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2018 Construction Industry Forecasts: Still Growing, But Not So Fast


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Construction Overall 2018 Growth Forecasts: 

Oxford Economics and ConstructConnect
4.8%
Dodge Data & Analytics  
  3.0%
FMI Corp.
 5.0%
Portland Cement Association
3.4%


The Design View

During ConstructConnect's 2018 Design & Construction Outlook webinar held on November 1, Kermit Baker, Chief Economist for the American Institute of Architects talked about the year-to-date movements in the Architectural Billings Index. The index is a monthly survey of architecture firms, asking about revenue trends at their firms. It's compiled as an index, centered around 50. Above 50 shows a growth in design activity, while below 50—a decline in design activity. Baker said the index was trending down, beginning around mid-year 2015 and through most of 2016.

The numbers began picking up early this year and have generally remained quite strong. Baker said the AIA also tracks new project work coming into architecture firms, and it has also stayed very strong. 

"Billings will continue to remain positive for the time being, at least in our view," Baker said. "This upturn in design activity should begin to show up as construction activity over the next few months. Design activity, in our analysis, leads construction activity by nine to 12 months. So that upturn that we saw earlier this year should be reflected in an upturn in construction activity towards the end of this year or the early part of 2018." 

The places where construction is predicted to show the most growth include the South Central region with 11&, the West with 4% and the South Atlantic region with 6%, according to Dodge Data & Analytics and as reported by Engineering News Record. Construction activity is predicted to be flat in the Midwest, and to drop by 11% in the Northeast.

Reasons for Caution

Ken Simonson, chief economist for the Associated General Contractors of America, also speaking at ConstructConnect's 2018 Design & Construction Outlook webinar, illustrated construction's changing fortunes with graphs, and explained the sector still wasn't back in terms of employment. 

"The figures that came out this morning showed that the latest September to September construction spending change was a positive 2%," Simonson said. "On the other hand, the August number was revised downward. So we're really only barely where we were almost 12 years ago, and that is without taking inflation into account. So construction has been growing, but it's still a long way below where it was in terms of employment." He added that construction employment is still more than 10% below its previous peak. 

Simonson said his outlook for 2018 is that overall construction spending will stay in a low-to-mid growth range. He said, it would be a little bit better than in 2016 or 2017 at best, but that he suspected it would end up lower than that.

"The leader will be residential, specifically single-family," Simonson said. "A very mixed story on private non-residential, with recovery showing up in power construction, and a year later, if not sooner, in manufacturing. Still positive, but slower growth rates for office and warehouse construction."

Simonson also said lodging construction would cool off or even go negative, while health care would stay flat. He said that public construction would stay negative next year, except for schools, airports, and, maybe, highways. 

Construction's Overdue Downturn

Robert Murray, chief economist for Dodge Data & Analytics, said the industry's continuing slowdown suggested it was reaching its full stage of expansion. Nevertheless, he claimed, there were still factors that could fuel the expansion into 2018, such as continued job growth, only slight upticks in interest rates, and continued funding from state and local bond measures.

Amplifying the moderate view of construction's economic fortunes for 2018, FMI predicted 5% growth for five categories, with most of the rest growing roughly with the rate of inflation. The company reported that sewage and waste, and water supply were expected to decline.

Construction Inputs

Labor

"You can see the total construction jobs, they've recovered; however, they're still not as high as they were in the boom period before the recession," said Alex Carrick, North American chief economist since 1985 for ConstructConnect and CanaData, also speaking at ConstructConnect's 2018 Design & Construction Outlook webinar.

"It turns out rebuilding the labor force is a difficult process after a recession, like the Great Recession that we went through now six or eight years ago," said AIA's Baker. "I think now we're also seeing some additional challenges in terms of demographic trends that are complicating the effort to rebuild the labor force this time."

Baker said construction just isn't attracting millennials unlike the young people of the previous generations. He cited research showing that a quarter of construction's workers are immigrants, a large share undocumented. That, as he said, affects the labor picture by making the workforce more vulnerable to immigration enforcement actions and policies.

