Best Year in Nonresidential Construction since 2000

The American Institute of Architects (AIA) reported that billings at U.S. architecture firms were positive every month in 2005 for the first time since 2000, pointing towards 2006 being the best year for nonresidential construction in six years. With construction accounting for 9% of GDP, increased nonresidential activity will ease the effects of a projected slowdown in the residential market. The Architecture Billings Index (ABI), a leading economic indicator of nonresidential construction activity, had a rating of 50.4 in December 2005 (any score above 50 indicates a positive score), compared to 58.4 for November 2005 and 47.8 for December 2004

“Considering the sluggish consumer spending coupled with the softening residential sector, nonresidential construction should be viewed as a key driver for the overall economy in 2006,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The nonresidential upturn should continue into 2007 and can be attributed to pent up demand for new projects that weren’t able to be undertaken in recent years.”

All major nonresidential sectors to benefit from improved business conditions:

•The significant upturn in demand for office space and hotel facilities will drive the commercial market;
•Educational and health care projects are expected to see substantial growth this year, fueling the institutional sector;
•An up tick in manufacturing activity will drive the need for more industrial facilities;
•Post-hurricane rebuilding is projected to accelerate in mid-2006 and continue for several years;
•The December inquiry index for new projects was 62.7 showing continued growth in new design projects.

Robert W. Baird & Co. senior industrial analyst, Michael A. Schneider, CFA, said, “We believe the AIA’s forecast for accelerating growth in nonresidential construction activity in 2006 bodes well for construction-related companies. Indeed, the bullish outlook is consistent with indications of strengthening demand from the construction services companies in our coverage universe. Furthermore, our contacts concur that the rebuilding process in the aftermath of recent hurricanes should enhance the nascent construction cycle.”

Possible challenges to continued growth
•Rising short-term interest rates may lead to expansion slowdown;
•Decreased availability and higher costs for building materials due to strong international construction activity;
•Supply disruptions for key construction materials and increased transportation costs caused by higher oil prices.

CIBC World Markets senior industrial multi-industry analyst, Robert P. McCarthy, CFA, said, “The AIA’s forecast for accelerating upcycle in nonresidential construction activity for ’06-’07 has positive implications in particular for electrical equipment suppliers. Recent channel checks with these suppliers indicate that backlogs tied to nonresidential construction are firming for the back half of 2006, particularly in lighting fixtures. Additionally, recent pricing actions in the lighting fixture space appear to be gaining traction, indicative of a solid, potentially accelerating demand environment.”

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