Hold onto your hardhats: the sky may finally be falling on the construction industry.

Actually, Robert Murray is not anticipating a major disaster over the short term, but the McGraw-Hill economist did warn audience members at a Build Boston program last week that construction activity is beginning to wane after a period of prolonged growth. Rising interest rates and oil prices, cracks in the stock market and international strife are all negative trends that may slow work in the coming months, according to Murray, who said such factors could even lead to a recession by 2002.

“The lengthy expansion might be ready to run out of steam,” said Murray, who was delivering his widely regarded forecast for the second year at the Build Boston program in South Boston. “It does seem like the economy is heading for a soft landing.”

Murray, who said that New England could be hit even harder than other regions, forecast a 1 percent increase in total construction nationally in 2001 to $468.4 billion. The industry had 3 percent growth this year and 10 percent in 1999. Single-family housing should tail off by 2 percent, he said, while institutional activity will see just 3 percent growth after a 5 percent rise this year and an 18 percent gain in 1999. With a 2 percent hike anticipated for income-producing properties after a stagnant 2000, Murray stressed that 2001 should still keep the industry busy, but said there are indications that activity is headed for a downward slope.

“As we look at what has happened in 2000, there might be a bit of concern,” said Murray, noting that average employment growth has dipped to 175,000 after 225,000 new jobs were created in 1999. Also, a recent survey of bank lending officers had 34 percent reporting more stringent lending standards in August versus just 25 percent in a May survey, said Murray, adding that the Federal Deposit Insurance Corp. recently warned that 13 major cities are in danger of overbuilding in the office sector.

“It would appear a tighter credit environment is certainly underway, and that should have a dampening [effect] on commercial development in 2001,” he said.

Income-producing properties would be among the most at-risk categories in a weakened economy, said Murray, noting that commercial properties are typically the ones which see the greatest swings in a boom/bust cycle. Construction of sports arenas has been hurt by community opposition, he said, but recent initiatives in Houston and talks of a new stadium for the Boston Red Sox are providing some hope for that specialty. Public works projects should keep heavy construction companies busy in 2001, with a pair of multibillion-dollar federal bills likely to increase activity for highway projects and small, regional airports, Murray said.

For commercial properties, the nation is coming off a record year in 1999 for retail construction, with 310 million square feet produced during that period. But although an economic downturn could hurt consumer confidence, and Murray said the industry will fall off in 2001, he nonetheless maintained that “the drop is not going to be that severe.” The area that will see the biggest slowdown will be for development of new cinemas. With 36,000 cinema complexes today versus 33,000 a few years ago, Murray said movie theater construction will be severely impeded. That is especially true since economists believe the nation can only support 28,000 cinema operations.

Another category that will likely have a difficult year is hotels, with limited service projects seen as being especially overbuilt. Luxury product could see some activity, Murray said, but hotel construction will fall off another 8 percent next year after a similar dip in 1999 and a 10 percent dropoff in 1998.

The industrial market is getting an unanticipated boost from the telecommunications field, with many older properties being rehabbed into space to accommodate Internet switching gear and other telecom needs. Office development will probably be down by 4 percent in 2001, however, Murray said.

Financial Constraints
In some respects, Murray said the dampening of office and hotel construction is a sign of greater discipline in the market, with lenders and developers unlikely to move forward unless the success of a project is guaranteed. That measured approach is one reason why demand has remained so strong in both areas, Murray said, with the nation’s office market averaging less than 10 percent vacancy.

“I think the memories are still very strong from what happened a decade ago,” he said, referring to the real estate crash of the late 1980s that was exacerbated by massive overbuilding. With supply/demand almost at an equilibrium, Murray said that “even if there is a downturn, we won’t see a sharp crash like we did before.”

One product that is in favor with investors is multifamily development, said Murray. Besides a lack of overall supply, he said the capital gains tax changes of 1997 are prompting more older people to sell their homes and join the apartment crowd, one traditionally reserved for younger adults. Pension funds are rushing in to meet the need, he said, with many pushing their typical portfolio allocation of 10 to 15 percent multifamily to between 20 and 25 percent. Given that, Murray anticipates a 3 percent hike in multifamily construction in 2001.

Locally, Murray said he believes New England will “settle back” in 2001 after two years of positive growth, including a 17 percent rise in construction volume this year to $21.6 billion. Among the best performers in 2000 have been income properties (up 12 percent), public works (up 27 percent) and institutional construction (up 28 percent). Those areas will begin to deteriorate in 2001, however, according to Murray. The economist anticipates a 4 percent decline in total construction, with income properties seen falling by 2 percent, single-family housing expected to be off by 4 percent, and institutional construction likely to dip by 13 percent.

“Overall, after a surge of activity in 2000, we’re looking at a slightly larger decline for New England as opposed to the rest of the United States,” Murray said. Even with some of the strongest market fundamentals in the country for office and hotel product, Murray said it appears money will be less available in Massachusetts next year.

“What comes through in Boston is, especially for hotels, financial constraints are really limiting the ability for [commercial projects] to move ahead,” he said.

One constricting factor could well be in the labor supply, with Murray predicting 1.3 percent job growth for 2000 through 2002, as opposed to 2.3 percent for 1998 and 1999. The high cost of living for the Bay State will be a leading reason, he said, with migration of new workers from outside the area unlikely to ease the situation.