Comprehending the Construction Marketplace Economics Trends Implications Rusty Sherwood, VP Market Development January 20, 2008 2009 Outlook

Comprehending the Construction Marketplace

EconomicsTrendsImplications

Rusty Sherwood, VP Market DevelopmentJanuary 20, 2008

2009 Outlook

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Trends

US & Global– Sustainability/Green Building

– Interoperability and BIM

– Workforce/Labor

– Innovation

– Materials

– Project Delivery Methods

“The trouble with our times is that the future

is not what it used to be”

Paul Valery


Trends



– Workforce/Labor

– Innovation

– Materials


ContextBig Picture

2009Trend Factors

So what


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Trends



– Workforce/Labor

– Innovation

– Materials


Economicsthe big picture


U.S. Construction Market Indicators The decline for Total Construction became steeper in 2008.

150

300

450

600

750

90 92 94 96 98 00 02 04 06 08

M-H Construction Starts 2007

-8% 2008

-12%Billions of Dollars

300

500

700

900

1,100

1,300

90 92 94 96 98 00 02 04 06 08

Construction Put in Place 2007

-2% 2008


4.5

5.2

5.9

6.6

7.3

8.0

90 92 94 96 98 00 02 04 06 08

Construction Employment 2007

-1%2008

-5% Millions of Workers


Major U.S. Construction Sectors (Starts) Single Family Housing still falling; Commercial Building heading down;

Institutional Bldg. healthy for now; Public Works slipping.

50

125

200

275

350

90 92 94 96 98 00 02 04 06 08

Single Family Housing 2007

-26% 2008


20

40

60

80

100

120

90 92 94 96 98 00 02 04 06 08

Commercial Building Construction Starts

2007

+8% 2008


35

55

75

95

115

135

90 92 94 96 98 00 02 04 06 08

Institutional Building Construction Starts

2007

+6% 2008

+10%Billions of Dollars

40

60

80

100

120

140

90 92 94 96 98 00 02 04 06 08

Public Works 2007

+8% 2008



U.S. Macroeconomic Picture

Change in Employment

-600

-400

-200

0

200

400

01 02 03 04 05 06 07 08 09

Thousands of Workers

Nov.'08 -584,000

Dec.'08 -524,000

Full Yr. 2008 2.6 million jobs lost

Real GDP Growth - Quarterly

-4

-2

0

2

4

6

8

01 02 03 04 05 06 07 08 09

Annualized Percent Change '08 Q3

-0.5%

Consumer Confidence

25

50

75

100

125

150

01 02 03 04 05 06 07 08 09

Monthly, 1985 = 100

The U.S. economy has been in recession since Dec. ’07.

Unemployment Rate

3

4

5

6

7

8

01 02 03 04 05 06 07 08 09

Percent


U.S. Macroeconomic Picture Inflation had shot upward – but then fell sharply in second half 2008.

Consumer Price Index

0

1

2

3

4

5

6

01 02 03 04 05 06 07 08 09

Percent Change, Year-over-Year

CPI

Core CPI

Price of Oil

0

25

50

75

100

125

150

01 02 03 04 05 06 07 08 09

Dollars per Barrel, West Texas Crude

U.S. Dollar vs. Major Currencies

60

70

80

90

100

110

120

01 02 03 04 05 06 07 08 09

Exchange Rate, Indexed, 1973=100


U.S. Macroeconomic Picture Short-term rates are down; long-term rates have also retreated.

With Dec. 16 action, the federal funds

funds rate target now set at 0% to .25%.

Numerous steps taken to improve liquidity over the course of 2008.

Also a plus – second stimulus bill coming.

Monetary Policy

0

1

2

3

4

5

6

7

01 02 03 04 05 06 07 08 09

Federal Funds Rate, Percent10-Year Treasury Bill

0

2

4

6

8

10

90 92 94 96 98 00 02 04 06 08

Percent


U.S. Macroeconomic Picture The Fall 2008 Financial Market Turmoil

– U.S. Treasury takeover of Fannie Mae, Freddie Mac in September.– Lehman Brothers goes bankrupt, AIG gets cash infusion.– Merrill Lynch sold to Bank of America.– Depositors pull out from money market funds.– Credit markets freeze up.

– U.S. Treasury proposes $700 billion bailout or rescue program.– Congress modifies program, passed.– Modified rescue – U.S. Treasury will use $250 billion to buy stakes in

banks -- TARP (Troubled Asset Relief Program), no longer focus of rescue effort.– Citigroup rescue package – $20 billion additional infusion, $300 billion to guarantee losses on troubled assets.– Additional program to buy up debt at Fannie Mae and Freddie Mac.– Will it work?


