The following is an overview of construction activity levels in the U.S. It will focus on key type-of-structure categories and attempt to answer where they are headed over the next couple of years, and with what degree of vitality.
In residential construction, the multi-family homebuilding segment has returned to a level of starts on a par with before the Great Recession. Single-family groundbreakings, while considerably better than they were in 2010, are still languishing below their previous ‘norm’.
There remains a great deal of lost ground to be made up in single-family construction. Many analysts are fond of calling this an accumulation of pent-up demand.
Also, a key demographic factor will soon play a role in lifting the single-family market. To this point in their lives, millennials, when they have moved out of their family homes or college dormitories, have tended to favor rental accommodation.
They’ve taken on financial commitments in areas such as electronic gaming and student debt that have pushed aside home ownership. Hopping aboard public transit or walking or biking to work from where they live, often in urban cores or on high-tech campuses, has helped establish their sensitive-to-the-environment credentials.
Speculation is heating up, though, that as millennials increasingly bond or marry and start raising children, they will, like their parents before them, exit to the suburbs, where plots of land provide yards for playing and gardening. Single-family accommodation has traditionally been viewed as healthier for child-rearing.
While this trend will fuel growth in single-family homebuilding in the next several years, it may not become as pervasive as in times gone by. There’s now a lot to like about downtown living, even with children in tow, as attempts by civic leaders to reduce pollution and crime have met with success. Also, the excitement that comes with near-at-hand cultural, entertainment and shopping venues is undeniable.
Over the next several years, single-family homebuilding will almost certainly forge ahead faster than the multi-family market, but the latter may show a liveliness that will catch many by surprise.
Something to watch for concerns the expiry of the 2006 softwood lumber agreement (SFA) between the U.S. and Canada. Its lapse will lead to a heating up of legal action to keep out forest products from north of the border. New home purchasers won’t cheer one consequence, higher building costs.
In nonresidential building construction, a logical kick-off point is the retail category. Since the Great Recession, the nation’s headline unemployment rate has fallen by half. It now sits slightly below 5.0% versus an ugly extreme of 10.0% in October 2009. The improvement in the availability of jobs, augmented by a slow but promising uptick in incomes, has provided a boost to consumer spending.
At the same time, retail sales over the Internet have been surging. They’ve established a growth rate approaching +10% per year since 2000. As result, many ‘bricks and mortar’ retailers have been forced to undertake unpleasant cost-cutting measures, which have included the closures of numerous outlets.
Nevertheless, ‘actual’ retail construction has managed a growth pattern that has been unexpectedly upbeat. The savviest of shopkeepers have learned that to attract clientele, it helps if they offer visitors a memorable ‘experience.’ In-store owner-doggie spas at PetSmart and yoga classes at Lululemon locations are two examples.
In keeping with the recent encouraging numbers on the economy and jobs, consumer confidence has perked up nicely. The Conference Board’s Confidence Index soared to 107.1 in November from 100.8 in October. (The base is 1985 = 100.0.) This is especially good news heading into the all-important holiday shopping season.
The Conference Board says the survey behind the November result was conducted before the Presidential election. But in its press release, it adds that there are early indications the improved optimism has not been greatly altered by the outcome of the vote.
GDP growth in the third quarter of this year (annualized) was recently upgraded to +3.2% from +2.9% by the Bureau of Economic Analysis (BEA). As gross domestic product continues to expand and the jobs market becomes tighter yet, with positive implications for earnings, retail construction will continue to fuel onsite construction activity.
Warehouse construction will benefit not only from the overall growth in retail construction, but also from the underlying key shift in the sector. The rapid proliferation of web-based sales is a boon to the building of regional distribution centers. Furthermore, the swing to supply customers with goods ordered by means of laptop, tablet or smartphone apps has necessitated the establishment of fulfillment centers on a local level.
One of the next major pushes in the retail sector to take advantage of digital connectivity will be a determined effort to win orders for the delivery of groceries. AmazonFresh, Instacart and Grocery Gateway are some of the companies leading this assault.
The economies of the world are increasingly dependent on logistics. The words ‘logistics’, ‘infrastructure’ and ‘productivity enhancements’ have become synonymous. The goal of improved logistics is to move goods, services and people faster, cheaper, safer and greener. The nation that understands and adapts to this new dynamic will prosper best.
Private office building construction has been on a tear over the last couple of years. Vacancy rates have diminished to their best levels in a decade in most major urban centers. Many of the highest profile career designations that lease space have been registering strong jobs advances.
