Outlook U.S. Construction Mid Year Update MHC Atlanta SMPS May 22, 2013 Dan Palmer Senior Director, Editorial Global Operations McGraw Hill Construction McGraw Hill Construction

2 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. U.S. Construction Market Indicators and Sectors The Environment -- Macroeconomic Picture Single Family Housing and Multifamily Housing Commercial Building Institutional Building, plus Manufacturing Bldgs. Public Works and Electric Utilities Total Construction Regional – The Southeast Cycle Charts Agenda

3 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Total Construction – starts leveled off in 2010 and 2011; put in place bottomed out in During 2012 – moderate upward movement for both series. U.S. Construction Market Indicators

4 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Residential Building strengthening; Commercial bldg. beginning to edge up. Institutional bldg. still in retreat; Public Works dealing with budget cuts. U.S. Construction Sectors (Starts)

5 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Economic growth picked up in 2013 Q1, after flattening out in 2012 Q4. On balance, the pace of economic expansion remains lackluster. GDP Pattern: History Forecast % +2.4% +1.8% +2.2% +2.2% Shape of Recovery: Subdued – Periods of moderate expansion have been followed by deceleration. Much of 2012 was adversely affected by Continued uncertainty, due to European debt crisis November 2012 elections Fiscal Cliff One plus – corporate profits healthy For 2013 – how much of a drag will come from sequester, higher payroll taxes. U.S. Macroeconomic Picture

6 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. After weakening in 2012 Q2, employment growth strengthened in second half of Pattern so far in 2013 has shown uneven improvement. Jobs lost from Feb.’08 to Feb. ’10: 8.7 Million. Job creation so far in : 6.2 Million. Unemployment rate at 7.5% Job growth in Jan.-Mar. ’12 : 262,000 /mo in Apr.-June ’12: 108,000 /mo in July‘12-Dec.’12: 180,000 /mo in Jan.’13-Apr.’13: 196,000 /mo U.S. Macroeconomic Picture

7 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Fiscal Cliff Averted, but Sequestration Began March 1. Fiscal Cliff Deferred by January 1 Agreement - For high income earners, income tax rate raised from 35% to 39.6%. For those below the thresholds, tax rates remain unchanged. - Automatic spending cuts called for by the Budget Control Act of 2011, which would have reduced spending on discretionary federal spending by about 8%, deferred until March 1. - Payroll tax cut, which lowered rate from 6.2% to 4.2%, allowed to expire Sequestration Now in Effect - $85 billion in cuts over next 7 months; $1.2 trillion in cuts over next ten years. - Impact not immediate; will kick in over several months as gov’t agencies implement cuts. - CBO: without sequestration, GDP growth would be 0.6% higher, more full-time jobs - Cuts to major construction programs estimated at $4 billion Biggest hits – Dept. of Energy environmental cleanup EPA water infrastructure Military construction - Infrastructure accounts financed by trusts funds are largely exempt from the sequester Including – Federal-aid highway funding Airport Improvement Program construction grants Some transit aid Veterans Administration construction accounts also exempt. U.S. Macroeconomic Picture

8 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Funding from federal government still constrained. Fiscal 2013 Appropriations A continuing resolution passed in September 2012, kept funding essentially steady through March 27, (Included 0.6% hike for domestic discretionary programs.) In late March, Congress passed another continuing resolution, financing federal programs through September 30, Sets highway and transit funding at MAP-21 levels. Fiscal 2012 Appropriations Federal highway program trimmed 5% to $39 bil. High-speed rail received zero funding again Mass transit account increased 5% Other accounts generally lower: Clean Water SRF’s cut 4% Drinking Water SRF’s cut 5% GSA new construction account cut 39% GSA repairs &renovation account unchanged DOD base closure account cut 77% DOD other military construction cut 8% VA major construction projects cut 45% Corps of Engineers construction increased 5% U.S. Macroeconomic Picture

9 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. State fiscal health improving, although still fragile for some states. Note: For fiscal year 2012, if TX and AK excluded, then year-end balance is 3.8%. For fiscal 2012, 12 states enacted budgets with balance levels below 1%, while 19 states enacted budgets with balance levels between 1% and 5%. Adequate fiscal cushion for a state is when year- end balance is at least 5%. Many states have faced large budget shortfalls, including the following states with the gaps closed when fiscal year 2012 budgets were adopted: –California ($23 billion) –Illinois ($5 billion) –New Jersey ($10 billion) –New York ($10 billion) –Florida ($4 billion) Source: Center on Budget and Policy Priorities Significantly – State Fiscal Stabilization Fund support under ARRA has diminished substantially – 2010: $61 billion 2011: $52 billion 2012: $ 5 billion 2013: $ 0.5 billion U.S. Macroeconomic Picture

