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2013 Outlook U.S. Construction Mid Year Update

2013 Outlook U.S. Construction Mid Year Update. McGraw Hill Construction. MHC Atlanta SMPS May 22, 2013 Dan Palmer Senior Director, Editorial Global Operations McGraw Hill Construction. Agenda. U.S. Construction Market Indicators and Sectors

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2013 Outlook U.S. Construction Mid Year Update

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  1. 2013 OutlookU.S. Construction Mid Year Update McGraw Hill Construction MHC Atlanta SMPSMay 22, 2013 Dan PalmerSenior Director, Editorial Global Operations McGraw Hill Construction

  2. Agenda U.S. Construction Market Indicators and Sectors The Environment -- Macroeconomic Picture Single Family Housing and Multifamily Housing Commercial Building Institutional Building, plus Manufacturing Bldgs. Public Works and Electric Utilities Total Construction Regional – The Southeast Cycle Charts

  3. U.S. Construction Market Indicators Total Construction – starts leveled off in 2010 and 2011; put in place bottomed out in 2011. During 2012 – moderate upward movement for both series.

  4. U.S. Construction Sectors (Starts) Residential Building strengthening; Commercial bldg. beginning to edge up. Institutional bldg. still in retreat; Public Works dealing with budget cuts.

  5. U.S. Macroeconomic Picture Economic growth picked up in 2013 Q1, after flattening out in 2012 Q4. On balance, the pace of economic expansion remains lackluster. • GDP Pattern: • HistoryForecast • 2009 20102011 20122013 • -3.1% +2.4% +1.8% +2.2% +2.2% • Shape of Recovery: • Subdued – • Periods of moderate expansion have • been followed by deceleration. • Much of 2012 was adversely • affected by • Continued uncertainty, due to • European debt crisis • November 2012 elections • Fiscal Cliff • One plus – corporate profits healthy • For 2013 – how much of a drag will • come from sequester, higher • payroll taxes.

  6. U.S. Macroeconomic Picture After weakening in 2012 Q2, employment growth strengthened in second half of 2012. Pattern so far in 2013 has shown uneven improvement. • Jobs lost from Feb.’08 to Feb. ’10: 8.7 Million. • Job creation so far in 2010-2013: 6.2 Million. Unemployment rate at 7.5% • Job growth in Jan.-Mar. ’12 : 262,000 /mo • in Apr.-June ’12: 108,000 /mo • in July‘12-Dec.’12: 180,000 /mo • in Jan.’13-Apr.’13: 196,000 /mo

  7. U.S. Macroeconomic Picture Fiscal Cliff Averted, but Sequestration Began March 1. • Fiscal Cliff Deferred by January 1 Agreement • -For high income earners, income tax rate raised from 35% to 39.6%. • For those below the thresholds, tax rates remain unchanged. • -Automatic spending cuts called for by the Budget Control Act of 2011, which would have • reduced spending on discretionary federal spending by about 8%, deferred until March 1. • - Payroll tax cut, which lowered rate from 6.2% to 4.2%, allowed to expire • Sequestration Now in Effect • -$85 billion in cuts over next 7 months; $1.2 trillion in cuts over next ten years. • -Impact not immediate; will kick in over several months as gov’t agencies implement cuts. • - CBO: without sequestration, GDP growth would be 0.6% higher, 750.000 more full-time jobs • - Cuts to major construction programs estimated at $4 billion • Biggest hits – Dept. of Energy environmental cleanup • EPA water infrastructure • Military construction • - Infrastructure accounts financed by trusts funds are largely exempt from the sequester • Including – Federal-aid highway funding • Airport Improvement Program construction grants • Some transit aid • Veterans Administration construction accounts also exempt.