Compared with the ‘Big Dip’ in 2008-09, staffing with architectural and engineering firms, accounting and bookkeeping firms, computer and design services companies and with financial services corporations is vastly better. Only the ‘legal services’ profession stands out for its failure to recover. One possible explanation may lie with the Web. Many residential real estate transactions in America have shifted to the Internet, while also embracing a do-it-yourself methodology.
A proxy for investment in government office buildings may be found in public sector employment. From early 2010 through early 2014, the tally of workers at the combined federal, state and local levels did nothing but retreat, as a deficit and debt-reducing emphasis on ‘austerity’ − reinforced by ‘sequestration’ in Washington − took its toll.
Since the spring of 2014, government payrolls have been inching upwards. At the same time, a little more fiscal wiggle room has been emerging on account of revenue increases from income, sales and property taxes that have moved upward organically with GDP growth.
Hotels and Motels
Investments in new and renovated hotel and motel facilities is almost always highly cyclical. Recent spending by owners in the lodging sector has been on the steep upward ascent of the curve.
ConstructConnect’s hotel/motel starts were up by half in 2015 versus 2014 and the BEA’s put-in-place numbers will be ahead by almost one-quarter in 2016. Improved prosperity within the U.S. is an incentive for both business and tourism travel.
The extraordinary strength in value of the U.S. dollar relative to almost all other international currencies is one counterweight to the optimism for this sector. For foreigners contemplating a visit to the U.S., the exchange rate effect on bottom line expenses has become a discouragement.
The current buoyancy in hotel/motel construction will almost surely be winding down by 2018. Plus another factor is coming into play. The sharing economy that has given rise to such companies as Airbnb will be dampening the demand for new square footage in the lodging sector. The overall impact, however, will be determined by the degree to which renting out one’s own personal space satisfies only a niche market – i.e., long-term stays away from home.
Amusement and Entertainment
Amusement project construction should also be surfing the improving prosperity wave as well, with the caution that multiple new ‘fun’ delivery systems are blunting the need for families and individuals to leave their homes. Netflix, YouTube, Hulu and other entertainment providers are capturing ‘eyes’ like never before and virtual and augmented reality will be transporting viewers and spectators to concert halls and stadiums in cyber space.
The entertainment industry has become the prime example of an old industry that has transformed itself into a visionary new industry, and at a breakneck pace that has few discernible limitations.
Campaigning during the most recent election season made clear the fervent hope in heartland America that manufacturing jobs can be repatriated from outside the country. Proposals by the new Trump administration to lower corporate taxes and to encourage companies to bring their foreign profits home point to more funds becoming available for new capital projects in the U.S.
But some of that money will be diverted into share buybacks, dividend increases and merger and acquisition activity, none of which contributes to the construction of new square footage. There are other headwinds to the creation of new manufacturing jobs to consider as well. Much of the decline in assembly line employment has resulted from a massive shift to the usage of robotics and automation, forms of production that will only become more pronounced in the years ahead.
There would seem to be opportunities in petrochemical investment. Thanks to new hydraulic fracturing sites, the U.S. now has abundant and cheap supplies of oil and natural gas. Gas from the Marcellus shale rock deposit in Pennsylvania is even supplanting shipments from Alberta in the Ontario and Quebec industrial and home heating marketplaces.
For the first time in decades, the U.S. is exporting energy thanks to new liquefied natural gas (LNG) terminals at Sabine Pass in Louisiana and Cove Point in Maryland. Kudos should also be extended to the expanded Panama Canal which provides easier access to potential energy product customers in Asia and along South America’s Pacific Coast.
Hospitals and Nursing Homes
After the introduction of the Patient Protection and Affordable Care Act (PPACA) in 2010, investment in hospital construction flattened for five years. There was too much uncertainty concerning Obamacare’s ability to weather congressional challenges. After a Supreme Court ruling last year that largely confirmed the Act’s legitimacy, employment at hospitals started to spike and investment in the sector began a healing process.
In the new political environment since November 8, however, the Republican stance in opposition to many aspects of Obamacare is once again casting doubt on the legislation’s future and shrouding the hospital construction outlook in uncertainty.
On the upside, a reduction in government regulations, as promised by the soon-to-be-invested Trump government, will help the bottom lines of pharmaceutical companies and health care providers. And the aging of the post-World War II baby boom generation will certainly drive a need for more treatment facilities and seniors’ residential and long-term care communities.
With respect to the latter, it would be easy to overestimate the immediacy of the need. While it’s true that the head count of seniors in the population is on the rise, the number of individuals in the age cohort most likely to require specialty housing and possibly care, − i.e., those aged 80-plus − won’t begin to truly skyrocket until the mid-2020s.