10 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Lending standards for commercial real estate loans continue to show gradual easing. Lending standards for commercial real estate loans have eased for 9 straight qtrs. Lending standards for C&I loans have eased for 13 out of 14 quarters. But, lending standards for residential mortgage loans have only recently shown some easing – 5% of lending officers in Jan survey 8% of lending officers in Apr survey Several major projects have resumed construction Impact of financial regulatory reform? Mortgage Bankers Survey results – commercial and multifamily mortgage originations up 24% in U.S. Macroeconomic Picture

11 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Signs of improving single family market – rising home sales, stabilizing prices. U.S. Single Family Housing Single Family Housing ,000 units -21% ,000 units +2% ,000 units -7% ,000 units +25%

12 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Signs of improving single family market. Inventory of new homes for sale fell to 4.0 months in January, lowest since Record low mortgage rates – reached 3.3% In late 2012, although edged up to 3.4% -3.6% in early 2013, before retreating to 3.4%. However, lending standards for home mortgages remain tight. Demographic demand: 1 to 1.2 million units per year. Will it be helped by by echo boom moving into their 20’s? Single Family Housing ,000 units +24% U.S. Single Family Housing

13 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Construction has shown steady gains since 2010, still going. Apartments led early upturn. Some benefit from stimulus act -- Affordable housing projects received a boost. Helped by push for downtown redevelopment. Demographics supportive, from both empty-nesters and now young adults. Rental vacancy rates retreating, rents are increasing. Condominium projects now picking up. Compared to commercial building, still a relatively attractive investment target given more stable revenue.. U.S. Multifamily Housing Multifamily Housing ,000 units -55% ,000 units +15% ,000 units +37% ,000 units +28% ,000 units +20%

14 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. After steep decline in , store construction is turning the corner. Derived demand from housing market – definitely true on the downside of the cycle; now beginning to show on upside. Recent retail sales have fluctuated. Payroll tax increase could be a negative for consumer spending in near term. Some outlet mall projects starting, along with projects by a few major retailers. Extreme discounters (Family Dollar, Dollar General) still expanding. Store renovations have seen much smaller decline. U.S. Commercial - Stores Stores and Shopping Centers msf -54% msf -16% msf +4% msf +23% msf +18%

15 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. U.S. Commercial – Stores Major alterations projects for stores has been much more stable than projects classified as new and additions, including growth in

16 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Warehouse construction now seeing healthy percentage growth. U.S. Commercial - Warehouses Warehouses msf -65% msf -28% msf +28% msf +48% msf +23% Vacancy rates still high, but easing. Reached 14.5% in 2010 Q2, and have since retreated to 12.3% in 2013 Q1. Some larger regional facilities being built by major retailers. In 2011 and 2012, several large facilities built for Amazon.com. Continued need for updated facilities to handle improved inventory management practices. Increased trade would help lift demand for warehouse space Imports/exports likely to be dampened in near term, due to global economic slowdown.

17 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. U.S. Commercial - Hotels Hotels msf -64% msf -39% msf +55% msf +26% msf +15% Hotel construction up sharply in ; more growth underway. More positives now: Business travel has improved Industry financials stronger Casino building becoming more active Several major projects reaching groundbreaking, Occupancies for 2012 at 61.4% Revpar for 2012 up 6.8%.

18 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. U.S. Commercial – Office Buildings Major office alterations projects stayed strong though 2009, retreated in 2010, and essentially stabilized in

19 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Office vacancy rates have topped off, now retreating gradually. Overbuilding is less than in past cycles. Corporations remain hesitant about hiring. U.S. Commercial – Office Buildings Office market fundamentals are improving.