U.S. Macroeconomic PictureTighter lending standards are a major constraint for 2008/ 2009.

More instances of tight credit conditions affecting large projects, such as

Cosmopolitan Resort in Las Vegas

Echelon Resort in Las Vegas

Atlantic Yards in Brooklyn

Seattle development (Clise property)

Chicago Spire

-30

-15

0

15

30

45

60

75

90

90 92 94 96 98 00 02 04 06 08

Survey of Bank Lending Officers Percent Reporting Tighter Lending Standards --

Commercial and Industrial Loans

-30

-15

0

15

30

45

60

75

90

90 92 94 96 98 00 02 04 06 08


Commercial Real Estate Loans


U.S. Macroeconomic Picture The Emergency Economic Stabilization Act of 2008

had numerous attachments, including “green provisions”. -- Electricity generation.

Tax incentive for generating electricity from wind

extended for one year.

Tax incentive for generating electricity from other sources –

geothermal, hydropower, trash combustion – extended for

two years.

-- Energy efficiency.

Extends tax credit for energy efficient improvements for commercial buildings through 2013. Energy efficient incentives for residential homes extended through 2009.

GDP Pattern: 2007 2008 2009 2010

+2.0% +1.1% -2.0% +2.5%


U.S. Macroeconomic Picture Federal budget – $455 billion deficit for fiscal 2008, more in 2009.

Federal Spending for Fiscal 2008

Federal-aid highway program, up 5% Mass transit, up 5% Airport Improve. Grants, flat Corps of Engineers, down 2% EPA Water Infrastructure down 7% -- Clean Water SRF’s, down 35%

GSA Construction, down 33% GSA renovations, down 16%

DOD base realignment, up 29%

Renewed focus on infrastructure following

I-35 W bridge collapse in Minneapolis

Fiscal 2009 –

Status quo bill passed, holding funding at 2008 levels through March 2009. Base realignment account gets another 18% hike. Large deficit limits options for next Administration.

Federal Budget Surplus/ Deficit

-1,200

-1,000

-800

-600

-400

-200

0

200

400

90 92 94 96 98 00 02 04 06 08

Billions of Dollars, CBO Projections


U.S. Macroeconomic Picture Proposed Stimulus Bill

“The American Recovery and Reinvestment Plan”.

Goal: Save or create at least 3 million jobs by the end of 2010. Cost: $775 billion or more Likely passage: now mid-February

Key components Middle-class tax cuts

Business investment incentives

State fiscal relief

“Substantial investments in infrastructure, education health, and energy.”

Energy and infrastructure are two largest components of job creation.

Impact on construction –


U.S. Macroeconomic PictureNumerous bond measures passed, but state fiscal health has

weakened.

November 2006 Elections

California -- voters approved Prop. 1B -- $19.9 bil. for transportation, also $10.4 bil. for school facilities

November 2007 Elections Texas – school const. measures passed. Washington State – voters rejected Proposition 1, which would have used tax hikes to fund transportation projects.

November 2008 Elections

California – voters approved $10 bil. measure for high-speed rail line, a $1 billion measure for children’s hospitals, and Los Angeles voters approved a $7 billion measure for school construction. But, numerous states with projected

budget gaps for Fiscal Year 2009, including:

Shortfall $ bil.

California $36.0

New York 6.4

Florida 5.7

Illinois 3.8

New Jersey 3.7

Massachusetts 3.3

Georgia 2.7

Virginia 2.3

State & Local Governments

0

2

4

6

8

10

12

90 92 94 96 98 00 02 04 06 08

Year-End Balance, Percent of Expenditures

.


U.S. Macroeconomic PictureMaterials Prices moved higher in 2008; now some signs of easing.

PPI -- Construction Materials

130

150

170

190

210

01 02 03 04 05 06 07 08 09

Index, 1982=100

First 8

Mos.'08

+13%

Sept.-

Nov.'08

-4%

PPI -- Iron and Steel Products

100

140

180

220

260

300

00 01 02 03 04 05 06 07 08 09

Index, 1982=100

First 8

Mos.'08

+48%

Sept.-

Nov.'08

-29%

PPI -- Iron and Steel Scrap

50

250

450

650

850

00 01 02 03 04 05 06 07 08 09

Index, 1982=100

First 8

Mos.'08

+87%

Sept.-

Nov.'08

-72% In early 2008, investors pushed commodity prices upward. Is slower U.S. economy leading to less pressure on commodity prices? Recent months – yes.