Age cohort head counts will also be important determining factors in the construction of educational facilities. The number of children aged 4 to 17 in the U.S. is projected to stay relatively flat over the next ten years. This is the age group that comprises attendance in classes from kindergarten through grade 12. With the exception of the new teaching space needed in fresh residential communities, the demographic influence on elementary and secondary school construction will be muted.
Those young couples among millennials who opt to raise their children in centralized urban environments, away from the suburbs, will be looking at schools that are set up in buildings formerly used for another purpose. Examples will include closed shopfronts or maybe even a fire hall that has been mothballed. This trend is also being seen in the religious sphere where congregations are gathering in what are the seemingly most unlikely of locales.
As for young adults, aged 18 to 26, their number is going into mild decline for the next five years, before staying on an even keel until the mid-2030s. Adding to the demographic impact on registrations at colleges and universities are other attendance-depressing factors including: the low unemployment rate which is an incentive to abandon studies in favor of entering the workforce; the high cost of tuition and the burdensome worry of student debt; and the readily accessible profusion of course material, delivered by expert presenters, over the Internet.
New faculties will be built on campuses nonetheless, most likely tied to research initiatives launched by private industry wishing to collaborate with academic authorities, or funded by newly rich entrepreneurs wishing to express, through generous donations, major-league gratitude to their alma maters. It should also be remembered that with stock markets setting new record highs, accumulations of endowment moneys held by institutions of higher learning have been increasing by leaps and bounds.
Heavy Engineering/Civil Construction
The outlooks for several of the major heavy engineering/civil categories of construction will be driven by two closely-related financial considerations. Fiscal stimulus is beginning to assume some of the responsibility for economic growth, hopefully giving monetary policy a bit of a break in the process. Also, there is about to be a special emphasis on building new infrastructure and on repairing existing capital assets that are causing safety concerns. Additional investments for bridges and water supply and takeaway systems have become critically important.
President-elect Trump has indicated a desire to backtrack on some ‘climate change’ initiatives. Commitments were made to coal miners during the election to help save their jobs. Shutdowns of existing coal-fired electric power plants are sure to be stalled, but new generating capacity will almost assuredly continue to employ natural gas as a feedstock. Besides, there are the cost savings to be realized. Natural gas has become so inexpensive, it would be hard to beat.
Passage of the Fixing America’s Surface Transportation Act in late 2015 has finally established a multi-year spending framework for Washington’s transportation projects. Prior to FAST, there was a decade’s worth of temporary extensions to previous financing provisions. As was to be expected, planning suffered.
Mr. Trump, on the campaign trail, touted his plan for $1 trillion to be spent on infrastructure over the long-term. Ingenuity will be required to come up with the money. One proposal being floated is that the private sector be given incentive to undertake the work on its own. The lure initially proposed consists of over $100 billion in tax credits.
Additionally, a greater frequency of public-private partnerships (PPPs) to carry out work in the infrastructure sphere is a foregone conclusion.
There are two other matters that should be addressed in this forecast report. The interest rate story, as written by the Federal Reserve, should be one of a gradual return to ‘normalization.’
Where this may run afoul of expectations, though, is if too severe protectionist measures, in the form of exorbitant tariffs, are imposed on the imports of foreign goods. Rapid inflation may then rear up forcing the imposition of elevated and investment-inhibiting yields.
Finally, population growth in the U.S. continues to be relatively strong. Many of the world’s industrialized nations are experiencing stagnant or declining resident counts. The +0.7% per year figure for the U.S. (or +2.5 million people annually in nominal terms) implies more consumer spending, which propels GDP, and a need for housing and essential commercial and institutional support structures, which sets in motion more construction.
Table 1: U.S. Construction Spending (put-in-place investment)
(billions of “current” $s)
|Type of Construction:||2011||2012||2013||2014||2015||2016||2017||2018|
|(year versus previous year)||7.9%||6.6%||11.0%||10.6%||4.4%||6.3%||7.2%|
|Total Commercial/for Lease||88.0||96.0||104.6||126.2||143.8||168.3||186.6||196.7|
|Amusement and Recreation||16.0||15.5||15.2||16.8||19.9||21.0||22.2||23.4|
|Highway and Street||79.3||80.5||81.4||84.7||89.8||89.4||95.1||102.7|
|Sewage and Waste Disposal||22.7||22.3||22.4||23.2||24.3||21.4||22.4||23.9|
|Conservation and Development||7.5||6.2||6.0||7.3||8.0||7.3||7.6||8.0|
“Current” means not adjusted for inflation.
Data source: U.S. Census Bureau.