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‘Better times’ ahead for Michigan construction, says latest forecast

Date Posted: November 23 2007

Time for a little construction conjecture.

As we move toward the end of the year, construction industry prognosticators unfailingly pop up and take a stab at predicting the future. One of the first we've seen is by Michigan Construction News.com (MCN), which took a look back on 2007 and a peek into 2008 for our state.

First the disclaimer: forecasting construction activity, even by the biggest corporations and think-tanks, is "a product of educated guesswork," as MCN put it, because of the highly fragmented nature of the industry, and the inability to get good information on small, family-owned firms.

Here are some of the findings:

  • "MCN's educated guess is that due to the current economic slump in Michigan, the size of the construction industry market in our state was approximately $45 billion in 2006, and could possibly rise to about $48 to $49 billion by the end of this year." Of that amount, $3 billion would represent the current size of Michigan's depressed residential construction sector. In 2006 residential construction was tabulated at $4.55 billion.
  • The housing slump is real. In 2006 Michigan residential construction included 31,010 units. Through August of this year Michigan's housing starts were down 19.1 percent compared to a year ago. Residential construction in Michigan currently is about 33 percent to 40 percent off the peak established in 2004, when 52,800 units were built.
  • When the final numbers of 2007 are compiled, nonresidential construction in Michigan is expected to jump in the 5-10 percent range compared to a year ago, and possibly continuing to climb at that same level through 2008, unadjusted for inflation.
  • Office construction "appears to be falling due to a saturated market with high vacancies extending well into the double-digits."
  • Highway/bridge construction may experience no growth, or even decline when 2007 ends. On the federal level, the Highway Trust Fund is expected to reduce payments to states, and the nation is facing an estimated $4 billion deficit in fiscal year 2009 if Congress does not raise vehicle fuel taxes.
  • Industrial construction: there's good news here. "Due to the automotive product cycle, a recovery is underway," MCN said. Early this year Ford announced an $866 million investment in its southeastern Michigan plants. General Motors reports it will be investing at least $500 million in plant improvements over the next two to three years.
  • Daimler Chrysler will soon have more than $1 billion in construction underway. A number of ethanol refineries have broken ground or have been proposed, such as a $100 million cellulosic ethanol plan, which may be the first of its kind in the nation.
  • Utility construction: While being restricted to pollution control upgrades and maintenance for many years, this spring Michigan's electrical utilities announced bold plans for the construction of baseload generating plants. DTE Energy said it was looking into development of a $3 billion nuclear unit for its Fermi II facility in Monroe. A reliable source has told MCN it is also developing plans for a baseload coal-fired plant, though he could provide no details. Over the next five years DTE also plans to invest $1 billion in advanced air scrubbers at its Monroe Plant.
  • Consumers Energy is developing plans for an approximately $1.5 billion, 750 megawatt, coal fired plant to be built at its Karn-Weadock station near Bay City. In Midland, the joint venture of L.S. Power Group and Dynergy, has proposed a $1.3 billion, 760 megawatt coal fired plant.
  • Educational construction: Many of Michigan's universities, particularly the University of Michigan, fielded substantial construction programs in 2006 and are continuing to do so in 2007. The list is too long to cover here, but since the first of the year the U-M Board of Regents has acted on more than $705 million in construction projects. Regarding K-12 public education, "we expect this to remain a strong market despite Michigan's currently depressed economy," MCN said.
  • Medical Construction: Michigan's Certificate of Need Commission approved $2.46 billion for 465 projects during 2006. This compares to $1.71 billion for 2005 and $1.97 billion for 2004.
  • Commercial: During 2006 the Michigan Economic Development Corporation granted $232.8 million in Michigan Single Business Tax relief to 73 projects with an estimated total value of $3.13 billion. Much of them were for mixed use developments where residential units (apartments or condominiums) are being built with retail and office space. For the first six months of 2007 it has provided tax incentives to 55 projects that will invest $1.34 billion.
  • Retail: Nothing has changed since our January 2007 forecast. It continues to be an active market despite Michigan's relatively high unemployment level.
  • Other projects: A July 2007 decision by the U.S. Court of Appeals has finally cleared the way to allow ground to be broken for the Firekeepers Casino in Emmett Township near Battle Creek. The complex is expected to cost $270 million. In Grand Rapids bids are currently being taken for the $115 million Terminal Area & Parking Improvement Program at the Gerald R. Ford International Airport.
  • Labor: The latest data available from the U.S. Census Bureau, covering the year 2004, shows more than 172,000 engaged in construction industry employment in Michigan. "I've been told by sources within Michigan's construction industry that figure has dropped to 142,000, with the unionized construction building trades representing approximately half that number," MCN said. "The remainder are employed by open shop contractors. Note that open shop contractors build virtually all of the new homes in Michigan. There are only a handful of unionized contractors still active in residential work."

Though the current unionized labor force is aging, retirement in its ranks has slowed, and apprentice recruitment and training appears to be keeping up with demand. Shortages in certain skilled trades do persist.

"My observation," said MCN's Guy Snyder, "is the supply of journeymen for unionized contractors may be strained by the time 2008 rolls around, when manpower requirements on major projects bid and begun in 2006 start to peak."

MCN said it's "our impression of a slowly growing recovery in Michigan's nonresidential construction market. Despite heavy competition from open shop workers, the unions that typically involved in the initial stages of a construction project are experiencing better times."