U.S. Macroeconomic Picture

Producer Price Indexes Percent Changes Annual Levels First 8 Sept.-

2004 2005 2006 2007 Mos. '08 Nov. '08

Construction Materials +10 +5 +6 +2 +13 -4

Iron and Steel +34 +5 +9 +8 +48 -29

Iron and Steel Scrap +77 -10 +16 +21 +87 -72

Copper Wire +18 +26 +61 -1 +15 -24

Lumber and Wood +10 -0- -1 -1 +2 -2

Gypsum +16 +15 +20 -15 +6 +1

Cement +3 +12 +13 +5 -0- -0-

Aluminum Mill Shapes +5 +7 +12 +4 +8 -9

Plastic Construction Prod. +4 +10 +14 -1 +5 -0-

Glass Products -2 +1 +2 +1 +4 +1

Insulation Materials +7 +4 +5 -3 -0- +1


Trends



– Workforce/Labor

– Innovation

– Materials


Construction Economics

2009The GoodThe BadThe Ugly

The Upside


The Good…

Public Buildings… federal projects continue / tougher at state level– Now settling back slightly from ‘07 highs

Public Works… both environmental and transportation to improve– ST – pull back, but quick re-strengthening transportation, water

Schools… slowing but off historic highs– Higher Ed / “Dorms” turning negative but decent volume

Healthcare… settling expected– LT – demographics/aging population favor expansion

Material Costs… product prices cooling due to capacity surplus– Steel still impacted by global demand, but improving


The Bad…

Energy… major pull-back but transmission capacity remains prime need

– LT – existing tax incentives / new administration pro-alternatives and energy independence

State Public Works… state income / deficits creating project pullback– Yet to be funded projects at serious risk

Offices… Better supply management preventing sharp pullback but expect double digit correction

– Job market; demand for office workers may prolong slump

Multi-family… residential still depressed but some demand in apartment easing slide in multi-fam

Manufacturing… expect double digit drop; some segments flat “Work on the boards”… 10th straight months of declines

– October steepest decline in history of ABI tracking

– Firms focused on commercial & industrial feeling the brunt of this downturn

– All regions of country effected – Northeast & South the mildest declines


The Ugly… Residential… single family continues downward through 2009

– 2009 single family starts 30% of 2005 peak

– Diversification of multi-family has eased length of downturn ie: apts

– A few rays of sunshine…national market declining at a declining rate

Retail & Warehouses… bankruptcies will continue; consumer spending down; expect a dramatic pullback

– Expect double digit declines following ’08’s massive 1-year 30% drop

Hotels… surplus capacity; reduced travel budgets; big pullback expected

Access to construction financing…– Conventional lending guidelines

unprecedented tightening through 2009

– Degree of access crisis still unclear

(when do banks get “back to business”?)

– Expect greater scrutiny on new funding

– Expect impact on projects “in-flite”

-30

-15

0

15

30

45

60

75

90

90 92 94 96 98 00 02 04 06 08


Commercial Real Estate Loans


Upside factors…

Alternative Energy… expect Obama administration support, but when will impact be felt?

– Probably not much help in 2009, but 2010 beyond!?!

“Green” (Public) Work… expect greater energy & water efficiency, and health quality requirements

– Required “triple bottom-line” results will sustain demand in spite of market slowing

LEED certified construction… developers, owners recognizing financial results in operations, occupancy, lease rates & resale

– Demand for LEED certified projects well above present supply Alternative construction financing…

– Will lack of conventional credit access stimulate use of new methods found effective internationally (ie: P3)?

And…


The Pending Stimulus Bill… significant emphasis in construction and energy Boost to infrastructure, especially

highways and bridges

School modernization efforts

Energy efficiency improvements to federal buildings

Energy efficiency incentives directed at residential buildings.

Incentives, support for alternate energy sources

11,391 projects “ready to go” with funding!!

Upside factors…


Trends



– Workforce/Labor

– Innovation

– Materials


Construction Economics

2009The Details


U.S. Single Family Housing Construction has continued to fall sharply.