  8. U.S. Macroeconomic Picture Funding from federal government still constrained. • Fiscal 2013 Appropriations • A continuing resolution passed in September 2012, • kept funding essentially steady through • March 27, 2013. (Included 0.6% hike for domestic • discretionary programs.) • In late March, Congress passed another continuing • resolution, financing federal programs through • September 30, 2013. Sets highway and transit • funding at MAP-21 levels. • Fiscal 2012 Appropriations • Federal highway program trimmed 5% to $39 bil. High-speed rail received zero funding again Mass transit account increased 5% • Other accounts generally lower: • Clean Water SRF’s cut 4% Drinking Water SRF’s cut 5% GSA new construction account cut 39% GSA repairs &renovation account unchanged DOD base closure account cut 77% DOD other military construction cut 8% VA major construction projects cut 45% Corps of Engineers construction increased 5%

  9. U.S. Macroeconomic Picture State fiscal health improving, although still fragile for some states. • Many states have faced large budget shortfalls, including the following states with the gaps closed when fiscal year 2012 budgets were adopted: • California ($23 billion) • Illinois ($5 billion) • New Jersey ($10 billion) • New York ($10 billion) • Florida ($4 billion) Source: Center on Budget and Policy Priorities • Significantly – State Fiscal Stabilization Fund support under ARRA has diminished substantially – 2010: $61 billion 2011: $52 billion 2012: $ 5 billion 2013: $ 0.5 billion Note: For fiscal year 2012, if TX and AK excluded, then year-end balance is 3.8%. For fiscal 2012, 12 states enacted budgets with balance levels below 1%, while 19 states enacted budgets with balance levels between 1% and 5%. Adequate fiscal cushion for a state is when year-end balance is at least 5%.

  10. U.S. Macroeconomic Picture Lending standards for commercial real estate loans continue to show gradual easing. • Lending standards for commercial real • estate loans have eased for 9 straight qtrs. • Lending standards for C&I loans have • eased for 13 out of 14 quarters. • But, lending standards for residential • mortgage loans have only recently shown • some easing – • 5% of lending officers in Jan. 2013 survey • 8% of lending officers in Apr. 2013 survey • Several major projects have resumed construction • Impact of financial regulatory reform? • Mortgage Bankers Survey results – • commercial and multifamily mortgage • originations up 24% in 2012.

  11. U.S. Single Family Housing Signs of improving single family market – rising home sales, stabilizing prices. • Single Family Housing • 2009435,000 units -21% • 2010446,000 units +2% • 413,000 units -7% • 516,000 units +25%

  12. U.S. Single Family Housing Signs of improving single family market. • Inventory of new homes for sale fell to 4.0 months in January, lowest since 2004. • Record low mortgage rates – reached 3.3% • In late 2012, although edged up to 3.4% -3.6% • in early 2013, before retreating to 3.4%. • However, lending standards for home • mortgages remain tight. • Demographic demand: 1 to 1.2 million units • per year. Will it be helped by by echo boom • moving into their 20’s? Single Family Housing 2013640,000 units +24%

  13. U.S. Multifamily Housing Construction has shown steady gains since 2010, still going. • Apartments led early upturn. • Some benefit from stimulus act -- • Affordable housing projects • received a boost. • Helped by push for • downtown redevelopment. • Demographics supportive, from both empty-nesters and now young adults. • Rental vacancy rates retreating, rents are increasing. • Condominium projects now picking up. • Compared to commercial building, • still a relatively attractive investment target given more stable revenue. • . • Multifamily Housing • 2009 136,000 units -55% • 2010 157,000 units +15% • 215,000 units +37% • 274,000 units +28% • 330,000 units +20%

  14. U.S. Commercial - Stores After steep decline in 2008-2010, store construction is turning the corner. • Derived demand from housing market – definitely true on the downside of the cycle; now beginning to show on upside. • Recent retail sales have fluctuated. • Payroll tax increase could be a negative • for consumer spending in near term. • Some outlet mall projects starting, • along with projects by a few major • retailers. • Extreme discounters (Family Dollar, • Dollar General) still expanding. • Store renovations have seen • much smaller decline. • Stores and Shopping Centers • 2009 96 msf -54% • 2010 81 msf -16% • 84 msf +4% • 104 msf +23% • 122 msf +18%

  15. U.S. Commercial – Stores Major alterations projects for stores has been much more stable than projects classified as new and additions, including growth in 2010-2012.

