Dodge predicts 3 percent growth in construction.

New construction contracts will advance 3 percent in 1995 to $294 billion, it was announced in a forecast presented by the Construction Information Group of McGraw-Hill, Inc. to an audience of about 400 building products executives.

The current construction recovery has already shown a subdued and extended quality - after bottoming out in 1991, the upturn witnessed moderate gains during its first three years, climbing 9 percent in 1992, 7 percent in 1993, and an estimated 7 percent in 1994. While the 1992-94 period benefitted from a strengthening market for single-family housing, 1995 will see a 2 percent decline in the value of single-family starts amidst higher mortgage rates and a slower expansion of the economy. It will be up to other industry sectors to pick up the slack from a slumping housing market, continuing a transition which began midway through 1994.

According to Robert A. Murray, vice president of economic affairs for McGraw-Hill's Construction Information Group, "The current pattern of recovery a surge of housing followed by a hand-off to non-residential building and public works, is certainly consistent with the traditional construction cycle. What's different this time is the recovery's gradual unfolding compared to previous upturns, in combination with the reduced support available from a commercial building sector still beleaguered by a glut of excess space. The balancing act becomes a bit precarious next year, since it depends on the downturn for single-family housing remaining limited in scope, as well as continued improvement in financing conditions for income properties and environmental public works. The moderate gains expected for institutional building and manufacturing construction seem the safest bets."

The pick-up in mortgage rates experienced during 1994 has already led to a slowdown in housing activity, which should continue during the first half of 1995 as mortgage rates move above 9 percent. Pent-up demand from the early 1990s recession had helped propel single-family housing over the one million unit mark during 1993-94, but it will have only a negligible presence in 1995's more restrained economic climate. Still, the principal homebuying age group, those aged 35 to 54 years old, has expanded by 10 million persons during the first half of the 1990s, implying continued demographic support for this market. From 1994's single-family volume of 1.045 million units (F.W. Dodge basis), activity next year is projected to show only a slight decline to 980,000 units.

With the more sustained economic recovery over the past year, the income property group (commercial building plus multi-family housing) has witnessed a modest retreat in vacancy rates, indicating hat progress is being made in absorbing at least some of the glut of excess space. Next year's "soft landing" economy, expanding at a slower 2 to 2.5 percent pace, may dampen some of this upward momentum, but continued growth is likely due to improved market fundamentals and an easing of the credit crunch as banks reduce their earlier reluctance to provide real estate loans.

Store construction, which alone among the income property categories has been able to return to a healthy volume of activity, may prove vulnerable to 1995's ebbing housing market and slower pace of retail sales. Overall, the dollar volume of the income property group is expected to advance 8 percent in 1995, according to the forecast. Manufacturing construction will also climb moderately next year, the study says, rising 1 1 percent with the support of expanding export markets.

Institutional building resumed its gradual upward trend during 1994 as state revenues showed improvement from this year's more sustained economic expansion. With continued growth in school enrollments, combined with the funding boost for prisons from the federal crime bill, next year's dollar volume of institutional building is projected to rise 4 percent. Public works construction will show a similar 1995 advance of 5 percent, due to further growth for highways and the likely push for sewers and water supply systems which would occur assuming early 1995 passage of updates to the Clean Water Act and Safe Drinking Water Act.