Outlook 2008

Southwest Construction Market Comes Up for Air in 2008

By Scott Blair

After stellar growth for the Southwest construction industry in 2005 and 2006, the market pulled back the reigns in 2007. What lies in store for 2008?

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The construction market in the Desert Southwest experienced a downturn in 2007 slightly larger than economists expected. This reflects the broader picture within the U.S., where it is estimated the construction industry will contract by 8% from 2006 numbers, according to McGraw-Hill Construction (parent company of this magazine).

The total of all construction in 2007, including commercial, residential, highway and public work, is expected to be $35.8 billion in Arizona, Nevada and New Mexico, down a larger-than-expected 16% from 2006. Nervousness and tightening lending practices caused by the sub-prime mortgage fiasco are major players leading to this downturn.

The coming year shouldn’t be as traumatic for the industry. McGraw-Hill Construction is predicting nearly stable numbers for 2008 with a projected $35.4 billion in total construction activity for Arizona, Nevada and New Mexico.

Arizona is expected to gain some ground in 2008, going from $18.2 billion in 2007 to $18.7 billion in 2008. McGraw-Hill even forecasts a slight gain in single-family construction by the end of 2008, after precipitous drops the past two years.

New Mexico is expected to be almost level, with $3.8 billion of activity in 2007 and $3.6 billion for 2008.

“The economy has slowed dramatically in the past few months,” says Lee Reynis, director of the University of New Mexico Bureau of Business and Economic Research. “In New Mexico, major private-sector projects have been put on hold, with manufacturing particularly weak, while funding cuts have hit transportation and other public capital improvement projects.”

Nevada’s drop will be larger. With total construction at $16 billion for 2006, projections call for $13.8 billion in 2007 and $13 billion in 2008.

Retail is expected to decline dramatically in the Southwest, with a drop of 12.6% forecast for 2008. “With the increase in oil prices and the decline in home prices, we are beginning to see some drop off in consumer spending,” says Cliff Brewis, senior director of editorial for McGraw-Hill Construction. “As a consequence, we are expecting a much more conservative retail construction environment.”

Brewis expects this to be the case cross the entire retail sector. “Up until a few months ago, the high end was doing well, but we are seeing declines even there,” he says.

Bright spots include healthcare and water utilities, which both should see double digit growth in 2008.

Highway and bridge construction in Arizona and Nevada is expected to be strong in 2008, jumping to $2.7 billion.

As is the case nationally, safety concerns are fueling part of this increase. “We expect with transportation that funding grows, especially in light of the Minneapolis I-35 bridge collapse,” Brewis says.

The main concern is how the subprime market will affect the broader construction market. “We are concerned about much of the private side of the marketplace,” Brewis says. “We are watching the office building and hotel numbers closely, and we expect those to be negative or close to last year’s mark.” 

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