Construction Industry Braces for Contraction

By ALEX FRANGOS

The construction industry, already hit hard by the housing downturn, is bracing for serious reductions in commercial and public-works projects that could lead to the industry's deepest and longest contraction in recent years.

In a closely watched report scheduled to be released Thursday, McGraw-Hill Construction estimates the value of new construction projects will fall to $515 billion next year, down 7% from this year and off 25% from its peak of $690 billion in 2006. The decline will be led by cutbacks in the construction of hotels, office buildings, warehouses and factories.

In recent years, as single-family housing slipped into a gulch, the building of hospitals, roads, schools and offices had remained relatively strong. But now states are suffering lower tax revenue, and financing for commercial projects has become prohibitively expensive or impossible to secure as banks pull back lending. For example, educational buildings will see a 3% decline to $55 billion, the McGraw-Hill report says. Health-care construction spending will see a similar percentage decline, to $26 billion. Highways and bridges will see a 4% decline to $50 billion in new projects.

It all adds up to the biggest sustained decline in construction in at least four decades. The length of the decline is also breaking records. Most construction downturns last one or two years. But according to McGraw-Hill, the construction downturn will endure its third year among all property types. It will be the fourth year of decline for construction of single-family homes. The last time that happened was 1979 to 1982.

"It's the most difficult environment for construction since the early 1990s," says Robert Murray, vice president for economic affairs at McGraw-Hill Construction, a unit of New York-based McGraw-Hill Cos. "The big story for 2009 will be how the weakening construction market will spread to nonresidential building and public works," he says.

"Nobody can get a loan if you are a developer, and if you are a state or local government, you may not be able to float a bond," says Kenneth Simonson, chief economist for Associated General Contractors, a trade group. He says developers and governments are canceling or halting projects across the country.

The McGraw-Hill forecast is based on the company's tracking of new-construction projects, including the issuance of building permits by local governments. The data, know as construction starts, are an indicator of future construction spending and often correlate strongly with actual construction spending, which is tracked monthly by the Census Bureau.

Nonresidential construction will drop 10% next year to about $220 billion. In square-footage terms, the country will build 12% less nonresidential space -- including stores, offices and warehouses -- than in 2008.

Write to Alex Frangos at alex.frangos@wsj.com