Making Headway

Construction to grow in 2014, despite challenging market conditions
Katy Devlin
January 31, 2014
COMMERCIAL, RETAIL, FABRICATION : CLOSER LOOK

In the face of strong economic headwinds, total U.S. construction is expected to continue its slow climb in 2014. The sector is projected to grow 9 percent to $555.3 billion during the year, up from 2013’s 5 percent year-over-year gain to $508 billion, according to the 2014 Dodge Construction Outlook from McGraw Hill Construction.

“We see 2014 as another year of measured expansion for the construction industry,” said Robert Murray, MHC’s vice president of Economic Affairs. “Against the backdrop of elevated uncertainty and federal spending cutbacks, the construction industry should still benefit from several positive factors going into 2014. Job growth, while sluggish, is still taking place. Interest rates remain very low by historical standards, and in the near term, the Federal Reserve is likely to take the necessary steps to keep them low. The bank lending environment is showing improvement in terms of both lending standards and the volume of loans. And, the improving fiscal posture of states and localities will help to offset some of the negative impact from decreased federal funding,” he said.

All figures from the Reed Construction Data forecast webinar, “The 2014 Outlook: Emerging Opportunities for Construction.” Source: Copyright © 2013 Reed Construction Data, a division of Reed Elsevier Inc.

Factors such as the standoffs in Washington, uncertainty in the European economy, and still-tight lending have muted construction growth coming out of the recession, said Bernard Markstein, chief economist for Reed Construction Data, during the “2014 Outlook: Emerging Opportunities for Construction” webinar. “Until these are resolved, there will be uncertainty,” he said. “The growth in construction is barely acceptable.”

Still, the residential, commercial and institutional segments are poised for growth in 2014, according to both MHC and Reed.

“The 2014 picture bears some similarity to what took place during 2013, with single-family housing providing much of the upward push; multifamily housing showing a slower yet still healthy rate of growth after four years of expansion; and commercial building gradually ascending from low levels,” Murray said. “One change that’s expected for 2014 is that institutional building will no longer be pulling down nonresidential building and total construction.”

Nonresidential construction

Nonresidential construction is expected to increase 7.6 percent in 2014, up from a mild 2.3 percent growth rate in 2013, according to Kermit Baker, chief economist, American Institute of Architects, who spoke during the Reed webinar. The AIA’s Architecture Billings Index, which provides an early indication of where construction activity is headed, has been in positive territory for “12 of the past 13 months,” said Baker. “We feel this is a sustained recovery in nonresidential design activity,” he explained.

Within the nonresidential segment, commercial building is projected to increase the most in 2014, with 11.5 percent gains during the year, up from the projected 8.5 percent gains in 2013, according to Baker. The Dodge Outlook provides an even more optimistic forecast for commercial building, showing 17 percent gains for 2014, following projected 15 percent gains in the segment in 2013.

Despite these gains, however, nonresidential construction remains far below pre-recessionary levels. In dollar terms, 2014 will remain 28 percent below 2007 peak levels, according to the Dodge Outlook. “The emerging recovery in nonresidential building has been extremely modest to date, particularly considering how far it fell,” said Baker.
The commercial segment faces its own challenges, including lack of financing. “Financing is still a big problem for the industry. It seems to be loosening slightly, but we’re coming out of a period of dramatic tightening,” Baker said.

Additionally, the proliferation of online purchasing has hurt the retail segment. “The shift to consumers spending more online has led to a big drop in construction of standalone shopping centers,” said Ken Simonson, chief economist for the Associated General Contractors of America, during the Reed Construction Data webinar. “We are seeing some investment in remodeling, or spending on retail housed on the first floor of multi-story residential or office buildings. But, we don’t see a comeback in overall retail spending.”

The office segment is also being hindered by “drastic changes” in office use, Simonson said. “There has been a growth in employment since 2009, but we are still below the previous peak. It seems companies that added employees just fit them into existing space,” he said. Increases in telecommuting and in-office group work spaces have cut down on office space, as have technological advances. “Law firms are getting rid of libraries; offices are eliminating telephone switching cabinets and computer rooms. … For generic downtown or suburban office spaces, there is much less happening,” he said.

Coming off of five years of declines, the institutional segment is expected to experience a slight turnaround in 2014. The Dodge Outlook is projecting 2 percent gains in the segment, while Baker’s AIA forecast shows 5.6 percent gains.

While slight gains are anticipated over the year, low levels of government spending will continue to challenge institutional building. “Public spending has declined for two years in a row, and it’s sure to decline even more,” Simonson said. “There is a lot less money going into construction, and there’s no guarantee that we’ll see state and local [government spending] rebound.”
Education construction spending, which has not expanded since 2008, will fall slightly in 2014. “Education is still on a downturn,” said Reed’s Markstein. “There is definitely some improvement in private [education] spending, but public [education] spending is getting killed. … In 2015 or 2016, we will begin to see a turnaround, but in the near term, it does not look good.”

Healthcare could be the bright spot of the institutional building segment, with increasing gains projected for 2014 and 2015, Markstein said. “I think healthcare institutions were holding back to see what was going to happen with the Affordable Care Act. Now that it’s settled, we see both hospitals and private practitioners both expanding. We are reasonably positive there,” he said.

Residential

The residential segment will continue to lead construction market growth in 2014. According to the Dodge Outlook, single-family housing is expected to rise 26 percent in terms of dollars and 24 percent in terms of units. Multifamily, which has been a relatively bright spot throughout the downturn, is expected to rise 11 percent in terms of dollars and 9 percent in units.

“Residential has been the strongest segment in recent years, fueled by the upturn in multifamily, and the resurgence of single family in the last two years,” said AIA’s Baker.

“Residential starts continue to be positive, but are still well below where we think we need to be in terms of long-term needs, particularly with single family,” added Markstein. “Single family is way off peak, even if you take out the [pre-recession housing] bubble.”
Simonson expects multifamily to continue to drive growth as more people opt for cities rather than suburbs, and renting rather than buying. “I see a lot of people not qualifying for mortgages, or holding student debt and not wanting to saddle [themselves] with a house. I see pewople less willing to trade miles for mortgages—to pay for gas for commutes,” he said. “More people are choosing to rent, to stay in cities or close in suburbs, and this will provide a continued boost to multifamily at the expense of single family.” Despite projected gains in single-family starts, Simonson expects the segment to top out at a “lower level than we saw in the last decade.”

Katy Devlin is editor for Glass Magazine. E-mail Katy at kdevlin@glass.org.