A new forecast for Hawai'i's construction industry still predicts there will be less building activity in the state this year, but in a surprising twist the number of jobs is expected to be higher than last year.

The report by the University of Hawai'i Economic Research Organization projects inflation-adjusted construction spending (in 2007 dollars) will decline 1.8 percent this year to $7.61 billion from last year's estimated $7.74 billion. Next year industry spending is forecast to decline 4.1 percent to $7.29 billion.

UHERO's projection represents a small downward revision from a forecast the organization issued in September, and reflects expected reductions in residential and commercial construction offset by rising government work.

But there was unexpected behavior in the industry's job count, which over the last couple of years has continued to rise after construction permits turned down in 2005.

"The (expected job) slowing just didn't happen," said Carl Bonham, a UH economics professor and UHERO executive director.

UHERO said in its report that continued construction job growth could be from military housing renovation projects for which permits aren't required.

The report forecasts that construction jobs will rise nearly 1 percent this year to 38,200 from 37,890 last year. Next year, the industry job count is expected to decline by nearly 1.6 percent to 37,610 and move further toward 37,000 in 2010.

While the projected job increase this year, if realized, would be good for people in construction trades, the rise won't significantly affect the state's overall job count like it did in past years.

"Construction isn't the engine that it used to be," Bonham said.

UHERO's report, which was authored by Bonham and Bank of Hawaii chief economist Paul Brewbaker, characterizes the construction industry's contraction as a "soft landing" that will contribute to an ongoing slowdown in state economic growth.

However, because of rising construction costs, UHERO projects that nominal construction industry spending, that is spending that includes inflation, will be 4 percent higher this year over last year before going flat in 2009 and 2010.

Construction costs, according to UHERO, rose 8 percent last year and are forecast to rise 5.9 percent this year then 4.4 percent next year.

UHERO said the construction cycle should be stabilized by relative strength in commercial building, which includes retail, resort and industrial projects. Commercial permits are expected to be down 4.4 percent this year followed by a less than 2 percent drop next year. Over the next five years, the level of commercial permits is expected to stabilize around $1.6 billion in 2007 dollars.

Government construction projects, despite increased financing costs and slowing state and county revenues, are expected to rise from $870 million last year to near $1 billion (in 2007 dollars) for the next several years.

In residential construction, UHERO said the slowdown has been moderate compared with the sharp downturn in homebuilding nationally.

UHERO said private residential permits by housing unit are down 29 percent from a 2005 peak, with the biggest slowdowns on Maui and the Big Island. Last year the inflation-adjusted dollar value of residential permits was down 5 percent, and is expected to decline about 12 percent this year and 10 percent next year.

"Persistent unaffordability, slowing aggregate employment growth, rising construction costs, and the increased costs of financing will act as a brake on residential construction," the report said.

UHERO also projected that the median price for existing O'ahu homes this year will decline 3.2 percent to $619,000 followed by a 2.3 percent decrease next year to $605,000.

Condominium prices are projected to decline 1 percent this year to $322,000 followed by a 2.8 percent decline next year to $313,000.

"Some downward drift in home prices will occur," the report said, "but Hawai'i will avoid the large-scale contraction that is occurring in many Mainland cities that must work off home price bubbles."

Reach Andrew Gomes at agomes@honoluluadvertiser.com.