecast to edge up an additional 2 percent to $122.9 billion, as more growth for highways, bridges, and the environmental categories outweighs a slower pace for site work.Highway and bridge construction in 2007 reached $53.4 billion, a 5 percent gain that followed a 15 percent advance in 2006. California was the leading state in dollar volume during 2007, jumping 31 percent with a huge push coming from the $1.4 billion start of the suspension span of the San Francisco-Oakland Bay Bridge. Particularly strong activity was also reported in Florida (up 23 percent) and New York (up 47 percent). The current federal transportation bill, SAFETEA-LU, spans the period from 2004 to 2009, so it is reaching its final years, which generally have smaller funding increases than were present in 2006 and 2007. At the same time, Congress finalized fiscal 2008 appropriations in December, with continued emphasis on transportation work. The federal-aid highway program gets a 5 percent increase to $41.1 billion, which includes $1 billion to upgrade bridges in response to the renewed focus on infrastructure maintenance after the I-35W bridge collapse in Minneapolis, Minn. This moderate increase in federal funding will help lift construction in 2008, with an additional financing push coming from the states. Further support may come from public-private partnerships, although reconsideration of such financing arrangements in Texas may limit their contribution to public works growth over the next year or two. In 2008, highway and bridge construction for the nation is forecast to rise 5 percent to $56.3 billion. Further expansion is less likely for 2009, which will be the final year for SAFETEA-LU and a $3.2 billion shortfall in the Highway Trust Fund is expected. The environmental public works group (river/harbor development, sewers, and water supply systems) registered healthy growth during the 2005 to 2007 period, with last year’s level rising 10 percent to $36.8 billion. Stronger contracting for sewers and especially water supply systems in 2007 outweighed a retreat for river/harbor development. For 2008, environmental public works will climb a more gradual 4 percent to $38.4 billion. The river/harbor development category showed strong growth in 2005 (up 21 percent) and 2006 (up 17 percent), reflecting in part reconstruction efforts in the Gulf of Mexico region following Hurricane Katrina. Contracting in 2007 slipped 6 percent to $8.0 billion, as the push for new starts arising from the reconstruction efforts subsided. For 2008, the river/harbor development category is expected to make a partial rebound of 4 percent to $8.3 billion, helped by greater funding for Corps of Engineers work included in the May 2007 supplemental spending bill. The federal government supports capital spending for sewer and wastewater construction through the state revolving funds program. While helpful, these federal funds are inadequate to meet overall spending requirements, and much of the financing responsibility for sewer construction falls on state and local governments. In 2007, the sewer category advanced 9 percent to $15.8 billion, boosted by a number of large projects. These included a $300 million waste water treatment plant in the state of Washington, plus large water pollution control plants in Virginia ($267 million) and New York ($228 million). Another project that boosted the sewer category in 2007 was related to hazardous waste cleanup, namely $1.2 billion for radiological waste cleanup in the state of Washington. For 2008, the sewer category is forecast to increase an additional 2 percent to $16.2 billion. The water supply category had a very strong 2007, with contracting climbing 26 percent to $13 billion. Major water supply projects that reached the construction start stage in 2007 included a $1.3 billion water filtration treatment plant in New York, a $190 million reservoir purification facility in Colorado, and a $121 million water intake facility in California. For 2008, the water supply category is forecast to rise 7 percent. Improvements to water supply systems, especially the acquisition of additional water supplies, have acquired a new urgency over the past year with the drought conditions experienced in such parts of the nation as the Southeast. The electric utility category in 2006 soared 106 percent to $16.2 billion, substantially moving beyond the lackluster activity of 2003 through 2005, when contracting averaged $8 billion per year. In 2007, contracting settled back 16 percent to $13.6 billion, still well above the lackluster performance of 2003 to 2005. Large power plant projects that reached groundbreaking in 2007 were located in Texas ($1.8 billion), West Virginia ($1.3 billion), Florida ($600 million and $475 million), and Pennsylvania ($550 million). Helping to keep electric power starts at relatively high levels is the expectation that demand will continue to grow 2 to 3 percent annually over the next five years. Some of this demand is coming from environmental mandates, such as legislative requirements to use a minimum percent of renewable energy sources in producing electricity as well as requirements to reduce carbon dioxide emissions (the “carbon footprint”) from existing plants. One segment of the electric utility total that continues to see an upward trend is transmission line work, with construction start statistics jumping from $300 million in 2002 to $1 billion in 2004, and then up to $1.4 billion in 2007. For the current year, electric utility construction is forecast to advance once again, rising 15 percent to $15.6 billion.
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