Construction Growth Begins to Slow

Industry set for more modest spending increases in 2017
Bethany Stough
January 16, 2017
COMMERCIAL, RETAIL, FABRICATION : CLOSER LOOK

The U.S. construction market will close out 2016 slightly higher than the previous year, with moderate growth continuing through 2017, according to industry forecasters. However, growth in 2016 was slower than expected, and the overall construction market began to show signs of deceleration after two years of steady gains.

“Total construction starts during the first half of this year lagged behind what was reported in 2015, raising some concern that the current construction expansion may have run its course,” said Robert Murray, chief economist for Dodge Data & Analytics in the 2017 Dodge Construction Outlook. “However, the early 2016 shortfall reflected the comparison to unusually elevated activity during the first half of 2015, lifted by 13 very large projects valued each at $1 billion or more ... As 2016 has proceeded, the year-to-date shortfall has grown smaller, easing concern that the construction industry may be in the early stage of cyclical decline. Instead, the construction industry has now entered a more mature phase of its expansion, one that is characterized by slower rates of growth than what took place during the 2012-2015 period, but still growth. Since the construction start statistics will lead the pattern of construction spending, this means that construction spending can be expected to see moderate gains through 2017 and beyond.”

Kermit Baker, chief economist for the American Institute of Architects, attributes the volatile growth in part to poor business investment numbers. “The gross domestic product numbers in the United States are reasonably disappointing,” he said, during the Nov. 17 webinar, Post-Election Outlook for Design & Construction, presented by ConstructConnect. “The softness in the economy is due to weak numbers in business investing. We had a major decline at the end of 2015 and into 2016, and quarters two and three were positive, but disappointing. This is holding us back, including construction.”

The Dodge Outlook report, released in October 2016, predicts a slight uptick in total U.S. construction starts for 2016, with gains of only 1 percent for the year, following double-digit gains of 11 percent in 2015. For 2017, the report projects that construction starts will post stronger single-digit growth, advancing 5 percent to $713 billion.

ConstructConnect adjusted its forecast due to the softness of the market during 2016. However, it still offers a slightly more optimistic forecast for construction than Dodge, with expected growth of 6.2 percent in 2016 and 6.8 percent in 2017, said Alex Carrick, chief economist for the organization during the Nov. 17 webinar. Although “construction really has not come back as we would have expected [in 2016],” there are still many things to like about the U.S. economy, he said. The market is “still doing better than other places. … [We’re] still talking about pretty decent growth in construction,” he said.

Nonresidential construction

By segment, nonresidential construction will post gains of about 5 percent for 2016, according to forecasters. Total nonresidential building construction spending was up 5.6 percent in September, and the segment will experience 5 percent growth overall by the year’s end if similar trends continue, according to Baker’s forecast. By building sector, multifamily made a full recovery to pre-recession levels in 2016, and exceeded spending of the last cyclical high, at $62 billion for the cycle, according to Baker. The commercial/industrial sector grew 10.1 percent as of September 2016. Institutional construction spending saw modest growth at 1.2 percent (See Figure 1).

The American Institute of Architects Consensus Construction Forecast offers similar projections, with an expected 5.8 percent gain for total nonresidential construction spending in 2016 followed by 5.6 percent gains in 2017. By segment, commercial construction, which experienced an estimated 11.7 percent bump in 2016, will see a much lower 6.5 percent increase in the coming year. Institutional construction spending saw a 4.5 percent increase in spending in 2016, with a forecast 5.8 percent increase in 2017, according to the AIA (See Fig. 2).

Commercial

Commercial building will increase 6 percent in 2017, on top of the 12 percent gain estimated for 2016, according to the Dodge Outlook forecast. Office construction, much of it mixed-use, is showing improvement from very low levels, lifted by the start of several signature office towers and broad development efforts in downtown markets. Employment in this sector is above pre-recession levels, which increases demand for more construction, according to Carrick.

Store construction should show some improvement in 2017 after a subdued 2016. The hotel/motel market is highly cyclical. In 2015, the put-in-place numbers for hotel/motel construction were up 50 percent, and just 10 percent in 2016. This category faces headwinds due to a strong U.S. dollar, which decreases the number of foreign visitors to the United States, according to Carrick.

More growth is expected for the amusement category (convention centers, sports arenas, casinos) and transportation terminals. As jobs and incomes increase, more money is spent on fun, which translates to more construction, according to Carrick.

Institutional

Forecasts for the institutional sector are mixed. According to the Dodge Outlook, the sector, including healthcare and educational building, will advance 10 percent, resuming its expansion after pausing in 2015 and 2016. This growth projection is based on the educational facilities category seeing an increasing amount of K-12 school construction, supported by the passage of recent school construction bond measures, according to the Dodge forecast.

However, Carrick notes the stagnant growth within healthcare building since the introduction of the Affordable Care Act. “There has been some expectation that it would pick up, but with the recent change in government, a lot of those predications have been thrown to the side,” Carrick said.

Complicating the forecast further are employment numbers in the sector. Employment in higher education has leveled off, decreasing demand for construction. However, according to Carrick, joint research projects in the private sector and donated buildings on college campuses are growth areas.

Multifamily

After years of stronger growth, multifamily housing will slip in 2017, with unit construction falling 2 percent to 435,000, according to Dodge. According to Murray, this project type now appears to have peaked in 2015, lifted in particular by an exceptional amount of activity in New York City, which is now settling back. The retreat at the national level, however, will stay gradual, due to continued growth for multifamily housing in other metropolitan areas, along with still generally healthy market fundamentals, according to Murray.

New administration

How will the moderating growth within the construction industry be affected as the U.S. presidential administration changes? Historically, once a presidential election has passed, the uncertainty within the economy subsides. However, much uncertainty remains following this election, including uncertainty within the construction industry, according to forecasters.

“The election of Donald Trump as President of the United States is throwing many of the preconceived notions about where the U.S. economy might be heading into doubt,” said Carrick. “Mr. Trump’s plans to apply fiscal stimulus through tax cuts and infrastructure spending, along with more than a hint of higher duties to limit the importation of foreign goods from some countries, are implying a spur to inflation ... Higher yields make it costlier to finance debt.”

Even with the uncertainty, forecasters at Dodge welcome the election of Trump as a potential boon for the U.S. construction industry, as his background in construction and real estate development may give him a better understanding of construction’s vital role in economic growth, according to Dodge forecasters.

The AIA’s Baker suggests watching the following topics as the new administration begins to lay out its plans:

  • Trade policy, which affects the price of materials and products, causing a need for higher price for imports; creates less competition
  • Immigration policies, which feed into labor force issues
  • Tax reform, which is expected to lead to lower corporate tax rate and more investment in the economy
  • Infrastructure spending, which is a top priority for this administration and would both boost the construction industry while exacerbating the labor issue
  • Reduced regulations, which could lower costs and speed processes
  • Finance reform, which could include a rollback in Dodd-Frank provisions and potentially ease up capital for banks and other lenders.

In the Construct Connect webinar, the economists emphasized that any predictions of how a Trump presidency could affect the construction economy were not set in stone. It is still an open question as to what specific programs and funding will be put in place.

“It’s too early to make predictions on direct impacts [of a Trump presidency], but we do have a sense of where the construction industry might be headed,” said Baker.

Stough is managing editor for Glass Magazine, GlassMagazine.com and e-glass weekly. Write her at bstough@glass.org.