AGC's Simonson noted that even though contractors continue hiring, they aren't finding the right mix of employees.  

"70% of firms said they were having trouble filling hourly craft positions, a wide variety of positions," Simonson said, referring to survey results during the summer. "58% of those firms said they were having trouble finding carpenters; over half the firms who hire plumbers, concrete workers, electricians, and bricklayers had that problem. Nearly half of the firms said they were having trouble finding project managers and supervisors."

Simonson said contractors are resorting to raising pay, paying more overtime hours, and doing in-house training. Yet, he said, those tactics are not likely to solve the problem. He believes it's going to take labor-saving equipment, tools and machinery, and greater adoption of building information modeling to make a difference in construction. He predicted labor costs would grow three to 4% in 2018.

The Double Edge of Commodities

ConstructConnect's Carrick made the case for how big changes in commodity demands will reshape construction categories. He used the examples of copper and lithium. Electric vehicles use large quantities of both, so construction related to mining could benefit. He also explained the close link between construction's fortunes and the costs of commodities.

"China's growing about 7%, and that 7% is on a much bigger base than it used to be; that’s why China's taking about 45% of world demand of resources," Carrick said. "And the United States is less than 10%. Commodity prices are starting to increase, and when they do, that's a signal to owners in the resource sector to really start thinking about expanding the facilities they have or building new extraction sites. So that's a huge positive for construction."

On the other hand, he cautioned that as commodity prices increase, so do construction materials costs.

Materials

Simonson said he expected prices for diesel fuel, steel, copper, and aluminum mill shapes to continue going up. He said overall what contractors are charging to put up new buildings is not keeping pace with increases in input costs. He wondered about the long-term outlook and whether they would be able to raise prices, find improvements in productivity, or whether the would just end up suffering through ever lower profit margins. Goods and services inputs are expected to increase three  to 4% in 2018.

Residential Outlook  

Oxford Economics/ConstructConnect 6.7%  

Dodge Data & Analytics 4.3% 

FMI 6.6% 

Portland Cement Association 5.3%  

Multifamily  

OE/CC 2.1%  

DD&A -8% 

National Association of Home Builders -4%

Single Family    

OE/CC 8.8%  

DD&A 9.0% 

NAHB 12%

Remodeling

NAHB 3% (dropping from 6% in 2017 over 2016)

"What's happened in residential is that there has really been 10 years when housing starts have been less than the 1.4 million benchmark needed to satisfy population growth and family formations," explained ConstructConnect's Carrick. "And the accumulated shortfall is now about 5 million units. The shortfall alone accounts for three normal years of housing starts. So if housing ever really gets going, it's going to drive the economy for years to come." 

Carrick said the long-term outlook to 2021 was for residential to post gains of 6% per year, serving as the main driver of construction's growth.

Dodge Data & Analytics predicted 9% growth for the single-family housing category in 2018. It is largely due to growing incomes and people in the millennial generation entering the home buying market. Scott Volling, principal at PwC, described recent home builder sentiment as highly optimistic in light of the shortage of existing homes. He wrote in his Housing Starts report for October that the home building category could be on track for many months of gains.  

Housing affordability, though, remains a wild card in the homeownership market. Dr. Ralph G. DeFranco, global chief economist, Mortgage Services of Arch Capital Services Inc., wrote that the shortage of housing is the factor pushing up home prices faster than incomes are rising. He predicted prices and rates would continue growing and would worsen affordability going forward. 

However, the affordability picture is highly dependent on geography. Some places are already pricing many people out of the market, while others are becoming less expensive. Nonetheless, overall, most sources are painting a rosy picture for single-family home construction in 2018.

But, things aren't looking as sunny for multifamily. Reports throughout 2017 have painted a sour picture of multifamily residential construction's growth, and that trend continues.

