Andrews Sees Pockets of Prosperity in 2003

BY BOB MIODONSKI

Of CONTRACTOR’s staff

PALM DESERT, CALIF. — With $850 billion in construction business anticipated in 2003, FMI Chairman Chip Andrews sounded somewhat optimistic when he addressed the Mechanical Contractors Association of America March 4 during its annual convention here.

“We think 2003 will be better than 2002,” Andrews told MCAA members during his “Construction Industry Trends” workshop. “Not a boom economy but not a bad economy.

“We see pockets of prosperity and pockets of disaster.”

The hot sectors this year include education and public safety facilities as well as construction related to conservation and the environment. Among the weakest sectors will be hotels and offices, he said.

Residential construction falls somewhere between those extremes with an expected decrease of 5% this year, Andrews noted. Housing-related work increased 5% in 2002 and 6% in 2001.

While hardly a hot market, industrial construction should at least hold steady this year, he said. After a 30% decrease in 2002, the industrial sector should be flat in 2003.

“The manufacturing recession is coming to an end,” Andrews said. “Low business inventories potentially point to increased production this year, but low capacity utilization will be constraining structural involvement.”

The industrial sector will continue to be affected by the increasing number of manufacturing jobs that are being exported to Asia, he said. Interestingly, industrial work will feel the impact that The Home Depot and other big-box retailers have made on the supply chain in recent years.

“Distribution has changed in a profound way,” Andrews said. “The no-inventory distribution philosophy affects construction.”

Retail construction is expected to see a nice bounce of 3% to 5% this year after a decrease of more than 6% in 2002. That drop, however, followed 2% growth in 2001.

“We’re remaining at really healthy levels historically,” Andrews said. “Reinvestment in retail in urban markets is a good opportunity.”

Among the weaker sectors, the office market may see a prolonged slump with a 3% decrease in work this year after a down year in 2002. The boom times may not return to the office sector until 2010, he said.

New hotel construction saw a major decline of 10% in 2001 with additional erosion of more than 15% in 2002 as 450,000 people were laid off in the hospitality business. Andrews said that he expects the decline in hotel construction work to carry over into 2003.

“We may see a possible rebound in late 2003 as ‘normal’ leisure and business travel returns,” he said.

Meanwhile, the telecommunications sector remains weak with companies unlikely to invest in construction in 2003, he said. Utility construction also saw a large slowdown in 2002.

Among stronger segments, education construction experienced slow growth in 2002 and so far in 2003 due to reduced state tax revenues, Andrews said. Still, the age of buildings will continue to drive this market.

Funding sources for new public safety construction is escalating significantly, Andrews said. Although funding in this sector declined 2% in 2002, it should be up 6% over the next two years. Prison construction has remained steady as capacity has struggled to keep up with demand.

Military construction, which saw no growth in 2001, will see average growth of 7% over the next four to five years due to heightened world tensions, said Andrews, who made his remarks about two weeks before the war started in Iraq.

Environmental spending up

Construction related to the environment increased 20% in 2001 and 16% in 2002. Spending will continue to grow because of public concern for environmental issues and resulting federal funding programs. Water and sewer construction also will continue to increase due to the need for repairs and modernization as well as the public awareness of the necessity of this type of work, Andrews said.

New health-care construction has been steady with more expected in 2003, Andrews said. The health-care segment performed better in 2002 than most commercial markets.

For nonresidential building improvements, Andrews said he expects to see moderate spending this year. After a 4% growth in 2001, nonresidential improvements dropped last year.

“You can create business by selling customers on improvements that help their bottom line,” Andrews said.