Archive for December, 2009

PSMJ’s 2010 AEC Firm US Market Forecast — One Month Later

Saturday, December 12th, 2009

Have you ever noticed how most market researchers never publicly review the accuracy of their predictions? They just put the material out there for people to consume, then do it all over again the next month, year, or decade, as if they were doing it for the first time.

It’s a defense mechanism. In market research, you put yourself out on a limb…and hope nothing comes along to snap it while you’re out there.

If the product of the market research is a for-sale book, it is usually left up to the buyer to determine whether the researcher’s conclusions were worth the money spent…and potentially spent again on the next version of the same product. If the research is a focused internal project, however, you can bet that some person or persons (i.e., managers) will “grade” the findings.

If you’ve ever done a large research project, you may relate to this. You may know the feeling of figuratively holding your breath in the weeks after your research is done and the product is submitted. The last thing you want is for something you’ve projected, predicted, or recommended to be proven false by a change of events, shocking revelation or other disaster. Especially within a few days or weeks of making your bold proclamations to the world (or your boss).

It is almost as bad to omit some area of critical importance that you could have — and should have — included.

When I read recently about the Dubai debt crisis, the first thing I did was rush back to PSMJ’s 2010 AEC Firm U.S. Market Forecast — the book I wrote and PSMJ published last month — to see what I had said about Dubai. I remembered the matter of heavy debt in Dubai coming up as I researched for a brief overview section on the state of the international markets, but I didn’t recall exactly what I’d chosen to include.

This is what we published in the report:

Reports on Dubai are mixed.

Emirates Business reports, “Dubai business leaders are bullish about the fourth quarter and about 61 percent of them expect improvement, according to a monthly survey conducted by Dubai Chamber of Commerce and Industry. Even as liquidity continues to remain a challenge, several ‘signs of recovery are being noticed’ after the slow business activity registered during the month of Ramadan as well as the summer holidays.”

However, engineering and construction consulting firm Mouchel (Surrey, UK), finished the year ended July 31, 2009, $23.5 million in the red. Much of that figure came from taking a hit on bad debts in Dubai.

“We have been adversely impacted by the deteriorating economic environment in the region. Currently, there is minimal demand for infrastructure development, particularly in Dubai,” said a company statement.

Phew! Imagine if I’d chosen to omit the part about Mouchel. The entire message on Dubai would be different.

No, I didn’t exactly fire a warning shot that the debt situation in Dubai was about to collapse. But I covered that base and can certainly stand behind what I wrote. As of mid December 2009, Dubai World, the government-owned investment company responsible for much of Dubai’s rapid growth, is weighted down by about $60 billion in debt it can’t repay. This financial crisis has temporarily crippled the construction market in Dubai, and talk of a fourth-quarter rebound is clearly out of the question. Yet, some areas of Dubai’s economy remain strong and its long-term chances for pulling out of the tailspin are good.

Another recent news item caught my attention and sent me sprinting to the Forecast. Several sources reported that commercial loan defaults have surged in 2009 and may continue to grow in 2010 and even into 2011. This news didn’t resonate worldwide the way the Dubai debt crisis did, but it is a matter of greater concern to the U.S. commercial construction industry.

In the Forecast, I wrote:

With business conditions as they are, credit continuing to be tight, and commercial property values depressed, it forms the potential scenario for a rise in defaults on commercial mortgages.

Bloomberg News reported on August 31, 2009, that “the default rate on commercial mortgages held by U.S. banks more than doubled in the second quarter from a year earlier amid falling rents and occupancies for malls, office buildings and warehouses.”

Some fear that a rise in commercial mortgage defaults could set off a crash similar to the one that occurred on the residential side.

We hit this theme throughout the book, sufficiently (in my opinion) sounding the alarm on this issue.

In fairness, this concern is expressed by just about everyone monitoring and reporting on the U.S. construction market. However, in this case, as well as the case with Dubai’s debt, I’m comfortable with what I presented in the report.

I’m writing this blog entry not for horn-tooting or back-patting reasons — it’s not as if the Forecast predicted some catastrophe akin to the housing crisis or bank meltdown (or that the Steelers would lose five straight games!). The point is to give you an inside look at the process and output of the Forecast we published last month, as well as into the mind of the author. And, for those who bought the book, to provide an update of its contents.

It is also a good exercise for me as it will improve the process and the product for future forecasts I might do.

I’ll review the book’s findings occasionally in this space over the next few weeks and months, even offering a mea culpa, as necessary. In the meantime, I’ll be out here on this limb, holding my breath.