  16. U.S. Commercial - Warehouses Warehouse construction now seeing healthy percentage growth. • Vacancy rates still high, but easing. • Reached 14.5% in 2010 Q2, and have • since retreated to 12.3% in 2013 Q1. • Some larger regional facilities being • built by major retailers. In 2011 and • 2012, several large facilities built for • Amazon.com. • Continued need for updated facilities • to handle improved inventory management • practices. • Increased trade would help lift demand • for warehouse space Imports/exports • likely to be dampened in near term, • due to global economic slowdown. • Warehouses • 2009 68 msf -65% • 2010 49 msf -28% • 63 msf +28% • 93 msf +48% • 114 msf +23%

  17. U.S. Commercial - Hotels Hotel construction up sharply in 2011-2012; more growth underway. • More positives now: Business travel has improved Industry financials stronger • Casino building becoming more active • Several major projects reaching groundbreaking, Occupancies for 2012 at 61.4% Revpar for 2012 up 6.8%. • Hotels • 2009 28 msf -64% • 2010 17 msf -39% • 26 msf +55% • 33 msf +26% • 38 msf +15%

  18. U.S. Commercial – Office Buildings Major office alterations projects stayed strong though 2009, retreated in 2010, and essentially stabilized in 2011-2012.

  19. U.S. Commercial – Office Buildings Office market fundamentals are improving. • Office vacancy rates have topped off, now retreating gradually. • Overbuilding is less than • in past cycles. • Corporations remain hesitant about hiring.

  20. U.S. Institutional – Educational Buildings Educational buildings continue to lose momentum. Based on Sq. Ft 20112012 Primary, Jr. Highs -15% -9% High Schools -10% -19% Colleges/Univ. -7% -18% Libraries -8% -39% Laboratories -9% -39% Museums +9% -26% Comm. Colleges -1% -36% Vocational Schools-16% -28% • Educational Buildings • 2009 174 msf -22% • 2010 149 msf -15% • 132 msf -11% • 109 msf -17% • 105 msf -4% • Several large bond measures passed • in November 2012 elections, in Texas, • California, New Jersey, among other • states. • . • College endowments were basically flat in 2012, a shift after strong gain in 2011. • Major universities still re-visiting deferred • capital spending plans. .

  21. U.S. Institutional – Educational Buildings K-12 school construction larger and more volatile than colleges/universities. In 2012, sq. ft. for K-12 school construction was 3.6 times the size of Colleges/Univ./Comm. Colleges. In 2012, dollars for K-12 school construction was 2.1 times the size of Colleges/Univ./Comm. Colleges.

  22. U.S. Institutional – Educational Buildings Major alterations for educational buildings have been relatively resilient. For K-12 –2010, +4%; 2011, -6; 2012, -7%. For Colleges/Univ./Comm.Col. – 2010, +21%; 2011, -11%; 2012, +12%.

  23. U.S. Institutional – Healthcare Facilities Healthcare facilities slipped back again in 2012, putting the modest recovery on hold in the near term. Based on Sq. Ft20112012 Clinics/ Nursing Homes +12% -5% Hospitals -7% -13% • Hospital chains hard-hit in 2009 • by tight credit conditions. • Debate over healthcare reform • created near-term uncertainty. • U.S. military Veterans Admin. projects • helped to ease some of the near-term slowdown. • Now – uncertainty over reduced • Medicare reimbursements, • Affordable Care Act implementation • More healthcare mergers. • Sector still supported by – • Need to replace aging facilities • Growth of elderly population. • Healthcare Facilities • 2009 68 msf -38% • 2010 73 msf +8% • 75 msf +3% • 69 msf -8% • 68 msf -2%

