Sustainable Recovery

Construction headed for growth in 2016 after better-than-expected 2015
Wendy Vardaman
February 15, 2016
COMMERCIAL, RETAIL, FABRICATION : CLOSER LOOK

While the construction recovery has occurred slowly and unevenly since its pre-recession peak, 2015 experienced unexpectedly strong growth in the nonresidential building sectors with increased spending of 17.2 percent year-over-year, according to U.S. Census data through September. The year also saw the full recovery and expansion of both the multifamily and residential home improvement segments.

This growth will continue in 2016, with full recovery likely across the nonresidential sectors, according to forecasts delivered at the Nov. 19 webinar, “Construction 2016: How Sustainable is the Construction Economic Recovery?” from CMD iSqFt. As for the residential sector, forecasters expect a continued but slower increase.

“We’re finally seeing some decent numbers in this sector of the economy,” said Kermit Baker, chief economist, American Institute of Architects, during the webinar. “All major construction sectors are reporting growth—residential, commercial/industrial, and institutional—although the spike that happened from initial turn arounds for institutional and residential has dropped off,” he said. “Having all the major sectors pulling together and reporting healthy numbers means that we're going to have a good, balanced construction recovery that's going to continue.”

Nonresidential construction will see overall growth of 8.2 percent in 2016, said Baker, citing the AIA Consensus Construction Forecast Panel. Overall, the AIA forecasts “a very healthy outlook, as all sectors are firing together,” he said.

Ken Simonson, chief economist, Associated General Contractors of America, expressed a more cautious interpretation of industry data during the forecast webinar. “Construction spending has been coming back steadily since 2011, but it's still 10 percent below the peak of March 2006 in nominal dollars, which doesn't take inflation into account,” Simonson said. He also noted that the overall 11 percent increase in industry spending January through September doesn’t reflect the fact that the growth in spending May through September slowed to 2 percent. Still, he forecasted a 6 to 10 percent increase in overall construction spending for both 2016 and 2017.

Driving growth in construction is the strong overall U.S. economy, said Alec Carrick, North American chief economist for CMD iSqFt, during the webinar. “The only game in town is the U.S. economy,” he said, noting that new weekly U.S. jobless claims are now at their lowest level since November 1973, and that other economic indicators from the trade deficit to GDP and oil imports are healthy. The CMD iSqFt/ Oxford Economics forecasts predict an 8.4 percent overall growth for construction spending in 2016 and 6.8 percent growth for 2017.

Nonresidential

The commercial and industrial sectors saw a 2015 spending increase of 28 percent, surpassing predictions of low double-digit growth. During the same period, the institutional sector grew nearly 8 percent, also more than expected, said Baker, citing the U.S. Census Bureau’s report of Value of Construction Put in Place from January to September.

Growth across the nonresidential building segments was uneven in 2015, and will continue to be uneven in the coming year, according to forecasters. All segments—aside from power construction— experienced growth in 2015. However, they ranged from 5 percent growth for healthcare to 53 percent growth in manufacturing.

In the commercial sector, office construction saw a 22.9 percent increase in 2015, lodging/hotel construction was up 31 percent, and retail and other commercial grew 9.3 percent, according to the Census Bureau report.

The AGC’s Simonson noted, however, that spending levels will begin to slow for commercial construction in 2016 and forecast that by 2017 the growth rate for the hotel and manufacturing segments could decline to negative numbers. Office construction should slow to high single or low double digit growth for 2016, he said.

The AIA’s 2016 forecast reflects this as well, with office construction projected to grow 11.7 percent and retail 8.9 percent.

Growth in the institutional sector lagged behind commercial construction during 2015, with gains in the healthcare and educational segments in the single digits. According to the Census Bureau report, total institutional building was up 7.8 percent in 2015, with healthcare up 5.5 percent and educational up 5.8 percent. The only institutional segment to experience double-digit growth was amusement and recreation, up 28.9 percent.

Looking into 2016, the AIA projects the slow single-digit growth to continue for institutional building. The organization forecasts a 5.8 percent growth in healthcare construction spending and 5.9 percent growth in educational spending.

With respect to institutional building, both Carrick and Simonson noted the flattening of college and university employment and building demand, though research facilities should remain strong. While K-12 employment has grown, other needs and excess capacity mean this segment is unlikely to expand. In contrast, the aging population and lack of corresponding building suggest that hospital and health facility construction is overdue for growth, according to Carrick.

Residential

Simonson reported that multifamily construction continues to outpace single family, growing “at an astounding 27 percent growth rate,” while single family rose 13 percent, and improvements grew at 22 percent in 2015. In the year ahead, he said the growth rate for multifamily and improvements will not remain at these high levels, and issues such as high student debt, shifting preferences for cities, and delayed marriage and childrearing will continue to slow single family home buying, according to Simonson.

