Nonresidential construction remains “surprisingly healthy,” say industry executives, especially considering the profound weakness in the housing market. Given the struggling U.S. economy, the well-documented credit crunch and other negative factors, however, many expect some nonresidential building sectors to take a turn for the worse late this year or early in 2009.

Shipments of structurals and other steel products used by the construction market, while down a bit from last year, remain “positive” so far, says Peter Wright, director of marketing for Chaparral Steel, Midlothian, Texas. But the tight credit market has cut off capital for most new commercial projects, which could affect steel shipments soon. “No one is going to do any speculative building of office space in the face of the declining economy,” he notes.

Chaparral’s parent company, Gerdau Ameristeel Corp., Tampa, Fla., reports that its order backlog remains strong and continues to build despite the increasing cost for construction materials. “I’m knocking on wood that there will continue to be solid, consistent demand going forward,” says Terry Sutter, Gerdau Ameristeel vice president and chief operating officer.

Executives at Nucor Corp., Charlotte, N.C., voice the same tenuous optimism regarding commercial construction. “It’s hard to say what will happen,” comments Joe Stratman, Nucor executive vice president. “The economic picture in the United States is mixed. I’m not sure where the economy is heading. Banks are tightening credit. That will have an impact eventually, but so far it hasn’t had a direct impact.”

David Jeanes, senior vice president of marketing development at the American Iron and Steel Institute in Washington, D.C., observes that nonresidential construction is the single largest consuming sector for the U.S. steel industry, using nearly all types of steel.

Nonresidential (commercial and industrial) and infrastructure spending have held up fairly well in the first half of 2008, says Christopher Plummer, managing director of Metal Strategies Inc., West Chester, Pa., which is one reason steelmakers have been able to repeatedly raise prices despite the flagging U.S. economy.

“Through 2007 there were several years of good upward momentum, as far as dollars spent on nonresidential construction starts,” concurs Kim Kennedy, manager of forecasting for McGraw-Hill Construction, New York. That momentum has slowed considerably, she adds, setting the stage for a slight decline in new-project starts in 2008.

Ken Simonson, chief economist for the Associated General Contractors of America, Arlington, Va., estimates that last year nonresidential construction spending increased by 15 percent—quite a contrast to the 18 percent decline in residential spending. “So far this year, nonresidential construction continues to grow strongly, but many contractors are concerned about keeping their order books full after their current projects are completed,” he says.

Many experts at least partially attribute the anticipated decline in commercial construction to the continued weakening of the housing market, which is currently at a 20-year low. David Seiders, chief economist for the Washington, D.C.-based National Association of Home Builders, says builders remain considerably downbeat after market conditions further eroded in May. Pointing to weak demand for new homes, the record overhang of vacant housing units, dismal consumer sentiment and rising unemployment, Seiders adds,  “The fundamentals point to further deterioration of single-family housing production over the balance of this year.”

Light commercial construction tends to follow single-family construction and, therefore, could see “a downturn short-term,” says Robert Wills, vice president of construction market development for AISI.

The connection between the housing downturn and the potential for falloff in nonresidential construction is not lost on steel suppliers. “Obviously, fewer shopping centers and other things related to consumers are being built,” says Burt Tenenbaum, president of Chatham Steel, Savannah, Ga. “Unless the project is already locked in, why add another strip mall when there aren’t more houses being built?” adds Bill Brown, general sales manager for Steel Dynamics Inc., Fort Wayne, Ind.

Simonson maintains that nonresidential and housing construction are not as directly linked as many people assume, even when it comes to the retail sector. “While with less housing there is less need for some retail, most retail is driven by personal income. Personal income tends to run neck and neck with the economy or inflation,” he asserts. He predicts that retail construction, while growing at a slower rate, will still see a small increase this year. Overall, retail building will gain 1 to 4 percent in 2008 vs. a 13 percent growth rate in 2007, he says.

The rising cost of materials is also having “a chilling effect” on construction spending, notes Scott Melnick, vice president of the American Institute of Steel Construction, Chicago. “As materials rise, the total cost of building increases, and that could change the economic viability of a project. We are already starting to see some projects delayed.”

Steel prices alone—including beams, rebar, structural tubing and plate—are up about 50 percent, notes Bill Jones, president of O’Neal Steel Inc. in Birmingham, Ala., who sees no relief ahead for buyers in the construction markets. “I believe these prices will continue to rise or else stabilize at these higher prices.” Chaparral’s Wright downplays the impact of recent steel price hikes, however, noting that steel represents only about 6 percent of the average finished building’s cost.

