2008 Outlook for U.S. Construction Activity Midyear Update

1. 2008 Outlook forU.S. Construction ActivityMidyear Update ENR-CURT Construction Business Forum St. Charles, MO – June 11, 2008 Robert Murray Vice President, Economic Affairs McGraw-Hill Construction

2. U.S. Construction Market Indicators Total construction fell in 2007 – first decline in current dollarssince 1991.

3. Major U.S. Construction Sectors (Starts) Single Family Housing down sharply; Commercial Bldg. turning; Institutional Bldg. , Public Works still have some upward potential.

4. U.S. Macroeconomic Picture The economy has slowed – and is close to recession.

5. U.S. Macroeconomic Picture The pressure on prices has picked up.

6. U.S. Macroeconomic Picture Both short-term and long-term rates have moved down. Also, Federal Reserve took aggressive steps in March to deal with latest stage of financial crisis. Stimulus Package includes:. Tax rebates Incentives for equipment purchases Steps to increase the funds available for mortgage lending. Aside from monetary policy, a $168 billion stimulus package was enacted on February 13. Pattern of GDP Annual Growth 2006 20072008 2009 +2.9 +2.2% +1.2% +2.5% (?)

7. U.S. Macroeconomic Picture Tighter lending standards are a major constraint for 2008. More instances of tight credit conditions affecting large projects, such as Cosmopolitan Resort in Las Vegas Atlantic Yards in Brooklyn Other New York City projects Seattle development (Clise property)

8. U.S. Macroeconomic Picture Federal budget restraint – ok for ’08, tougher climate in 2009. Supplemental Spending Bill for 2007 • Additional funding for Corps of Engineers, base realignments, homeland security, rail and transit systems. 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 – Bush Admin. Proposals • Federal-aid highway program, down 4% • Mass transit, up 7% • Airport Improve. Grants, down 22% • Corps of Engineers, down 18% • EPA Water Infrastructure down 12% -- Clean Water SRF’s, down 21% • DOD base realignment, up 26%

9. U.S. Macroeconomic Picture State fiscal health now weakening. Current Status • New York State – as example, funding boost still coming from $2.9 bil. bond measure passed in 2005. Also – ambitious capital programs of NY-NJ Port Authority, MTA But – budget picture has changed • 21 States with Projected Budget Gaps for Fiscal Year 2009, including: Shortfall California $16.0 bil. New York 4.7 bil. New Jersey 3.5 bil. Florida 2.0 bil. Ohio 1.9 bil. 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.

10. U.S. Macroeconomic Picture Materials prices in 2007 had varied pattern. Shift from 2004-2006. • Is there more capacity coming on line? Yes. • Is slower U.S. economy leading to less pressure on commodity prices? In some cases, yes. But, in 2008 investors are pushing commodity prices upward.

11. U.S. Macroeconomic Picture Other building materials -- renewed concern over steel prices.

12. U.S. Macroeconomic Picture

13. U.S. Single Family Housing Construction fell sharply in 2006 and 2007 after 2005 peak. Single Family Housing Starts 2005 1.626 million units +5% 2006 1.331 million units -18% 2007 .936 million units -30%

14. U.S. Single Family Housing Major negatives – falling prices, high inventories, tighter lending. Bank regulators have issued guidelines to banks for unconventional mortgages. Subprime lending turmoil is now affecting more traditional mortgage lending. (Fed. Res. Jan.’08 survey) Steps taken to improve funds available for mortgages -- will they help? Single Family Housing Starts 2008 .650 million units -31%

15. U.S. Multifamily Housing Construction relatively stable in 2006, weakened in 2007.. • Comprised of both apartments and condominiums. • Helped by push for • downtown redevelopment. Demographics supportive, especially from empty-nesters. • Mid-decade strength has come from condominium development. • 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 442,000 units -14% 2008 345,000 units -22%

16. U.S. Multifamily Housing Major metropolitan areas Multifamily Housing Top 10 Metros -- ranked by new dwelling units Year 2007, %ch 07/06 1. New York -23% 2. Chicago -23% 3. Washington DC +3% 4. Atlanta +5% 5. Seattle +19% 6. Houston +40% 7. Miami -50% 8. Los Angeles -34% 9. Orlando Fl -7% 10. Phoenix +14% 12. Las Vegas -3% Year 2006, %ch 06/05 1. New York -0- 2. Miami -23% 3. Chicago +33% 4. Los Angeles +21% 5. Dallas-Ft.Worth +26% 6. Washington DC -21% 7. Atlanta -22% 8. Orlando FL +20% 9. Seattle +39% 10.Houston -6% 12. Las Vegas +16%

17. U.S. Commercial Bldgs. -- Stores Construction in 2006 and 2007 still at very high level. • Derived demand from housing market – definitely going up; but is it also true going down? • Substantial building from five major players: Wal-Mart, Home Depot, Lowe’s Target, Kohl’s • Impact of slowing retail sales; still, competitive retail landscape. • Wal-Mart announcement on plans to scale back expansion. • Move to smaller venues e.g., “lifestyle centers”. Store Construction 2006 308 msf -1% 2007 311 msf +1% 2008 253 msf -19% (msf = million of sq. ft.)

18. U.S. Commercial Bldgs.-- Hotels Construction soared in 2006, more growth in 2007, down in 2008. • 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%. • 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 • Shorter “upcycle” this time? Hotels 2006 82 msf +67% 2007 86 msf +5% 2008 77 msf -10%

19. U.S. Commercial Bldgs. -- Offices Construction upturn has been measured this time … • Recovery re-established in 2006: activity stalled in 2005 as projects reassessed due to higher costs. • Market fundamentals still relatively healthy, but now turning. office employment vacancy rates – suburban in 2008 Q1 up to 14.9%; downtown in 2008 Q1 eased to 10.2% • 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 Office construction 2006 208 msf +24% 2007 215 msf +4% 2008 192 msf -11%

20. U.S. Commercial Bldgs. -- Offices Office Building Factors • No extensive overbuilding – Means downturn likely to be Measured, not precipitous.