  24. U.S. Institutional – Public Buildings Public Buildings continue to lose momentum. Based on Sq. Ft.20112012 Detention Facilities -29% -25% Armories/Military -17% -20% Courthouses -24% +2% Police/Fire Stations -10% -20% Post Offices -98% -0- • Received benefits of 2009 federal stimulus act for courthouses, federal buildings, land ports of entry. • Now affected by winding down of stimulus support, in combination with diminished federal spending. • Public Buildings • 2009 48 msf -3% • 2010 34 msf -29% • 27 msf -21% • 22 msf -17% • 20 msf -10%

  25. U.S. Institutional – Amusement & Rec. Amusement/Recreational appears to be turning the corner. Based on Sq. Ft20112012 Convention Centers -11% -39% Sports Arenas -12% +31% Theaters -19%+4% Other (inc. theme parks) -2% -1% • This category is affected by both public and • private financial support. • The year 2010 included several large • amusement renovation projects in NYC -- • $850 million for Madison Sq. Garden, $400 million for the Javits Convention Center, • $53 million for Carnegie Hall. • Casino projects gaining some momentum. • Amusement & Rec. Bldgs. • 2009 42 msf -29% • 2010 35 msf -17% • 33 msf -5% • 32 msf -2% • 35 msf +8%

  26. U.S. Institutional – Airport Terminals Airport terminal work in sq. ft. up in 2012, while dollars retreated. In general, renovation work has moderated decline in dollars relative to sq. ft. • Airport Terminals • 2009$2.6 bil. -4% • 2010$2.6 bil. -0- • $2.4 bil. -6% • $1.8 bil. -25% • $1.8 bil -0- • Airport Terminals • 2009 4.4 msf +49% • 2010 3.0 msf -33% • 1.5 msf -49% • 1.8 msf +20% • 1.6 msf -10%

  27. U.S. Manufacturing Buildings Plant construction decelerated in 2012, due to the economic and political uncertainty, as well as trade slowdown. Dollars pulled back after strong ’11. • Manufacturing Bldgs. • 2009$9.7 bil. -69% • 2010$9.5 bil. -2% • $17.2 bil. +81% • $12.2 bil. -29% • $13.2 bil +8% • Manufacturing Bldgs. • 2009 36 msf -55% • 2010 47 msf +29% • 54 msf +16% • 56 msf +3% • 58 msf +5%

  28. U.S. Public Works – Highways and Bridges Highways/bridges retreated through 2012; several large projects will help in 2013. • Waning stimulus support, combined with tough • state fiscal environment has dampened • construction near term. • Fiscal 2012 appropriations – federal highway funding cut 5% to $39 billion. Some additional funds provided for disaster relief reconstruction. • MAP-21 (Moving Ahead for Progress in the 21st Century) will keep transportation funding at current levels through 2014. Contains mechanisms to “stretch” funding. • Federal funding for highways and bridges will • not be hit hard by budget sequestration, since funding comes via Highway Trust Fund. • Added lift in 2013 could come from large projects, including a portion of the $3 billion Tappan Zee Bridge project in New York. • Highways and Bridges • 2009 $57.2 bil. +8% • 2010 $59.5 bil. +4% • $56.8 bil. -5% • $52.4 bil. -8% • $53.8 bil +3%

  29. U.S. Public Works – Environmental Environmental public works adversely affected by tight budgets. • Environmental Public Works • 2009 $36.6 bil. -5% • 2010 $33.2 bil. -9% • $31.5 bil. -5% • $28.8 bil. -9% • $28.1 bil -2% • Projects generally take longer to reach construction start stage compared to transportation work. • Construction often the result • of EPA mandates to local governments. • Budget sequestration will hit environmental • projects harder than transportation work.