Single Family Housing Starts

2005 1.626 million units +5%

2006 1.331 million units -18%

2007 .937 million units -30%

200

400

600

800

1,000

1,200

1,400

1,600

1,800

86 88 90 92 94 96 98 00 02 04 06 08

Single Family HousingThousands of Dwelling Units

0.3

0.5

0.7

0.9

1.1

1.3

1.5

01 02 03 04 05 06 07 08 09

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

New Homes (L)

Existing Homes (R)

Millions -- New homes, left scale; Existing homes, right scale

Home Sales -- New and Existing Homes

Supply of Single Family Housing

2

4

6

8

10

12

90 92 94 96 98 00 02 04 06 08

Number of Months


U.S. Single Family Housing Major negatives – falling prices, tighter lending.

Single Family Housing Starts



Home prices continue to fall.

Subprime lending turmoil is now

affecting more traditional mortgage lending. (Fed. Reserve surveys)

Steps taken to improve funds available for mortgages -- will they help?

Also – efforts to limit foreclosures taken at state level; similar efforts at federal level could be coming in spring ’09.

One positive – low mortgage rates.

-20

-15

-10

-5

0

5

10

15

20

90 92 94 96 98 00 02 04 06 08

S&P/Case-Shiller Home Price IndexPercent Change, Same Quarter a Year Ago

Mortgage Rates - Weekly

4

5

6

7

8

9

10

11

90 92 94 96 98 00 02 04 06 08

Percent


U.S. Multifamily Housing Construction relatively stable in 2006, weakened in 2007 and 2008.

Comprised of both apartments and condominiums.

Helped by push for downtown redevelopment.

Demographics supportive, especially from empty-nesters.

Mid-decade strength came come from condominium development, focus now on apts.

Was attractive investment target, less so now –

due to mounting concern about over-building of condos and diminished credit availability.

Multifamily Housing

2006 516,000 units -3%2007 455,000 units -12%

2008 310,000 units -32%

2009 250,000 units -19%

0

200

400

600

800

1,000

86 88 90 92 94 96 98 00 02 04 06 08

Multifamily HousingThousands of Dwelling Units


U.S. Commercial Bldgs. -- Stores Construction in 2007 at all-time high; now in sharp retreat..

Store Construction

2006 308 msf -1%2007 313 msf +2%

2008 210 msf -33%

2009 150 msf -29% (msf = million of sq. ft.)

Derived demand from housing market – definitely going up; now true going down. Substantial building from five major players: Wal-Mart, Home Depot, Lowe’s Target, Kohl’s

Impact of slowing retail sales – reduced store openings, store closings, etc.

Still, competitive retail landscape.

Fate of “lifestyle centers”?

100

150

200

250

300

350

86 88 90 92 94 96 98 00 02 04 06 08

Stores and Shopping CentersMillions of Square Feet


U.S. Commercial Bldgs.-- Warehouses Construction rebounded in 2007; now heading down.

Warehouses

2006 221 msf -1%

2007 255 msf +15%

2008 193 msf -24%

2009 140 msf -27%

Slow economy now having Impact on construction.

Vacancy rates now moving up. 2008Q3 reported at 11.4%, after bottoming at 9.5% in 2006 Q3.

Still, push coming from greater demand from increased global trade.

Larger regional facilities being built by major retailers.

Need for updated facilities to handle improved inventory management practices.

75

125

175

225

275

325

86 88 90 92 94 96 98 00 02 04 06 08

WarehousesMillions of Square Feet


U.S. Commercial Bldgs.-- Hotels Construction soared in 2006, more growth in 2007 and 2008.

Hotels

2006 82 msf +68%2007 86 msf +5%

2008 83 msf -3%

2009 57 msf -31%

Industry financials had strengthened: Occupancies in 2006 at 63.3%, vs. 63.1% in 2005. Revpar in 2006 up 7.5%. almost as strong as 8.5% in 2005. (Smith Travel Research)

2007 Revpar up 5.7%.

2008 Revpar up only 1%.

In 2005: hotel/casino projects, and convention center- related hotels. In 2006 and 2007: broader expansion, more Las Vegas projects, convention center hotels, “condo” hotels

10

30

50

70

90

110

86 88 90 92 94 96 98 00 02 04 06 08

HotelsMillions of Square Feet


U.S. Commercial Bldgs. -- Offices Construction upturn has been measured this time …

Office construction

2006 208 msf +24% 2007 219 msf +5%

2008 168 msf -23%

2009 125 msf -26%

Market fundamentals still relatively healthy, but now turning. office employment vacancy rates –

suburban in 2008 Q3 up to 15.8%; downtown in 2008 Q3 rose to 10.9%

In 2006 and 2007: several major high-rise projects reached groundbreaking, including:

Goldman Sachs headquarters Freedom Tower 11 Times Square

Early 2008: more NYC WTC – Towers 2, 3, 4

50

125

200

275

350

425

86 88 90 92 94 96 98 00 02 04 06 08

Office BuildingsMillions of Square Feet


U.S. Commercial Bldgs. -- Offices Office Building Factors

Overbuilding is less than in past cycles.

