Public Safety Sector to Avoid Worst of Downturn

WASHINGTON — The public safety construction sector will perform relatively well compared to other nonresidential sectors and avoid the worst of the declines in project activity for the next two years, according to the American Institute of Architects semi-annual forecast.

Stimulus Breakdown
Public Safety Sector

Billions of dollars will be funneled into criminal justice, law enforcement and corrections during the next two years as part of the $787 billion economic stimulus package signed into law by President Obama.

• The American Recovery and Reinvestment Act appropriates more than $5 billion to support construction, infrastructure, technology and operations projects and programs in the areas of public safety and law enforcement.

• Congress earmarked $800 million for construction and facility programs in the Federal Bureau of Prisons. The bill includes $300 million for the FBI and $100 million for the U.S. Marshals Service for construction projects.

• Customs and Border Protection will receive $720 million to construct ports of entry and improve border security. The National Institute of Standards and Technology receives $360 million for the renovation and construction of new facilities.

• Federal, state and local agencies could also benefit from about $16 billion set aside for building energy efficiency projects and renewable energy programs. State and local governments will receive $6.3 billion to help improve their energy efficiency and reduce carbon emissions.

• The General Services Administration will manage the approximately $5 billion appropriated to the Federal Buildings Fund for the construction, modernization and energy-efficiency retrofit of federal facilities.

• The Office of Justice Programs will manage about $2 billion in grants to assist the improvement of local criminal justice programs and systems and law enforcement operations. More than $1 billion will be directed to a range of programs administered by the Department of Homeland Security.

• The Department of Justice will receive $100 million to support the development of the National Tactical Law Enforcement Wireless Network and $100 million was appropriated to the Office of the Federal Detention Trustee.

The public safety segment of the institutional construction sector is projected to decline less than 4 percent in 2009, faring the best of any nonresidential market segment, according to the AIA’s 2009 Consensus Construction Forecast. Public safety construction spending was valued at approximately $12 billion in 2008.

“Looking at the consensus numbers, the institutional sector should see a modest downturn compared to other nonresidential sectors,” says Kermit Baker, AIA chief economist. “The public safety sector is projected to do better than other major institutional sectors, such as education.”

The healthcare and education markets will experience declines of about 4 percent and 7 percent, respectively, in 2009, according to forecasts.

During 2010, public safety construction activity is projected to decline by less than 2 percent, matching the relatively healthy performance forecasts for healthcare and education and the institutional sector average.

Nonresidential construction activity is projected to decline more than 11 percent in 2009 and by 5 percent in 2010, as the economic downturn impacts the commercial, industrial and institutional sectors to varying degrees, according to the panel consensus.

The economic downturn is projected to result in steep two-year declines in activity for the commercial and industrial sectors of the nonresidential market, more than 26 percent and almost 20 percent, respectively. The institutional sector is expected to experience a 7 percent drop during the next 18 to 21 months.

Major commercial sectors will be hardest-hit by the downturn with projected two-year declines in construction activity between 28 percent and 32 percent for offices, retail facilities and hotels.

The AIA Architectural Billings Index began signaling a contraction in nonresidential construction activity at the start of 2008 as work on the boards masked the underlying construction downturn. The deteriorating domestic and global situation prompted significant downward revisions in consensus panel forecasts.

“As profits for businesses have fallen and the ability to get credit to finance projects has become far more difficult, construction plans have been put on hold or canceled outright in recent months,” Baker says.

Construction activity levels in the nonresidential construction market, which accounts for about 10 percent of U.S. GDP (approximately $14 trillion), are unlikely to recover until a sustained revitalization takes hold in the broader economy.
“This is not expected to turn around anytime soon and it’s likely to get worse before it gets better,” Baker says.

The construction sector suffered significant to major declines in activity levels as the U.S. economy weathered recessions in each of the decades since 1979. The National Bureau of Economic Research traced the start-point of the current recession to the last quarter of 2007.

The downturns of the early 1980s, 1990s and 2000s lasted 12, 15 and 17 quarters, respectively. The current recession, which is in its sixth quarter, will likely be similarly structured to, but less severe than, the downturn of the 1990s, according to the AIA consensus panel.

The institutional segment fared better than other nonresidential segments during the three previous downturns, according to the AIA consensus report. The commercial and industrial sectors suffered combined declines of 34 percent in the 1980s, 48 percent in the 1990s and 29 percent in the 2000s, compared to institutional declines of 12 percent, 7 percent and 21 percent, respectively.

The consensus panel forecasts do not factor the potential impact of the $787 billion federal economic stimulus package, which could significantly improve the outlook for the nonresidential construction sector and the prospects for construction activity in the institutional sector through 2010, experts say.

The American Recovery and Reinvestment Act of 2009 combines a range of fiscal and economic stimulus measures with investments in infrastructure, technology and energy efficiency.

“The federal package is designed to stimulate certain sectors of the market and also to spur broader recovery of the U.S. economy,” Baker says.

However, the economic stimulus could have only a modest direct effect on the construction industry through the next 18 to 24 months and it will likely be 2011 before the full effects of the stimulus package are felt, Baker says.

“Some aspects of the stimulus package have a longer fuse and there is also a degree of lag time with infrastructure and construction projects,” Baker says. “Even shovel-ready projects take some time to get up and running.”

The semi-annual AIA Consensus Construction Forecast Panel includes leading nonresidential construction forecasters, McGraw Hill Construction, Global Insight, Moody’s, Reed Business Information, and FMI.

Consensus Construction Forecast