  30. U.S. Public Works – “Other” Public Works Diverse set of project types can be volatile; rail-related work picked up in 2012. • Includes site work, rail-related work, pipelines, • airport runways, outdoor sports stadiums. • Pipelines strengthened though 2010, retreated • in 2011, made partial rebound in 2012 with • segment of Keystone oil pipeline. Will the • major part of the Keystone oil pipe start in 2013? • Mass transit account has fared relatively • well, raised 5% for fiscal year 2012. • In 2012 – numerous rail projects – - $877 mil. RTD Eagle commuter rail in Denver CO - $326 mil. Metro Gold Line in Pasadena CA -$280 mil. Warm Springs St. Ext. in Fremont CA • High-speed rail plans? Received zero federal • funding for fiscal 2012, but still has support of • Obama Administration. • California high-speed rail project in progress. • “Other” Public Works • 2009 $29.9 bil. -0- • 2010 $28.1 bil. -6% • $18.1 bil. -36% • $23.1 bil. +28% • $22.4 bil -3%

  31. New electric utility starts reached record high in 2012; downturn now underway. U.S. Electric Utilities • Energy Bills of 2005-2007 – provided tax incentives for electric utilities, transmission lines, etc. • Stimulus act also provided boost – incentives for alternative sources of electricity generation. • Capacity utilization was at 87% for 2007; utilization retreated to 74% in 2012, reflecting surge of new plants. • Gas-fired plants strong in 2012. • Vogtle and Summer nuclear plants (at $8.5 billion each) started in 2012. Prospects for nuclear plants being re-evaluated, however. • Alternative energy power plants very strong – 2010 up 124% and 2011 up 55% But 2012 down 38%. Loan guarantees extended another year. • Power lines also strong – 2010 up 52% and 2011 up 8%. But, 2012 slipped 12%. • Electric Utilities • 2009 $21.1 bil. -37% • 2010 $28.6 bil. +36% • $43.8 bil. +53% • $48.4 bil. +11% • $32.0 bil -34%

  32. U.S. Total Construction Starts for 2013 Billions of Dollars

  33. The Southeast Region (FL, GA, SC, NC, TN, AL) Comparing the pattern of total construction starts to the U.S. Total Construction in 2012, by State %ch %ch $ Bil.12/1112/05 FL $28.0 +23% -61% GA 19.7 +56% -29% SC 16.1 +100% +25% NC 15.2 -0- -38% TN 9.2 +12% -32% AL 6.4 +6% -34% Total $94.6 +30% -41%

  34. The Southeast Region The employment decline in the Southeast during 2008-2010 was generally steeper than the U.S. Job growth in 2011-2012 close to U.S. Florida Pluses: Still a leading retiree and tourist destination. Strong international ties, particularly to Latin America. Georgia Pluses: High population growth. Strong potential in trade and distribution. Growing auto manufacturing industry. North Carolina Pluses: Important high-tech base. Universities that attract tech firms and professionals.

  35. The Southeast Region Single Family Housing now heading upward. Single Family Housing in 2012, by State Units %ch %ch (thous.) 11/10 11/05 FL 40.0 +37% -79% NC 28.6 +20% -64% GA 18.2 +24% -80% TN 15.2 +20% -63% SC 14.8 +19% -64% AL 11.6 +6% -59% Total 128.5 +24% -73%

  36. The Southeast Region – Recent Large Projects Multifamily Housing and Commercial Building

  37. The Southeast Region Multifamily Housing and Commercial Building

  38. The Southeast Region – Atlanta Metro Area Multifamily Housing and Commercial Building in the Atlanta metro area

  39. The Southeast Region – Recent Large Projects Institutional and Manufacturing Buildings

  40. The Southeast Region Institutional Buildings

  41. The Southeast Region Airport-related Work and Manufacturing Buildings

  42. The Southeast Region – Recent Large Projects Public Works and Electric Utilities

  43. The Southeast Region Public Works and Electric Utilities

  44. Southeast Total Construction Starts for 2013 Billions of Dollars

  45. Points of Perspective – U.S. Construction Note: the 2011-?? Cycle includes 2011-2012 historical data and estimate for 2013.

  46. Points of Perspective – U.S. Construction Note: the 2011-?? Cycle includes 2011-2012 historical data and estimates for 2013

  47. Thank You Very Much!

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