But – cutbacks in office employment now affecting market fundamentals more severely.

0

5

10

15

20

25

86 88 90 92 94 96 98 00 02 04 06 08

Downtown

Suburban

U.S. Office Vacancy Rates Source: CB Richard Ellis

15.8%

10.9%

Change in Office Employment

-750

-500

-250

0

250

500

750

1,000

1,250

86 88 90 92 94 96 98 00 02 04 06 08 10

Thousands of Workers


U.S. Commercial Bldgs. -- AlterationsOffice Building Alterations

0

2

4

6

8

10

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars

Hotel Alterations

0.0

0.5

1.0

1.5

2.0

2.5

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars

Stores Alterations

0

2

4

6

8

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars


U.S. Institutional -- Educational Bldgs. School construction still strong, but losing some momentum.

2007 2008

Primary, Jr. Highs -6% -5%

High Schools -7% +10%Colleges/Univ. +10% +1%

Libraries -5% -11%Laboratories +11% -30%

Museums -26% +6%Comm. Colleges -0- +8%

Vocational Schools -43% +33%

Numerous states in recent years have passed school construction bond measures, especially California and Texas. Major universities increased capital spending plans – but, now under re-evaluation.

Educational Buildings

2006 230 msf +5%2007 220 msf -4%

2008 223 msf +1%

2009 192 msf -14%

50

100

150

200

250

300

86 88 90 92 94 96 98 00 02 04 06 08

Educational BuildingsMillions of Square Feet


U.S. Institutional – Educational Bldgs. College/University construction was strong, now declining.

Colleges, Univ.,Comm.Col.

2006 29.3 msf +12%2007 31.8 msf +8%

2008 32.4 msf +2%

2009 27.2 msf -16%

Dormitories

2006 24.1 msf -11%2007 26.6 msf +10%

2008 29.0 msf +9%

2009 24.0 msf -17%

Dormitories (College dorms, & barracks)

0

5

10

15

20

25

30

35

86 88 90 92 94 96 98 00 02 04 06 08

Millions of Square Feet College/Universities & Comm. Col.

0

5

10

15

20

25

30

35

86 88 90 92 94 96 98 00 02 04 06 08

Millions of Square Feet


U.S. Institutional -- Educational Bldgs.

Educational Building Alterations

0

2

4

6

8

10

12

14

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars

School renovation work already strong – now getting more emphasis from school modernization focus of Obama stimulus plan.


U.S. Institutional -- Healthcare Buildings Healthcare facilities reached new high in 2006, now settling back.

2007 2008 Clinics/ Nursing Homes +2% -7%

Hospitals -16% +25%

Ongoing need to replace aging facilities

Hospital vs. outpatient clinic dynamic

Closer scrutiny of finances

Growth of the elderly population

Healthcare Facilities

2006 110 msf +1%2007 103 msf -6%

2008 110 msf +7%

2009 97 msf -12%

Healthcare Facilities

0

15

30

45

60

75

90

86 88 90 92 94 96 98 00 02 04 06 08

Millions of Square Feet

Hospitals

Clinics


U.S. Institutional BuildingsPublic Buildings had strong 2007; Amusement category weakening again.

0

15

30

45

60

75

86 88 90 92 94 96 98 00 02 04 06 08

Public BuildingsMillions of Squaare Feet

15

35

55

75

95

115

86 88 90 92 94 96 98 00 02 04 06 08

Amusement & Rec. BuildingsMillions of Squaare Feet

2008Detention Facilities -47%Armories/Military +41%Courthouses -6%Police/Fire Stations +13% Post Offices -5%

Total Public 2006 +2%Total Public 2007 +48%

Total Public 2008 -1%Total Public 2009 -6%

2008Convention Centers +12% Sports Arenas +55%Theaters -29% Other (inc. theme parks) -14%

Total Amuse. & Rec. 2006 +8% Total Amuse. & Rec. 2007 -9%

Total Amuse. & Rec. 2008 -9%

Total Amuse. & Rec. 2009 -5%


U.S. Institutional BuildingsChurches still declining, airport terminal work (sq. ft.) now weak

10

20

30

40

50

60

86 88 90 92 94 96 98 00 02 04 06 08

Religious BuildingsMillions of Squaare Feet

Airport Terminals

0.0

2.0

4.0

6.0

8.0

10.0

84 86 88 90 92 94 96 98 00 02 04 06 08

Millions of Sq. Ft.