20 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Educational buildings continue to lose momentum. Based on Sq. Ft Primary, Jr. Highs -15% -9% High Schools -10% -19% Colleges/Univ. -7% -18% Libraries -8% -39% Laboratories -9% -39% Museums +9% -26% Comm. Colleges -1% -36% Vocational Schools -16% -28% Several large bond measures passed in November 2012 elections, in Texas, California, New Jersey, among other states.. College endowments were basically flat in 2012, a shift after strong gain in Major universities still re-visiting deferred capital spending plans.. U.S. Institutional – Educational Buildings Educational Buildings msf -22% msf -15% msf -11% msf -17% msf -4%

21 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. K-12 school construction larger and more volatile than colleges/universities. In 2012, sq. ft. for K-12 school construction was 3.6 times the size of Colleges/Univ./Comm. Colleges. In 2012, dollars for K-12 school construction was 2.1 times the size of Colleges/Univ./Comm. Colleges. U.S. Institutional – Educational Buildings

22 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. U.S. Institutional – Educational Buildings Major alterations for educational buildings have been relatively resilient. For K-12 – 2010, +4%; 2011, -6; 2012, -7%. For Colleges/Univ./Comm.Col. – 2010, +21%; 2011, -11%; 2012, +12%.

23 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Based on Sq. Ft Clinics/ Nursing Homes +12% -5% Hospitals -7% -13% Healthcare Facilities msf -38% msf +8% msf +3% msf -8% msf -2% U.S. Institutional – Healthcare Facilities Healthcare facilities slipped back again in 2012, putting the modest recovery on hold in the near term. Hospital chains hard-hit in 2009 by tight credit conditions. Debate over healthcare reform created near-term uncertainty. U.S. military Veterans Admin. projects helped to ease some of the near-term slowdown. Now – uncertainty over reduced Medicare reimbursements, Affordable Care Act implementation More healthcare mergers. Sector still supported by – Need to replace aging facilities Growth of elderly population.

24 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Public Buildings continue to lose momentum. Received benefits of 2009 federal stimulus act for courthouses, federal buildings, land ports of entry. Now affected by winding down of stimulus support, in combination with diminished federal spending. Based on Sq. Ft Detention Facilities -29% -25% Armories/Military -17% -20% Courthouses -24% +2% Police/Fire Stations -10% -20% Post Offices -98% -0- U.S. Institutional – Public Buildings Public Buildings msf -3% msf -29% msf -21% msf -17% msf -10%

25 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Amusement/Recreational appears to be turning the corner. Based on Sq. Ft Convention Centers -11% -39% Sports Arenas -12% +31% Theaters -19% +4% Other (inc. theme parks) -2% -1% This category is affected by both public and private financial support. The year 2010 included several large amusement renovation projects in NYC -- $850 million for Madison Sq. Garden, $400 million for the Javits Convention Center, $53 million for Carnegie Hall. Casino projects gaining some momentum. Amusement & Rec. Bldgs msf -29% msf -17% msf -5% msf -2% msf +8% U.S. Institutional – Amusement & Rec.

26 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Airport terminal work in sq. ft. up in 2012, while dollars retreated. In general, renovation work has moderated decline in dollars relative to sq. ft. U.S. Institutional – Airport Terminals Airport Terminals msf +49% msf -33% msf -49% msf +20% msf -10% Airport Terminals 2009 $2.6 bil. -4% 2010 $2.6 bil $2.4 bil. -6% 2012 $1.8 bil. -25% 2013 $1.8 bil -0-

27 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Plant construction decelerated in 2012, due to the economic and political uncertainty, as well as trade slowdown. Dollars pulled back after strong ’11. U.S. Manufacturing Buildings Manufacturing Bldgs msf -55% msf +29% msf +16% msf +3% msf +5% Manufacturing Bldgs $9.7 bil. -69% 2010 $9.5 bil. -2% 2011 $17.2 bil. +81% 2012 $12.2 bil. -29% 2013 $13.2 bil +8%

28 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Highways/bridges retreated through 2012; several large projects will help in Waning stimulus support, combined with tough state fiscal environment has dampened construction near term. Fiscal 2012 appropriations – federal highway funding cut 5% to $39 billion. Some additional funds provided for disaster relief reconstruction. MAP-21 (Moving Ahead for Progress in the 21 st Century) will keep transportation funding at current levels through Contains mechanisms to “stretch” funding. Federal funding for highways and bridges will not be hit hard by budget sequestration, since funding comes via Highway Trust Fund. Added lift in 2013 could come from large projects, including a portion of the $3 billion Tappan Zee Bridge project in New York. Highways and Bridges 2009 $57.2 bil. +8% 2010 $59.5 bil. +4% 2011 $56.8 bil. -5% 2012 $52.4 bil. -8% 2013 $53.8 bil +3% U.S. Public Works – Highways and Bridges