Yardi Matrix, a business development and asset management tool for investment professionals, reported in mid-November that U.S. rents dropped by $4 in October. That is signalling a continuation of multifamily's deceleration. Steve Hovland, director of research with HomeUnion, noted that the decline in the multifamily market led to a drop in demand for new units in many urban areas. 

And, the National Association of Homebuilders predicted a multiple-year slowdown for the multifamily category starting with a -4% drop in 2018. Dodge Data & Analytics was more pessimistic, predicting a plummet of -8%. AGC's Simonson, however, came out more positive about multifamily's prospects. He pointed out that while millennials might be entering family formation years, many have also found their niche with a job or location and will want to continue renting for a while longer. 

Simonson also said that multifamily could benefit from home improvement trends with owners seeking to upgrade or turn properties into rentals. He added that tax reform could push some people out of the market for a home if it makes the home mortgage and the real property tax deductions less valuable.

Nonresidential  

OE/CC 1.9% 

AIA Consensus Construction Forecast Panel 3.6% 

AGC's Simonson 1.5%

DD&A 2.3%

FMI 5.2%

PCA 3.5%

Retail  

OE/CC -2.8%

DD&A 3.1%

ConstructConnect's Carrick talked about how the bricks and mortar category of retail is suffering with store closings and how the excess space left behind will slow new construction starts in this category. He referred to the category's growth prospects for 2018 as "quite weak."

"It's going to take a lot more than just fitness gyms and old car dealerships, and maybe even the occasional grow-op moving into those spaces before retail can really recover much," Carrick summarized.

Overall Commercial 

OE/CC 12.4% 

AIA Consensus 4% 

AGC's Simonson "less positive"

FMI 7.3%

PCA 7.2%

Private Office 

OE/CC 11.2%  

Government Office 

OE/CC 3.2% 

AGC's Simonson "less positive"

Carrick pointed out that this category's tenants are shifting from finance, legal services, accounting, and computer systems to high tech. Simonson on the other hand,  noted the big growth is in co-work spaces and in a few markets with high-rise office projects. He characterized the growth for traditional, suburban low-rise office space as "very cold." 

Hotel/Motel  

OE/CC -1.9%

DD&A -4.2%

FMI 5.1%

PCA 1.8%

"This has been very strong in terms of the construction numbers," said Carrick. "Our starts are going to hit a very high level in 2017. But then, we have it declining from that point on. This is a highly cyclical category of construction."

AGC's Simonson predicted negative growth prospects for the lodging category. He said gateway and resort markets are possibly seeing declines in visitors because of the difficulties in getting visas, hassles of getting cleared through airports, and tourists not wanting to go where they don’t feel welcomed.

Overall Industrial  

AIA Consensus 1.1% 

OE/CC -5.6%

PCA -0.2%

Warehouse 

OE/CC 4.7%

Carrick said warehouse category is expected to continue its growth trajectory led by large retailers like Walmart, Kroger, and Amazon.

Simonson said he thought the warehouse construction category would continue to feature distribution centers, click and collect points, and self-storage. Even with that in mind, he still didn't think it would outperform its 2017 growth.

Manufacturing 

OE/CC -13.8% 

AGC's Simonson "flat"

FMI 6.2%

DD&A -0.9%

ConstructConnect's Carrick said the lower capacity utilization rate for this category is inhibiting manufacturers from expanding their facilities. Other headwinds for manufacturing, in terms of employment, include robotics and automation. He said the bright spots for manufacturing included food and beverage manufacturing, motor vehicle parts, and aerospace product manufacturing.

AGC's Simonson said he thought the slump in manufacturing construction was close to bottoming out, and named several high-dollar projects and others that foreshadow a leveling out before an uptick for the category starting in 2019. 

Overall Institutional 

OE/CC 3.3% 

AIA Consensus 5.8% 

AGC's Simonson predicted "small positive" growth for health care

PCA 4.5%

Medical  

OE/CC 2.8% (Hospitals/Clinics 2.9%; Misc Medical -.03%; Nursing Homes 5.8%)

DD&A 1.9%

FMI 3.4%

Carrick said there was continuing growth prospects for this category. Yet, the political uncertainty posed a serious setback  as health care facility owners continued to worry about getting paid for the services they provided. He said that modular construction was figuring more prominently in this category.

