Much as Standard & Poor's Ratings Services expected, commercial construction activity declined in the latter half of 2008, primarily because of the normal lag after a residential downturn. However, this drop was much faster and deeper than previously anticipated. As a result, U.S. building-materials companies are now grappling with continued depressed residential end markets and rapidly falling commercial construction activity.

Residential construction remained exceedingly weak in 2008, with housing starts falling nearly 75% from their peak in 2005. Commercial construction, which was strong throughout the first half of 2008, began to sharply decline following the disruptions in credit markets in late September.

The forces creating the sharp downturn in commercial end markets for building-materials companies raise some important questions for the sector. Here are some answers, from Standard & Poor's Ratings Services:

How will the steep decline in commercial construction affect Standard & Poor's outlook for building materials companies and the ratings on these companies?

Clearly, the downturn in residential and commercial construction end markets has contributed to a negative trend in the credit ratings of building-materials companies. As of Apr. 27, 2009, 75% of the global industry's approximately 34 total rated building-materials companies had a negative outlook or were on CreditWatch with negative implications. In addition, we rate three companies D or SD [selective default]. Furthermore, since the start of 2009, Standard & Poor's has taken 25 negative rating actions on building materials companies.

Companies that strongly depend on commercial construction are likely to experience more ratings pressure over the next several quarters because we expect their end markets to continue to deteriorate. We do not forecast credit quality to improve until residential construction activity begins to pick up toward the end of 2009 and commercial end markets begin to improve in the latter part of 2010. We anticipate that U.S. government stimulus spending will help soften the decline in commercial construction but likely won't meaningfully affect building-materials companies' operating conditions until 2010. As a result, even those companies that serve diverse end markets will probably see their ratings slip.

What are your estimates regarding the extent of decline in commercial construction over the next few years? Why has the decline been faster and deeper than originally expected?

Standard & Poor's economists forecast the current recession to be the deepest and longest since the Great Depression, with a sluggish recovery beginning in late 2009. We estimate real gross domestic product will decline 3.0% in 2009, followed by 1.4% growth in 2010. While we expect economic output to start recovering in 2010, we project nonresidential construction activity to be down 20.9% in 2009 and another 10.3% in 2010.