Religious Buildings

2006 34 msf -6%2007 31 msf -11%

2008 27 msf -12%

2009 25 msf -7%

Airport Terminals

2006 3.1 msf -28%

2007 2.2 msf -28%

2008 2.1 msf -5%

2009 1.9 msf -9%


U.S. Manufacturing BuildingsPlant construction in sq. ft. lackluster, yet growth in dollar terms

0

50

100

150

200

250

86 88 90 92 94 96 98 00 02 04 06 08

Manufacturing BuildingsMillions of Square Feet

0

10

20

30

40

86 88 90 92 94 96 98 00 02 04 06 08

Manufacturing BuildingsBillions of Dollars

Manufacturing Buildings

2006 83 msf +4%2007 90 msf +8%

2008 78 msf -13%

2009 70 msf -10%

Manufacturing Buildings

2006 $13.6 bil. +34%

2007 $17.6 bil. +29%

2008 $26.9 bil. +53%

2009 $18.3 bil. -32%

Surge of ethanol plants in 2006-2007

Huge refinery additions in 2008


U.S. Public Works -- Highways & BridgesHighways and bridges slipped back in 2008; should get more funding in 2009 from stimulus bill.

Highways and Bridges

10

20

30

40

50

60

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars

Highways, Bridges

2006 $51.0 billion +15%

2007 $53.6 billion +5%

2008 $52.4 billion -2%

2009 $55.9 billion +7%

Renewed focus on infrastructure following I-35W bridge collapse in Minneapolis.

Fiscal 2008 appropriations – federal-aid highway program up 5%, including added funding for bridge maintenance. Fiscal 2009: status quo.

Congress supplied $8 billion to Highway Trust Fund in Sept.

Potential boost in 2009 from second stimulus bill.

AASHTO – 5,148 projects totaling $64 billion ready to start in 180 days.

This year and next – debate over new transportation bill to replace SAFETEA-LU.


U.S. Public Works -- EnvironmentalEnvironmental public works is now settling back. May get gradual boost from stimulus bill.

Sewers, Dams/ Water Resources

0

3

6

9

12

15

18

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars

Dams, Water Resources

Sewers

Water Resources

Water Supply Systems

0

3

6

9

12

15

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars

Environmental Public Works

2006 $33.4 billion +6%

2007 $37.1 billion +11%

2008 $38.2 billion +3%

2009 $37.8 billion -1%

• Projects generally take longer to reach construction start stage compared to transportation work.

• Various “gap” analyses point to aging infrastructure, and how current funding is coming up short.


U.S. Electric UtilitiesNew electric utility starts have soared in 2008.

Electric Utilities

0

5

10

15

20

25

30

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars

Electric Utilities

2006 $17.7 billion +125%

2007 $16.8 billion -5%

2008 $26.4 billion +57%

2009 $17.1 billion -35%

Energy Bills -- tax incentives for oil and gas production, electric utilities, transmission lines, etc. Extended with financial rescue package.

Capacity utilization had climbed to 87% for full year 2007; has since retreated to 83% (late ’08).

Stimulus bill should provide boost -- incentives for alternative sources of electricity generation. Also, push for “smart grid.”