Simonson agreed that hospital construction would remain subdued. He said more would happen with special care facilities, such as standalone emergency care centers, rehab centers, and hospice care.

Education  

OE/CC 4.2% (College/University 4.2%; Elementary 6.4%; High School 2.4%; Special/Vocational 4.1%)

DD&A 10.8%

FMI 3%

PCA 3.5%

Carrick said the construction starts in education are outperforming those in health care but he sounded cautions about education's longer term performance. The population growth of young people between four and 16 years old is slowing, and immigration is declining. The low unemployment rate is reducing enrollments in higher education.

AGC's Simonson said property tax revenues and rising prices of homes and commercial property were behind the growth in construction of primary schools. Rising property prices mean more tax receipts coming into school districts and other local governments. He said he thought the private side of higher education would do well because they rely very heavily on endowments and capital campaigns. They, which in, turn benefit from the rise in the stock market.

Simonson predicted modest growth next year even with small declines in the school aged population, and a potential decline in the number of foreign students allowed into this country or choosing to come to this country in light of the harsher immigration rules. 

Religious

OE/CC 0.7%

FMI 1.1%

PCA 0%

Civil 

OE/CC 6.6% (Bridges 10.2%; Dams/Canals/Marine Work 8.6%; Power Infrastructure -12.3%; Water & Sewage 7.2%)

ConstructConnect's Carrick highlighted the current presidential administration's strong interest in promoting utility power, oil, and gas as signs of potential growth for those categories. However, he sounded caution about the power category because of reducing demand as energy efficiency efforts start to take hold.

AGC's Simonson said that besides pipelines, natural gas power plants, and continued investment in solar and wind are fueling the power category's growth. He predicted positive growth for the power category.

Airports 

American Road & Transportation Builders Association predicted growth of 14%. 

"If you travel around the United States, almost every airport is being expanded, or there's new runways being put in, or the road systems to those airports are being fixed up," said ConstructConnect's Carrick. "So that's an area of the economy where strong growth should be for many years to come." 

"Airports are expanding and modernizing," Simonson said. "Most of that money is going into terminals to speed passage through the security lines and update the retail facilities. They're also adding gates in some places and improving the access roads, the parking structures, or the car rental facilities in some areas. And, on the air side, new control towers or deicing pads, and so forth. So that's quite a mix of things." 

Roads 

OE/CC 5.9%

DD&A 5.4%

FMI 1.8%

PCA 0.3%

ConstructConnect's Carrick explained that all levels of government are anxious to start building and repairing infrastructure, and roads are a major aspect of that. Roads often open up new land for development, and, with the emergence of autonomous vehicles, roads maintain their importance. He said new technology like sensors and monitoring systems will form an integral part of road construction.

"Highway and street construction has been quite a surprise, how negative this has been so far, down 4% through the first nine months," said AGC's Simonson. "And I no longer think it will wind up even at zero. It's going to stay in the negative column. And this is despite having something like 29 states that increased their gas taxes or other funding sources for highways. There's also been, it appears, a small uptick at least, in public private partnerships. So you would think that the highway and streets construction spending would've been higher than last year, not lower. So I have to say, this one is a bit of a puzzle. I'm holding my forecast as being flat for next year, but if I had to pick something that I may be missing the mark, I'd say highway and street could go higher in 2018." 

Alison Black, chief economist for American Road & Transportation Builders Association, also said that even with states increasing their gasoline taxes, highway, and bridge work haven't taken off. And, she said that eventually shows up at the national level.

Sports Stadiums and Convention Centers  

OE/CC -1.9%

Carrick cited new multibillion-dollar stadiums for both the Rams and the Chargers, a stadium in Las Vegas for the former Oakland Raiders who are moving there and a proposed soccer stadium in Miami, Florida, as notable projects in this category. 

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