“The outlook for multifamily is still stronger than single family, at least through 2016,” Simonson said. The AGC forecasts residential growth between 5 to 10 percent overall, with multifamily growth of 10 to 15 percent in 2016.

CMD forecasts stronger overall growth of 15.3 percent in residential construction through 2016. Although Carrick noted pent up demand in single family housing, he added, “there's a lot of speculation that when Millennials reach the age that they start having their children, they're going to go back to the suburbs, but I'm not so sure that's going to happen. I think some of them are, but not all. There's a lot to like about downtown living.” Increased urban living means lower demand throughout the industry for building, including big box retail, schools, malls and big houses, said Carrick, who noted that the strongest growth is still in multi-use, mixing retail, residential and office building.

Both Carrick and Simonson noted that while younger workers have become more willing to sacrifice square footage and rent longer, in order to live closer to work and to cultural amenities, these shifting preferences are not limited to younger people. Those close to retirement also show a growing preference for cities.

Pre-recession levels

The spending growth across the construction industry in recent years has driven several building sectors back to near pre-recession levels. (See Fig. 1).

Construction spending for commercial and industrial building plunged from $244 billion at its pre-recessionary peak to $128 billion at the trough. Current spending levels for the sector reached $233 billion, according to Baker. Institutional building spending, which fell from $256 billion to $205 billion peak to trough, has rebounded slightly less, up to $228 billion.

“The nonresidential side is a story of two different markets. Commercial/ industrial saw a steep downturn during the recession but is almost back to where it was. 2016 should be the year when commercial and industrial activity fully recovers. Institutional didn't see the severity of the downturn, but it just really began its recovery earlier this year. So that's still in the early stages of recovery," said Baker.

Looking at the residential sector, multifamily construction spending put in place fell from $53 billion to $15 billion peak to trough. The segment has now surpassed pre-recessionary levels, with spending up to $57 billion. The home improvement segment has also surpassed pre-recession levels. Spending for the segment reached $324 billion at the peak, fell to $281 billion, and has rebounded to current levels of $326 billion.

The single family sector, however, continues to remain far below peak spending levels of $434 billion. The segment saw the most severe fallout during the recession, with spending levels plummeting to $105 billion. Spending in the segment is currently at $222 billion, according to Baker.

“The single family sector, which saw an extremely severe downturn during the recession, though we're seeing some strong growth now, has a very long ways to return to traditional levels of construction, certainly those before the recession,” Baker said.

Challenges to sustained recovery

While the U.S. economic news from 2015 and into 2016 is overwhelmingly positive, the construction industry faces one major challenge that could hinder recovery: a worker shortage.

“What could sink this recovery?” asked Baker, turning to the loss of two million jobs across the industry compared to pre-recession numbers. Given the dramatic decline in the construction industry’s unemployment rate, currently at pre-recession levels of 5.7 percent, Baker suggested that many of the industry’s workers have moved on to other jobs. Changes in the workforce since 2008 and the construction industry’s traditional hiring practices exacerbate the shortage, he said, pointing to specific trends in aging, job training, flattening immigration rates, and declining share of female workers, which has dropped from 2.8 to 2.5 percent since 2000. (See Fig. 2).

The problem is widespread in the construction industry. In a September AGC survey of members, 79 percent of 1,300 respondents reported having trouble filling hourly craft jobs and 52 percent filling salaried jobs, said Simonson. “The pool of labor has dropped to 15-year lows. If a company hopes to find an experienced worker, they're either going to have to steal them from a competitor, lure them back from another agency or start training them,” he said.

Some strategies to rebuild the workforce and compete for labor include more on-the-job training; increasing compensation; expanding legal immigration; rebuilding technical and vocational training, which contracted during the recession; strengthening apprentice programs, almost 50 percent lower than prior to the recession; and doing more to attract women, who at nearly 50 percent of the U.S. workforce, are strikingly absent in construction, Baker said. “We obviously have to change that if we’re going to rebuild the workforce,” he said.

While the worker shortage is the main concern for construction going into 2016, the forecasters indicated several other challenges that could impact the industry. Carrick pointed to other changes in demographics, social organization and behavior that have affected the construction industry across all sectors, including such trends as online shopping, high student debt and return to downtown living.

With respect to the question of when the construction industry will “return to normal,” Carrick said, “I’m not sure there is a normal anymore—we’ve all got to be faster on our feet.”

Wendy Vardaman is the assistant web editor for Glass Magazine. Contact her at wvardaman@glass.org.