Other construction materials, with the exception of wood, also have seen considerable price jumps, including copper, concrete and gypsum. Overall, construction material costs have risen at double the rate of the consumer price index over the past four years, says Simonson.

Such price escalation is sending builders back to the drawing board for redesigns and rebids on many projects. Steel, surprisingly, is not the primary focus of such cost-cutting efforts. In fact, steel’s share of the nonresidential construction market has continued to increase because the prices of certain competitive materials, such as concrete and masonry, have risen even more sharply, notes Melnick at the AISC.

Efforts by the steel industry to promote steel use have been paying off. One such marketing program at AISI has doubled metal roofing usage in the last decade. AISI is currently promoting steel in the design of short-span bridges, those with spans of under 120 feet, through its new Short Span Bridge Alliance. “We think this is a good opportunity for steel,” says Jeanes. In the past, the industry has made inroads with new higher-performance steels among designers of larger bridges. “We haven’t paid as much attention to small-span bridges, many of which are in disrepair and for which steel could be a good solution.”

Because of steel’s recyclability, the industry’s promotional efforts dovetail nicely with the growing interest in “green” building. “We want to take part in the ‘green rush,’” he adds. 

Several nonresidential construction sectors remain especially strong, notably industrial construction, say the experts. Helped by skyrocketing energy prices, projects related to electricity-generating infrastructure, oil and gas production, petrochemical refineries and alternative energy sources such as wind towers continue to move forward.

Because of the rapidly growing demand for energy at a time when power-generating capacity is constrained, this type of construction is less sensitive to the U.S. economic downturn, says Gerdau Ameristeel’s Sutter. “People are working hard to open up more capacity in North America, doing a number of debottlenecking projects. I think there is reason for optimism going forward given that these projects tend to have long-term capital investment plans.”

Energy-related construction has registered double-digit growth in dollars spent, notes McGraw-Hill’s Kennedy. “Refineries, both for ethanol and conventional energy, have seen a big surge. There reportedly are also some nuclear plants in the pipeline,” she says, though such projects may be years away because nuclear energy remains such a hot political issue.

Infrastructure upgrades also have been “fairly robust,” says Steel Dynamics’ Brown. “The Minnesota bridge collapse brought the reality to the forefront, that some areas of our infrastructure are clearly outdated and need to be addressed.” By some estimates, as many as 70 percent of U.S. bridges may be functionally obsolete.

“The bridge collapse caused a good amount of dialogue by different municipalities regarding the need for infrastructure work,” Sutter adds. “If they don’t already have such work in their budgets, over time we will see more come through the bidding cycle. Infrastructure has a long build cycle, but we will see more work in the next three to five years.” 

Federal funding for highway and bridge work may fall short of anticipated levels because fuel tax revenues are lagging as truckers cut back due to high diesel prices and the weak economy. The current U.S. infrastructure-spending bill was supposed to cover projects through 2009, but the federal highway account could fall short. “The Senate Finance Committee is trying to come up with a patch to cover 2009, but if that doesn’t go through, funds to the states will be trimmed,” Simonson says. Compounding the problem, many states are not in the position to provide the required matching funds to maximize the federal dollars that are available.

Nevertheless, public works construction is expected to grow about 2.3 percent this year, approximately the same rate of growth as in 2007, says Plummer at Metal Strategies. He expects that rate to slow to about 1.4 percent in 2009.

O’Neal’s Jones sees 2008 as a good year for steel suppliers given the volumes going into construction markets, and an even better year from a dollar standpoint given the rising prices of steel products. “It will, however, be a difficult year for fabricators or anyone who bids on a fixed-price basis.”

The outlook for the construction market in 2009 is a bit cloudy, but many observers expect it to be weaker than 2008. “Nonresidential has seen several strong years, so it’s unrealistic to expect it to stay up forever,” says AISI’s Wills.

Metal Strategies forecasts a slowdown in construction spending beginning in the next six to 12 months that could lead to a couple years of slow or even negative growth.

Hoped-for improvement in the housing sector next year could pick nonresidential construction back up as early as 2010, says Kennedy. “And the manufacturing/industrial construction sector might not decline at all,” she adds.