29 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Environmental public works adversely affected by tight budgets. Projects generally take longer to reach construction start stage compared to transportation work. Construction often the result of EPA mandates to local governments. Budget sequestration will hit environmental projects harder than transportation work. Environmental Public Works 2009 $36.6 bil. -5% 2010 $33.2 bil. -9% 2011 $31.5 bil. -5% 2012 $28.8 bil. -9% 2013 $28.1 bil -2% U.S. Public Works – Environmental

30 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Diverse set of project types can be volatile; rail-related work picked up in Includes site work, rail-related work, pipelines, airport runways, outdoor sports stadiums. Pipelines strengthened though 2010, retreated in 2011, made partial rebound in 2012 with segment of Keystone oil pipeline. Will the major part of the Keystone oil pipe start in 2013? Mass transit account has fared relatively well, raised 5% for fiscal year In 2012 – numerous rail projects – - $877 mil. RTD Eagle commuter rail in Denver CO - $326 mil. Metro Gold Line in Pasadena CA -$280 mil. Warm Springs St. Ext. in Fremont CA High-speed rail plans? Received zero federal funding for fiscal 2012, but still has support of Obama Administration. California high-speed rail project in progress. “Other” Public Works 2009 $29.9 bil $28.1 bil. -6% 2011 $18.1 bil. -36% 2012 $23.1 bil. +28% 2013 $22.4 bil -3% U.S. Public Works – “Other” Public Works

31 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. New electric utility starts reached record high in 2012; downturn now underway. Energy Bills of – provided tax incentives for electric utilities, transmission lines, etc. Stimulus act also provided boost – incentives for alternative sources of electricity generation. Capacity utilization was at 87% for 2007; utilization retreated to 74% in 2012, reflecting surge of new plants. Gas-fired plants strong in Vogtle and Summer nuclear plants (at $8.5 billion each) started in Prospects for nuclear plants being re-evaluated, however. Alternative energy power plants very strong – 2010 up 124% and 2011 up 55% But 2012 down 38%. Loan guarantees extended another year. Power lines also strong – 2010 up 52% and 2011 up 8%. But, 2012 slipped 12%. Electric Utilities 2009 $21.1 bil. -37% 2010 $28.6 bil. +36% 2011 $43.8 bil. +53% 2012 $48.4 bil. +11% 2013 $32.0 bil -34% U.S. Electric Utilities

32 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Billions of Dollars U.S. Total Construction Starts for 2013

33 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Total Construction in 2012, by State %ch %ch $ Bil. 12/11 12/05 FL $ % -61% GA % -29% SC % +25% NC % TN % -32% AL % -34% Total $ % -41% The Southeast Region (FL, GA, SC, NC, TN, AL) Comparing the pattern of total construction starts to the U.S.

34 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Florida Pluses: Still a leading retiree and tourist destination. Strong international ties, particularly to Latin America. Georgia Pluses: High population growth. Strong potential in trade and distribution. Growing auto manufacturing industry. North Carolina Pluses: Important high-tech base. Universities that attract tech firms and professionals. The Southeast Region The employment decline in the Southeast during was generally steeper than the U.S. Job growth in close to U.S.

35 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Single Family Housing in 2012, by State Units %ch %ch (thous.) 11/10 11/05 FL % -79% NC % -64% GA % -80% TN % -63% SC % -64% AL % -59% Total % -73% The Southeast Region Single Family Housing now heading upward.

36 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region – Recent Large Projects Multifamily Housing and Commercial Building

37 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region Multifamily Housing and Commercial Building

38 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region – Atlanta Metro Area Multifamily Housing and Commercial Building in the Atlanta metro area

39 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region – Recent Large Projects Institutional and Manufacturing Buildings

40 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region Institutional Buildings

41 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region Airport-related Work and Manufacturing Buildings

42 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region – Recent Large Projects Public Works and Electric Utilities

43 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. The Southeast Region Public Works and Electric Utilities

44 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Billions of Dollars Southeast Total Construction Starts for 2013

45 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Note: the 2011-?? Cycle includes historical data and estimate for Points of Perspective – U.S. Construction

46 McGraw Hill Construction Confidential. All information McGraw Hill Construction, All rights reserved. Note: the 2011-?? Cycle includes historical data and estimates for 2013 Points of Perspective – U.S. Construction

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