Construction economics never rests.
As the economic winds continually shift, we’re tapping into a wide range of professional opinions to present (as best we can) a construction economic forecast for the remainder of 2016. Each year, CMD iSqFt brings together three construction economists to provide insight into construction’s economic fortunes:
Chief Economist with the American Institute of Architects
Chief Economist with the Associated General Contractors of America
Chief Economist with CMD iSqFt
Their predictions, and the background information supporting them, are provided here, along with perspectives from the Associated Builders and Contractors, Oxford Economics, the Procore Construction Health Indicator, the National Association of Homebuilders, the Equipment Leasing and Finance Association, the Equipment Leasing andFinance Foundation, ADP, HomeUnion, Morrissey Goodale, LLC, and PricewaterhouseCoopers.
The Industry Overall (Average of forecasts 9.2% growth)
Kermit Baker, Chief Economist for the American Institute of Architects, reported on the institute’s Architectural Billings Index, an indicator that provides a view of construction’s fortunes about a year in advance. He said that, while the index was in positive territory for the past three and a half years, the numbers now suggest a period of slower growth for the industry.
Ken Simonson, Chief Economist for the Associated General Contractors of America, reported the results of the association’s recent membership poll, which asked what they expected for dollar volumes of projects to bid in the coming year. This year, 44% said they expected more work to bid on, while 9% expected less. When asked about their expectations for 12 specific sectors, each sector except federal construction was projected to have growth in 2016. Simonson said he expected the results would have been even more positive had the survey taken place later in the year, after Congress passed the latest funding bill. Simonson predicted overall construction spending growth in 2016 would be a little bit less than 11%, and less strong in 2017, but still in positive territory. He predicts the money will be well distributed across residential, private nonresidential, and public construction.
When asked about their expectations for 12 specific sectors, each sector except federal construction was projected to have growth in 2016.
Alex Carrick reported that the CMD and Oxford Economics forecast for total construction spending growth in 2016 is 7.4%.
A weak global economy, slipping corporate profits, and government indecision are the headwinds.
Nonresidential construction spending is expected to see growth in the upper single digits in 2016, but with some signs of weakening. Trends are developing right down to the city level. Prices are firming up and vacancy rates are dropping in sought-after city center locations partially due to a weak global economy, slipping corporate profits, and government indecision.
In March, the Associated Builders and Contractors Inc. reported strong momentum in nonresidential spending. January spending on nonresidential construction hit the $700 billion mark; a number not seen since March 2009. The news capped a string of improved industry indicators, including improved contractor backlogs and stable measures of industry confidence. At that time, however, Anirban Basu, Procore Chief Economist, remarked that even though nonresidential recovery was holding, the overall outlook for the industry was still dicey due to the weak global economy and corporate profits slipping at domestic corporations.
Multifamily is currently 40% above its pre-downturn high, and has rebounded very strongly.
The nonresidential construction sectors that were expanding in January included highway and street, sewage, amusement and recreation, conservation, lodging, religious, manufacturing, power, water supply, and office. Sectors facing headwinds included commercial, education, transportation, healthcare, public safety, and communication.
Even though nonresidential spending dipped in February, 16 nonresidential sectors saw gross growth. Recreation, lodging, water, office, transportation, healthcare, and public safety had spending increases on a monthly basis. Sectors with decreasing spending included educational, communication, sewage, conservation, religious, and manufacturing, as reported by the ABC.
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March saw nonresidential construction spending slip again with a 0.4% decline on a monthly basis. However, year-over-year spending was up by 8.3%, with eight nonresidential subsections showing monthly spending growth, and 12 increasing over a year ago. Basu attributed the declines to US corporations remaining hesitant to invest in large- scale projects because of slow growth in corporate profits, and “hesitant government agencies.” Water, conservation, and public safety in particular saw declines year over year largely because they depend so much on public sector budgets.
The Dodge Momentum Index, a monthly measure of nonresidential building projects in the planning stages, declined 7% in March from its revised February reading. This is the first time the index had retreated in three months, however, the up and down swings during the past year have mirrored the economy’s growth pattern. A decrease in institutional planning was behind most of the March decline. The index in March was even with March 2015, according to Dodge Data & Analytics.
January spending on nonresidential construction hit the $700 billion mark; a number not seen since March 2009.
Kermit Baker, Chief Economist with the American Institute of Architects, talked about trends in the commercial real estate market to provide background for nonresidential forecasts for the rest of 2016. He contrasted multifamily property value growth with that of commercial properties.
Multifamily is currently 40% above its pre-downturn high, and has rebounded very strongly. Commercial property values, however, are currently 10% above their previous highs—growing much less dramatically than apartment properties.
Baker said there isn’t any evidence of overheated prices on the broader commercial side of the market, and highlights the wide variation in vacancy rates across the country to illustrate the regional trends at play. However, the trend toward central city locations has caused prices to rm up, and lowered the vacancy rates in those commercial facilities in downtown locations. The commercial market is also showing signs of weakening in suburban locations, suggesting commercial market trends are not purely driven by regional dynamics.
For trends in nonresidential, residential , materials, employment, capital investment, and mergers and acquisitions download the full eBook here.