Construction, Nonresidential Building

SIC 1540

NAICS 2362

Nonresidential construction firms build, alter, remodel, repair, and renovate a wide range of commercial, industrial, and public buildings, including industrial buildings, warehouses, office buildings, churches and synagogues, hospitals, museums, schools, restaurants and shopping centers, and stadiums. See also Construction, Residential Building and Engineering Services.

INDUSTRY SNAPSHOT

The global construction industry is closely tied to general business and economic conditions. Certain segments of the nonresidential building construction industry proved healthier than others amid the fluctuating economic trends of the early 2000s. While office building construction was plagued by oversupply in the early 1990s, economic conditions improved later in the decade. Despite problems like corporate downsizing, temporary work forces, and inventory reduction, the strong economy facilitated a rapid decline in office vacancies in the United States. The economic situation was particularly beneficial for smaller office building construction in smaller cities around the world as many corporations began to decentralize their operations and moved divisional offices closer to manufacturing and distribution centers. Some corporations in search of lower costs abandoned large cities completely. This trend created an upturn in demand for new office buildings in some medium-sized cities in the southeastern United States. Furthermore, the industry, especially in the United States and parts of Western Europe, saw a shift in demographics in office building construction, as many businesses moved away from their traditional urban settings into suburbs and outlying areas.

The nonresidential building segment of the construction industry is aided by the fact that institutional building, like governmental buildings and schools, tends to remain relatively stable. Additionally, even in mature construction markets like the United States, new facilities, or at least upgrades to older facilities, are quite often needed to replace or refurbish aging schools, hospitals, and other publicly funded structures. In the case of schools, quite often increasing enrollment can bolster construction needs.

The rapid expansion of the Asian economies in most business sectors enabled construction companies worldwide to tap into this market. When companies established themselves in the Asia-Pacific region, construction contractors would then build the new facilities. Gains in the Asian market made it possible for international contractors to offset the more modest gains in the mature markets of Europe and North America, as well as regions with comparatively low demand such as Latin America, the Middle East, and Africa. Asia (excluding Japan) was expected by most industry analysts to remain the leading region for new construction in the world early in the twenty-first century; areas such as Latin America and Eastern Europe were also predicted to grow, albeit somewhat more slowly.

ORGANIZATION AND STRUCTURE

International construction companies and the design firms that work closely with them are among the most independent of corporations. While international manufacturing corporations may diversify their products and services, builders tend to remain focused on construction. One division may specialize in high-rise office buildings while another will concentrate on petrochemical plants.

Most international construction companies and design firms manage their businesses independently of their respective governments. However, this does not mean that they are not regulated. Companies must build to local or national building codes and follow local or national environmental standards. They are usually monitored for safety on the work site by government departments and their own safety directors. In the United States the Occupational Safety and Health Administration (OSHA) regularly issues and monitors rules that govern various aspects of the nonresidential building industry. In early 1995, for example, OSHA issued a safety regulation that mandated that all construction employees wear harnesses if working near the edge of a building. The harnesses, which are secured to the building, are designed to prevent the wearers from falling more than a few feet.

In the early 2000s many of the largest construction firms were private companies, such as Bechtel Group Inc. and Parsons Corporation. Some companies were owned and headed primarily by their founding families. While many corporations hired for their higher management positions "business"people who often had little practical knowledge of the company, construction companies and engineering design firms were more typically headed by builders and engineers. Many in key positions in the industry began working in the field as project managers and subsequently learned how to run the business by working their way up.

BACKGROUND AND DEVELOPMENT

After reaching peak levels in 1998, due to strong economies in both North America and Europe, the nonresidential construction market began to decline in 2000 as a result of weakening economic trends. Companies in Europe, the United States, and Japan in particular saw significant reductions in new contracts, particularly for domestic projects. This downward trend, however, had begun to improve by 2004, when worldwide spending on construction, fueled in large part by surging demand in China and India, reached US$3.9 trillion. In the early 2000s, about 65 percent of the construction industry's business was in the form of new construction, while the remainder was derived from alterations, maintenance, and repair. While the United States remained a world leader in the nonresidential construction industry, about 80 percent of the world's construction activity took place outside U.S. borders.

Demand for office building construction increased when the dot-com boom of the late 1990s fueled numerous start-ups and expansion among existing businesses. However, in 2000 the growth in the office building market slowed considerably when the dot-com firms began disappearing and many technology firms began scaling back operations to weather the downturn. In fact, U.S. office building construction declined 22 percent in 2001, more than any other nonresidential construction sector. In comparison, the U.S. nonresidential building industry as a whole fell only 4 percent, from US$173.1 billion in 2000 to US$165.8 billion in 2001. According to U.S. Construction Trends, a report released by construction industry research firm F. W. Dodge, "After a very strong 2000, the demand for office space was dampened by the dot-com correction, as a substantial amount of sublease space was put back on the market. The decline for office construction was especially pronounced in those cities that benefited from the high-tech boom, such as Washington D.C., Seattle, San Jose, and Dallas." More favorable economic conditions after 2004, however, began to reverse this downward trend. According to McGraw-Hill Construction, office building construction in January 2005 rose 11 percent nationwide (adjusted annual rate).

In the early 2000s oil refinery and chemical plant construction around the world remained one of the fundamental cornerstones of the industry. Industry observers noted that, with China and other Asian countries such as Vietnam becoming more receptive to outside influence, the market for petrochemical plants was expected to remain steady early in the twenty-first century. U.S. companies particularly had the advantage in this market with decades of international experience building oil refineries. The rapid growth in global trade has also increased the need for projects such as port facilities and airports, especially in developing countries.

Construction of manufacturing plants has traditionally remained relatively steady over the years. Manufacturing plants, according to conventional wisdom, always need to be expanded, upgraded, rebuilt, and built in new locations. In fact, most of the construction activity in this industry segment is done to increase capacity, which was expected to continue as companies expand globally and need greater capacity— with the caveat that cyclically many manufacturing industries reach stages of...

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