Pent-Up Market

Demand

Builds

in

Education

During the worst phase of the downturn in nonresidential construction activity, many contractors shifted their priorities from the private market to institutional jobs, including schools and higher education-related projects. While private construction volumes shrank rapidly during the aftermath of the financial crisis that began in September 2008, school construction volumes persisted for a while due to the relative stability of public sector capital budgets, which were boosted in part by the 2009 American Recovery and Reinvestment Act. A rich pipeline of projects also was in place prior to the onset of the recession. In 2009, school construction totaled $16.4 billion. By 2011, this figure dropped to $12.2 billion, with more than 56 percent of that total spent on new schools. The balance was split between additions to existing buildings and retrofits of existing structures. Last year, the proportion of construction dollars spent on new buildings reached its lowest level since 2003 and was a far cry from 2009, when the new school construction share was 73 percent. In other words, school districts are making do with existing facilities. From 2000 to 2008, U.S. school construction averaged more than $20 billion annually, according to School Planning & Management. This year, construction is expected to be in the range of $10 billionhalf of what it was prior to the recession. Demand for more high-quality schools has not diminished. In fact, the number of school children has continued to rise, growing 8 percent between 1995 and 2008, according to the National Center for Education Statistics (NCES). However, much of the money that would be used to finance school construction has simply dried up. For example, Illinois cut $161 million in aid for schools in its 20122013 budget. Areas of Opportunity for School Construction One exception to the overall trend of reduced financing and construction is charter schools. As charter schools have expanded their reach, sales of bonds that typically are used to finance the construction of new facilities grew as well. Because these bonds often are associated with relatively high yields (3.41 percentage points more than top-rated general obligation bonds over a recent period), they are enticing to market participants at a time when many other assets are yielding only slightly above 0 percent. Of course, charter school debt is

riskier than general obligation bonds. Bond offerings of $30 million or more accounted for nearly 12 percent of all charter school bond sales last year, according to Moodys Investors Service. Another possible source of renewed financing and construction is public-private partnerships. For example, a private developer financed, constructed and now operates a new dormitory at Montclair State University in New Jersey. The university paid nothing for the $211 million project, but also does not receive any of the rent paid by students living in the building. Because of lingering fiscal constraints, school leaders also have become increasingly focused on reducing their carbon footprints and diminishing energy consumption. School districts across the nation are turning toward solar power to slash electricity costs. In some cases, the money saved was expended to retain more teachers and programs in the face of broader budget cuts. According to The Wall Street Journal, more than 500 K12 schools in 43 states have installed solar panels, many of them during the past three years as solar power costs have declined. In some states, such as California, solar power is cheaper than retail electricity (11 to 12 cents per kilowatt hour for solar versus 17 to 24 cents for retail power). A kilowatt hour represents roughly the amount of electricity required to light one classroom for one hour. University Spending Stagnant According to College Planning & Management, college construction smashed through the $7 billion barrier for the first time in 2000. During the next two years, spending rose to $11 billion, largely in response to a growing demand for seats in academic buildings and rooms in residence halls. By 2004, annual construction exceeded $13 billion and stayed in that stratosphere for the next several years, rising to $15 billion by 2006. Inevitably, spending tumbled. By 2009, the financial crisis had deeply compromised college and university endowments, and construction spending slipped below $11 billion. It has stayed at that level for the past two years. Looking ahead, a diminishing share of college construction spending will be devoted to new buildings. Similar to 2011, when almost $1.4 billion was spent on renovations, expect to see smaller projects in existing buildings this yearmany of which involve overhauling electrical, plumbing and HVAC systems. Looking Ahead Even as education-related spending remains flat, pent-up demand continues to build. Student enrollment will rise with the population, though some periods will be associated with more rapid growth than others due to the impact of larger versus smaller generational cohorts. Between 2012 and 2020, enrollment in U.S. public elementary and secondary schools will rise 6.1 percent, according to NCES projections. All things being equal, this should translate into more construction.

But all things are not equal. Online education continues to gain market share as it is offered by more of the nations prestigious institutions. The spread of online education is likely to negatively impact the pace of construction spending growth going forward, but by how much remains unclear.

Written by:
Anirban Basu
Anirban Basu is chief economist of Associated Builders and Contractors. For more information, visit www.abc.org/economics.