Power Lines

0.0

0.3

0.6

0.9

1.2

1.5

86 88 90 92 94 96 98 00 02 04 06 08

Billions of Dollars


U.S. Total Construction Starts for 2009Billions of Dollars

2005 2006 2007 2008 2009

Total Construction 670.3 689.9 638.2 550.7 482.2 +13% +3% -7% -14% -12%

Single Family Housing 315.5 272.4 201.2 122.2 104.1+12% -14% -26% -39% -15%

Multifamily Housing 68.6 69.9 63.5 41.0 33.9+36% +2% -9% -35% -17%

Commercial Bldgs. 72.2 93.0 100.7 87.5 67.7+7% +29% +8% -13% -23%

Institutional Bldgs. 100.1 110.7 117.2 129.0 121.3 +12% +11% +6% +10% -6%

Manufacturing Bldgs. 10.1 13.6 17.6 26.9 18.3 +26% +34% +29% +53% -32%

Public Works 96.0 112.5 121.2 117.8 119.7 +9% +17% +8% -3% +2%

Electric Utilities 7.9 17.7 16.8 26.4 17.1+6% +125% -5% +57% -35%


Points of Perspective – U.S. Construction

85

100

115

130

145

160

175

190

T T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 T+18

1982-1991

1991- 2005

1975-1982

Cyclical Trough (T) = 100, Based on Constant 2000 Dollars

Years from Cyclical Trough

Total Construction Activity by Cycle

1991-2009


Points of Perspective – U.S. Construction

80

100

120

140

160

180

T T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 T+18

1982-91

1991- 2004

1975-82

Based on Constant DollarsCyclical Trough (T) = 100, as determined by Total Construction pattern

Years from Cyclical Trough

Nonresidential Building by Cycle

1991-2009


Impact of Recession on Construction Commercial building has the

strongest negative response to recession

One year after start of last 2 recessions commercial has fallen by 30%

The change in Institutional is slight and lagged.

Based on construction starts Public Works shows little downward impact in the near term

More impacted by federal funding, environmental mandates and state transportation bondsImpact of recession may be present but spread out over several years so hard to discern-40 -30 -20 -10 0 10 20

Total Commercial

Total Com. & Mfg.

Total Institutional

Total Residential

Total Public Works

Total Nonbuilding Year 2%ch,'02/'00Year 1%ch,'01/'00 Year 2%ch,'92/90Year 2%ch,'92/90Year 1%ch,'91/'90


Global Total Construction Spending – Top 15 Countries

0

100

200

300

400

500

600

700

800

900

United S

tate

s

Japa

n

China

United K

ingdom

Franc

e

Germ

any

Spain

Italy

South

Kore

a

Canada

India

Brazil

Mex

ico

Austra

lia

Nether

lands

Bill

ions

of

2000

US

$

2006 2011

United States is still the largest construction market in 2011 despite China's growth

Source: Global Insight


Trends



– Workforce/Labor

– Innovation

– Materials


TrendsGreen

InnovationLabor & MaterialsProject Delivery


Becoming Mainstream

Tipping Points Occurring Across Industry Sectors

Commercial– By 2010: 10% of all starts green (~$23 billion)

Corporate America– By 2009: 82% greening at least 16% of their real estate

portfolios (18% greening at least 60%) Healthcare and Education

– Over next 5 years: Dramatic increases expected Residential

– By end of 2007: 52% of the builder population greening at least 16% of their portfolio

Green Building Serves as Market Differentiator in Down Markets

Green Building


Sources: U.S. Energy Information Administration, 2006; World Trends & Forecasts, Nov-Dec 2005; Glenn and Gordon, “Update on the State of the Future,” Jan-Feb 2006

The Prime Catalyst – Global Energy Demand, Impact and… Energy resources are being used at

the rate of 421 Quadrillion BTU annually, increasing 3.8% each year

Energy demand will grow 71% by 2030

New energy investments of $538 billion needed each year

CO2 emissions are being produced at the rate of 25 billion metric tons annually Alternative energy is

growing in popularityand getting cheaper!

Green Building


Perceived Advantages of Building Green from AEC firms and Owners

Decreased Operating Costs: 8-9%8-9% 13.6%13.6% Increased Building Values: 7.5%7.5% 10.9%10.9% Improvement in ROI: 6.6% 6.6% 9.9%9.9% Increased Occupancy: 3.5%3.5% 6.4%6.4% Rent Rise: 3.0%3.0% 6.1%6.1% Increased revenue flows: 71%71% 77%77%

Increased profits: 59%59% 61%61%

Advantages are Increasing Over Time!

