Bruce Buckley / ENR Construction is in retrenchment, says Murray.

The depressed housing market and the severe financial crisis it created is about to drag down the rest of construction. By next year, the value of construction starts for both private and public nonresidential building markets, public works and electric utilities will all be in decline. That’s the discomfiting scenario described by a forecast released by McGraw-Hill Construction, the parent of ENR.

Construction starts will record a third consecutive year of overall decline with total construction falling another 7% in 2009, following declines of 12% in 2008 and 8% in 2007. That will shrink the total value of new starts next year to $514.6 billion, the lowest level since 2002, says Robert Murray, chief economist for McGraw-Hill Construction. Murray presented the forecast on Oct. 23 at MHC’s Outlook conference in Washington, D.C.

The forecast assumes the varied government stimulus packages aimed at jump-starting the economy and unfreezing the credit markets will be successful. Still, considerable drops are expected even if government intervention succeeds. “By whatever broad measure of the industry that you look at, it’s clearly in retrenchment,” Murray says.

Housing suffered the biggest decline this year, with single-family housing falling 36%, to $128.8 billion, and multi-family falling 30%, to $44 billion. On the positive side, manufacturers built 69% more this year than last—$29.6 billion worth—with most of the upsurge coming from the oil industry. Electric utilities upped construction of all kinds 55% to a near-record level of $24 billion. But even those bright spots will fade next year as a weakening economy creates an industry-wide drag on activity in 2009.

Although single-family housing starts have been in consistent free fall since 2005, declines could ease considerably in the coming year. Dropping from a peak of 1.626 million units in 2005 to 937,000 units in 2007, starts fell an additional 38% in 2008 to 582,000 units. McGraw-Hill Construction is forecasting a relatively modest decline of 4% in 2009, to 560,000 units.

The tight credit markets will continue to erode commercial-sector starts, which are expected to fall 10% in 2008, to $89.8 billion. Retail projects are seeing some of the biggest declines, echoing the decline of the housing sector. Next year, the office market will take the biggest hit in the commercial sector with a predicted 18% drop in new-start square footage.

After four years of steady increases, institutional building starts could flatten. The sector increased by 7% in 2008, to $124.4 billion, but could drop slightly to $121 billion in 2009 as financial pressures force public agencies to defer projects in the near term, Murray says.

Government restraint also is expected to hamper public-works activity. The sector dipped 5% in 2008, to $114.8 billion, and will fall another 5% in 2009, Murray says. Even with the potential for government stimulus to boost infrastructure spending, highways and bridges starts are expected to slide 4% in 2009. Increased ridership reported by mass transit systems will not be enough to stop a 5% decline in that market in 2009.

The electric utility market has seen wild swings in activity in recent years but continues at a high level from a historical perspective, Murray says. The sector surged 55% to a near-record $24 billion in 2008. However, that gain will be followed by a 30% decline in 2009. At that level, starts by dollar value will still be the fourth largest of the decade.