Construction – Lost in the Housing Hubbub

The dramatic reversal of the home building industry raised concerns of a far reaching domino effect in which the entire US economy weakened into recession. One contravening factor has been the strength of the non-residential construction industry, experiencing a significant surge of its own, and helping to mop up the unemployment created from the housing downturn.

The sharp rise and fall and consumer relevance of the housing industry has masked the strength and impressive performance of the non-residential construction industry, both nationally and in Florida particularly.

National. Not without some justification. Residential’s explosive growth (up 71% from 2000-2005) and then retraction (down 14% 2005-2007) regularly garnered national headlines. At housing’s peak of $674 billion at year end 2005, residential represented 56% of the overall construction industry. However, non-residential construction has racked up remarkable growth through mid-2007, surpassing residential construction with $617 billion in April 2007.

Growth in housing starts drove significant gains in construction employment, peaking at 7.7 million in April 2006. Note that despite the significant decline in housing starts in 2006 and year-to-date 2007, construction employment has held steady, buoyed by the expansion of non-residential construction.

The strength of non-residential construction is supported across almost every sub-sector of the industry, with the top four sectors (education, commercial, highway & street, and office) all turning in significant gains beginning in 2003. Lodging, after moving sideways for several years, more than doubled from $14.5 billion in 2005 to just shy of $30 billion by mid-2007.

Florida. In Florida, the mix of construction tilts even more heavily towards housing, where it generated 73% of all construction in 2005, up from 64% in 2003. In the run up to 2005, residential turned in three successive years of 25%+ growth when it reached an all time peak of $52 billion.

Slower but steady is winning the day on the non-residential side. Florida non-residential construction is on a four year roll, averaging over 10% growth through 2007. Florida non-building construction, after a down year in 2004, has had two strong years of 10%+ with essentially a flat year expected for 2007.

Non-residential. Florida’s non-residential construction is expected to grow from $13.5 billion in 2006 to more than $15.1 billion in 2007. At 22%, education represents that largest portion of non-residential construction, with stores and offices each representing an additional 14%.Hospitals, office, education all turned in growth rates in 2006 of more than 20%; warehouse, office and hospitals all are expected to show growth north of 12% in 2007.

Non-building. Florida’s non-building construction weighted in at $7.7 billion in 2006 with a small step back to $7.4 billion expected for 2007. At 32%, $2.5 billion in streets and highway construction represent the largest sector of non-building construction in Florida. Volatile dams and reservoirs jumped into the second largest sector in 2006 with a 64% gain.

Trading Values. Not surprisingly, the stock of engineering & construction companies, are performing quite well in the public markets. While stocks are trading at 52 week if not historic highs, we do not believe their growth rates are sustainable. Multiples are also up with the engineering and construction sector trading north of 13.25 times cash flow.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Poole

Investment Banking
mpoole@pcecompanies.com
Orlando Office

407-621-2100 (main)
407-621-2112 (direct)
407-621-2199 (fax)