CanaData has recently revised its square footage forecasts for the three primary categories of non-residential building construction. The quickness with which the economy is weakening has necessitated some adjustment in the numbers downward. However, before discussing the ICI categories (i.e., industrial, commercial and institutional), the forecast for the residential sector needs to be set out.

Housing Starts are Shifting to a Lower Plateau
Housing starts are in the process of dropping from a consistent monthly level of 220,000-plus units, established over seven years from 2002 to the fall of 2008, to a new plateau of about 180,000 units. They may even touch on the 150,000-unit level upon occasion in this recession. Residential construction activity levels are a touchstone that influences many corners of the economy, including the other major categories of construction.

Consumer Spending turns More Cautious
Establishing the outlook for residential activity levels is an important first step when looking at the other cyclical construction markets as well. For example, when it comes to commercial construction, a major sub-category is retail investment. Upon reflection, one realizes that a great deal of retail activity depends on how much consumers are spending on their homes.

Just think about the products that a typical family goes shopping for on the weekend. This may range from bigger ticket items like appliances, drapes and carpeting, through fun items like home entertainment equipment, all the way to home reno products like paint and wallpaper. When the residential market tails off, so does retail activity. This problem will be compounded by the current tighter credit conditions. Banks are revising profitability expectations for retail-based firms seeking money for expansion plans.

Office Building has been Impacted by Financial Services
Weakness in the U.S. financial sector has spread to branch offices in other countries. Recession-induced mergers and acquisitions, combined with some outright bankruptcies, will raise office vacancy rates and lower rents. Canada is fortunate in one key regard when it comes to office building markets. Only Calgary and Toronto accounted for a large increase in office building construction in 2007 and 2008. As a result, there has not been the overbuilding of offices that has prolonged the pain for as long as a decade on several previous occasions, for example from the late 1980s through most of the 90s.

Warehouse Construction depends on Retail and Manufacturing
Warehouse construction is closely tied to retail activity, as well as to how manufacturers are faring. The manufacturing sector is comprised of auto assembly and parts suppliers. Who doesn't know that several major firms in that line of work are struggling to simply survive? Non-auto manufacturing is often geared towards residential markets and the products that stock retailers' shelves. As such, prospects have become more restrained.

Hotels and Motels — Fewer Travelers and Fewer American Visitors
The final category of commercial construction is hotels and motels. Several factors are working against ongoing strength in this kind of work. The recession in Canada is cutting into both business and tourism travel. The same can be said for trips to Canada by our American friends and relatives, plus there are the added security measures that have made crossing the border a trying experience at best. Also, many new hotel projects have been relying on a 50%-or-higher condominium component to make them commercially viable. That market cannot be counted on to the same degree through at least next year.

CanaData's forecast for commercial building construction starts is calling for 35.0 million square feet in 2009, 34.0 million in 2010, followed by a pick-up in 2011 to 39.0 million. To place this in context, commercial starts were 42.7 million in 2008 and 58.1 million in 2007.

Industrial Construction has Three Main Sub-components
Another key cyclical category is industrial construction and some of its key sub-components have already been discussed. When it comes to resource-related industrial investment, all that needs saying is that prices for nine key commodities − including lumber, copper, nickel, aluminum, coal, oil and natural gas − have dropped by nearly two-thirds from their most recent cyclical peaks, mainly in July 2008, to their current levels. Owners are not going to take expansion risks until a year or so after the world economy begins to advance again, which will probably get underway late this year or early next year.

Institutional (and Engineering) will Benefit from the Federal Budget
Where there can be an expectation of continuing solid construction markets is in the two sectors where government money comes into particular play. January's federal budget was in keeping with what is happening around the world, with fiscal dollars being directed into both "soft" infrastructure projects − schools and hospitals in the institutional construction category− and "hard" infrastructure projects in civil engineering such as: new bridge crossings and repairs to existing structures; street, road and highway work; and sewers, water purification and water pipeline construction.