21. U.S. Institutional -- Educational Bldgs. School construction still strong, but losing some momentum. 20062007 Primary, Jr. Highs +1% -6% High Schools +15% -8% Colleges/Univ. +7% +10% Libraries -0- -6% Laboratories -22% +8% Museums +5% -26% Comm. Colleges +43% -2% Vocational Schools +37% -43% Educational Buildings 2006 230 msf +5% 2007 220 msf -5% 2008 217 msf -1% • Numerous states in recent years have passed school construction bond measures, especially California. • Major universities have increased capital spending plans.

22. U.S. Institutional – Educational Bldgs. College/University construction remains on upward track. Dormitories 2006 24.1 msf -11% 2007 26.0 msf +8% 2008 26.6 msf +3% Colleges, Univ.,Comm.Col. 2006 29.3 msf +12% 2007 31.6 msf +8% 2008 32.8 msf +4%

23. U.S. Institutional -- Educational Bldgs. Educational Buildings Top 10 States -- ranked by sq. ft. of new starts Year 2007, %ch 07/06 1. Texas +9% 2. Florida -16% 3. Georgia +46% 4. California -28% 5. Pennsylvania -24% 6. Ohio -32% 7. North Carolina -8% 8. New York +19% 9. Illinois -17% 10. Arizona -6% Year 2006, %ch 06/05 1. Texas +6% 2. Florida +22% 3. California +12% 4. Ohio +19% 5. Pennsylvania +61% 6. Georgia -4% 7. North Carolina +8% 8. Illinois +2% 9. Virginia +31% 10. Arizona +63%

24. U.S. Institutional -- Healthcare Buildings Healthcare facilities reached new high in 2006, now settling back. 20062007 Clinics/ Nursing Homes +1% -0- Hospitals +1% -18% • 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 101 msf -8% 2008 96 msf -5%

25. U.S. Institutional Buildings Public Buildings had strong 2007; Amusement category weakening again. 2007 Detention Facilities +51% Armories/Military +80% Courthouses +59% Police/Fire Stations -2% Post Offices +111% Total Public 2006 +1% Total Public 2007 +44% Total Public 2008 -9% 2007 Convention Centers -24% Sports Arenas -32% Theaters -23% Other (inc. theme parks) -3% Total Amuse. & Rec. 2006 +8% Total Amuse. & Rec. 2007 -9% Total Amuse. & Rec. 2008 -2%

26. U.S. Manufacturing Buildings Plant construction in sq. ft. lackluster, yet growth in dollar terms. Manufacturing Buildings 2006 83 msf +4% 2007 83 msf -0- 2008 78 msf -6% Manufacturing Buildings 2006 $13.5 bil. +33% 2007 $16.8 bil. +25% 2008 $18.0 bil. +7% Surge of ethanol plants in 2006-2007

27. U.S. Public Works -- Highways & Bridges Highways and bridges advanced in ’06 and ‘07, with more growth ahead. • SAFETEA-LU, with 2004 added, up 38% compared to TEA-21. • Passage of SAFETEA-LU reduced uncertainty regarding long-term funding. • Key concerns – higher costs reduced benefits of more funds; FHA price index up 21% in 2006. • 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. • Concern for 2009 – Highway Trust Fund shortfall. Highways, Bridges 2006 $50.9 billion +15% 2007 $53.4 billion +5% 2008 $56.3 billion +5%

28. U.S. Public Works -- Environmental Environmental public works growing more slowly after recent surge. • Fiscal 2008 – Bush proposals call for funding cuts; to be modified by Congress. • Water Resources Bill – passed over Bush veto • Various “gap” analyses point to aging infrastructure, and how current funding is coming up short. Environmental Public Works 2006 $33.4 billion +6% 2007 $36.8 billion +10% 2008 $38.4 billion +4%

29. U.S. Electric Utilities New electric utility starts holding close to level reached in 2006. • Glut of power generation absorbed • Projects started in 1999-2001 have become operational • Capacity utilization dropped from 95% in 2000 down to 85% in 2003. By summer of 2006 cap. utilization back up to 91%. • Energy Bill -- tax incentives for oil and gas production, electric utilities, transmission lines, etc. Electric Utilities 2006$16.2 billion+106% 2007$13.6 billion-16% 2008$15.6 billion +15%

30. U.S. Total Construction Starts for 2008 Billions of Dollars 2004200520062007 2008 Total Construction593.2 670.3 687.5 628.3 558.5+12% +13% +3% -9% -11% Single Family Housing 282.7 315.5 272.4 201.2 144.0+17% +12% -14% -26% -28% Multifamily Housing 50.5 68.6 69.8 62.4 49.9+23% +36% +2% -11% -20% Commercial Bldgs. 67.3 72.3 92.7 98.5 91.0 +14% +7% +28% +6% -8% Institutional Bldgs. 89.1 100.0 110.5 115.5 117.3 -1% +12% +11% +4% +2% Manufacturing Bldgs. 8.0 10.1 13.5 16.8 18.0 +17% +26% +33% +25% +7% Public Works 88.2 95.9 112.4 120.4 122.8 +6% +9% +17% +7% +2% Electric Utilities 7.3 7.9 16.2 13.6 15.6 -18% +8% +106% -16% +15%