20052005 20082008

Green Building


Impact of LEED LEED more important

than government Programs

Contractors find LEED even more effective

– Consistent with other studies

Resistance to mandates

Green Building


Driven by Key Sector Needs & Adoption

Key Drivers to Future Green Growth:– Changing ethics– Government regulations– Energy cost increases– Corporate

Investment/Involvement– Market differentiation– Cost savings – Health benefits– More green product

availabilityEducation Institutional Health Care Retail

HospitalityOfficeGovernment

U.S. Sectors Expected to HaveGreen Building Growth

#1Growth Sector

in Europe

= same in Europe

Green Building


Adopting New Means & Methods Considered Key to Productivity Gains

Innovation Broadly Refers to Process and Procedure Improvements

Many Global Firm Leaders Believe Innovation in Technology and Processes Will Help Solve Their Biggest Concerns

Pre-Fabrication& Modularization

13%

Safety & Healthof Workforce

29%

New ConstructionMethods & Processes

13%

GreenBuilding

16%

Intelligent Building& Infrastructure

13%

Other16%

Areas of Innovation with Greatest Expected Impact on Future Business

Innovation


• BIM “tipping point” in AEC/O in 2008

BIMWho is using BIM?


Source: ENR April 23, 2008

BIMStructural adoption of BIM accelerating


From SmartMarket Report on BIM

Architects Engineers Contractors Owners

2009Current2009Current2009Current2009Current2009Current

60%+

31-59%

16-30%

1-15%

2009: 2009: Year of the ContractorYear of the Contractor

Low

Med

High

V.High

BIMBIM project involvement2009 Year of the Contractor


The Workforce Crunch: A Global ConcernDemographic Shifts Around the World Are Leadingto a More Mobile, Aging Workforce

Top Concerns of Both European and U.S. Firm Leaders– Training– Safety– Well-being of workforce

U.S. Construction Workforce– Industry needs to fill 12 million new jobs by 2012– An estimated 95,000 new craft workers will be needed each year

for the next decade to replace those leaving the industry European Construction Workforce

– Biggest shortage seen in electricians, carpenters, roofers, plumbers

– Expect shortage to stay severe for next 5-7 years

Workforce Resources


Project Delivery Methods

Construction Management At-Risk is the most common delivery method among respondents

Design-Bid-Build is a close second, though it represents more by “number of projects” than by “dollar value”

13%

5%

2%

0%

2%

39%

41%Construction Management At-Risk

Design-Bid-Build

Design-Build(Contractor Led)

Multiple Prime (Owner holds trade contracts)

Integrated/Tri-Party Agreement

Design-Build(Architect Led)

Other

Project Delivery Method Used Most Often - By Project

Is the case for IPD growing?


Trends



– Workforce/Labor

– Innovation

– Materials


So whatimplications


Assume pending or proposed projects are NOT safe if financed through conventional construction loans

– Anecdotally loan-to-values of 60% or less are at risk

Stay close to existing clients & keep an eye on fiscal health of key trade and supply partners

Expect “Green” to become de facto market expectation, particularly for public works, institutional and office

– Can you deliver profitably; are you aligned with trades experienced with green projects?

– Are you internalizing sustainability efficiencies into your business?

• Besides direct bottom-line impact, “green savvy” clients will begin to inquire about your corporate commitment to sustainable business practices

Implications


Infrastructure, Education, Healthcare, Alternative Energy & Transmission are all good bets over the long term…

– Driven by demographics– Driven by state of economy – simultaneous need for

jobs and repairs– Driven by need for energy independence– Priorities of Obama’s Stimulus Plan

Alternative delivery ie: IPD becomes increasingly attractive as owners look for greater efficiencies and risk sharing

– Is your firm ready to engage and/or lead IPD projects?

– BIM is the critical enabler in IPD/other project management efficiencies – have you invested / are competent with these enabling technologies?

• Industry leaders Walter P Moore, JE Dunn - near 100% BIM deliverable

Implications


Alternative financing like PPP has renewed appeal as state /local govt’s balance infrastructure needs and budget shortfalls

It’s a great time to recruit!– Top talent at weaker firms are looking

Use of prefabrication and modularization will accelerate

– Owner expectations driving job productivity improvements, reduced waste and better cost management

– Companies in favorable cash position are investing in innovation to secure profitable competitive advantage

Implications


“Co-opetition” essential to managing risk and leveraging expertise on complex high $ projects

Continued softness in residential and “softening” with income / retail segments should stabilize / reduce building material costs…

Don’t expect fuel costs to remain low…

– Any recovery will spark a rapid rise in oil prices

– Energy mgm’t should remain a top priority with operational efficiency efforts

– Carbon taxes and offsets are coming!!

Implications


Trends



– Workforce/Labor

– Innovation

– Materials


“Luck favors the prepared mind.”- Louis Pasteur -

Thanks for listening!Questions or comments??

[email protected]

Documents

Comprehending the Construction Marketplace Economics Trends Implications Rusty Sherwood, VP Market Development January 20, 2008 2009 Outlook