Associated Builders and Contractors (ABC) Chief Economist Anirban Basu, American Institute of Architects (AIA) Chief Economist Kermit Baker, and National Association of Home Builders (NAHB) Chief Economist Robert Dietz predicted continued growth for the construction industry in 2017 during a joint economic forecast in August.
“Revenue at architecture firms continues to grow, so prospects for the construction industry remain solid over the next 12 to 18 months,” says AIA’s Baker. “Given current demographic trends, the single-family residential and the institutional building sectors have the greatest potential for further expansion at present.”
Nonresidential: healthy but slower growth
Construction spending greatly exceeded expectations in the nonresidential market in 2015, during which most industrial and commercial construction sectors grew by 20% or more, according to Kermit Baker, PhD, American Institute of Architects’ (AIA) chief economist. After such a strong year, AIA’s Consensus Construction Forecast Panel expects construction industry expansion to be more tempered over the next 18 months.
AIA’s forecast, released in late July, projects that spending will increase just less than 6% for 2016, with next year’s projection being an additional 5.6% gain. Basu, however, provided a more conservative range of 3% to 4% growth in the coming year.
Both Baker and Basu say healthy job growth, strong consumer confidence, and low interest rates will allow some of the pent-up demand from the last downturn to go forward. However, although Baker believes high demand for hotels, office space, and amusement and recreation spaces will ensure continued growth in overall construction spending, Basu warns that these market segments may not be quite as strong going forward—there is growing concern that they are being overbuilt due to inflated demand fueled by foreign investors, which may create a bubble.
Additional issues that could derail continued expansion in the nonresidential construction sector, says Baker, include weak U.S. manufacturing output, struggling economies in key international markets, the ripple effect from England’s decision to leave the European Union (Brexit), and the typical uncertainty leading up to a U.S. presidential election that results in reluctant investors.
Residential: slow but steady recovery
NAHB’s latest forecast shows a slow but steady recovery of the housing market. Single-family production is on track to expand by more than 10% in 2016, and the currently robust multifamily sector is leveling off, according to NAHB Chief Economist Robert Dietz.
“Historically low mortgage interest rates and favorable demographics should keep the housing market moving forward at a gradual pace, but residential construction growth will be constrained by shortages of labor and lots and rising regulatory costs,” says Dietz.
In August, the NAHB/First American Leading Markets Index (LMI) showed that 146 of the nation’s 340 metro areas returned to or exceeded their last “normal” levels of economic and housing activity before the economic downturn. These normal levels are based on 2000-2003 single-family permits and home prices and 2007 employment.
“House prices are making the most far-reaching progress, with almost 97% of markets having returned to or exceeded their last normal levels. Meanwhile, 78 metros have reached or exceeded normal employment activity,” says Dietz. “Single-family permits have edged up to 50% of normal activity, but remain the sluggish element of the [LMI] index.”
In addition, 91% of markets have shown an improvement year over year. According to the LMI, the top 10 most-improving major metros are:
- Baton Rouge, La.
- Austin, Texas
- San Jose, Calif.
- Provo, Utah
- Spokane, Wash.
- Nashville, Tenn.
- Los Angeles
- Oklahoma City
Top five smaller most-improving metro markets are:
- Odessa, Texas
- Midland, Texas
- Manhattan, Kansas
- Walla Walla, Wash.
- Grand Forks, N.D.
Public: flat until funding kicks in
In late 2015, Dodge Data & Analytics predicted that the public works sector will remain flat during 2016, at $122.9 billion in total spending. Dodge analysts do not expect FAST Act funding to impact the industry in the short term. Seemingly in agreement, ABC's Basu recently said public spending will continue to be lackluster in 2017 as governors and other policymakers wrestle with surging Medicaid expenditures, underfunded pensions, and other priorities.
The good news, says Basu, is the housing sector has begun to meaningfully improve, translating into more government revenue in the form of permitting fees and property tax collections.
The Portland Cement Association (PCA) and American Road and Transportation Builders Association (ARTBA) are more confident about federal funding’s impact on public-sector construction. After a decade of short-term Band-Aid-type investments, Fixing America’s Surface Transportation (FAST) was passed in late 2015, calling for spending approximately $205 billion on highways and $48 billion on transit projects over five years. The long-term nature of this legislation provides public departments of transportation (DOTs) with the ability to plan and pay for long-range, complex highway projects. Federal funding accounts for an average of 52% of state DOT capital outlays for highway and bridge improvements, according to ARTBA.
“FAST represents an average addition of 835,000 metric tons annually to the cement industry,” says Edward Sullivan, PCA’s chief economist and group vice president. “Smaller increases will occur in the near term (370,000 tons for 2016) and larger net increases will occur in the out years of the forecast horizon (1.4 million tons for 2020).”
Additionally, ARTBA reported that eight states—Iowa, South Dakota, Utah, Idaho, Georgia, Nebraska, Washington, and Michigan—also approved a gas tax or its equivalent in 2015 to pay for transportation improvements. As a result of these new federal and state investments, ARTBA Chief Economist Alison Premo Black expects 4% growth in the transportation construction market as long as the U.S. economy continues to strengthen.
“The modest increase in federal highway and bridge investment in 2016 will help the program keep pace with changes in inflation, materials, and project costs,” says Black.
According to Black’s forecast:
- Highway and bridge construction will be uneven across the country, with programs growing in 23 states and Washington, D.C., and remaining flat in nine states.
- Highway, private driveways, and parking lot construction will increase 4.2%.
- Real growth in highway, road, and street construction is moving in the right direction, but is still years away from a full recovery, absent a major increase in investment at all levels of government.
- Contractors will have an additional $45.7 billion in business opportunities from private highway and bridge work that is completed as part of housing developments and larger commercial structures, separate from parking lots and driveways. This is up from an estimated $42.6 billion in private work in 2015.
- Bridge and tunnel construction will remain strong, accounting for more than 37% of all highway and bridge work over the next five years.
- Light rail, subway, and railroad construction will be down slightly in 2016, but should resume growth of close to 3% in 2017 as the economy grows and federal investment (FAST Act) levels become stable.
- Investment in airport runways is expected to grow from $5.8 billion in 2015 to $6 billion in 2016, and terminal construction will grow from $5 billion to $5.9 billion. Terminal work over the next five years is forecast to reach $8 billion, the same investment levels before the market downturn that started after 2009.
FAST Act paves way to new markets
The first long-term U.S. transportation spending package since 2005 just may be a game-changer for concrete producers willing to expand into new markets.
In late 2015, President Obama signed into law the five-year, $305 billion highway bill, Fixing America’s Surface Transportation (FAST) Act. Paid for with gas tax revenue and $70 billion in offsets from other areas of the federal budget, the legislation calls for spending $205 billion on highways and $48 billion on transit projects. Perhaps more important, the FAST Act ensures a more stable financing environment for state and local governments, enabling their commitment to longer-term projects.
Many of the companies who made TCP’s Top 10 Producers list, including Vulcan Materials and Martin Marietta, anticipate financial gains through projects funded by the FAST Act. PCA also predicts that cement manufacturers will see steadily rising cement consumption , with the largest impact coming from authorizations by the Federal Highway Administration.
Almost one-half (49%) of producers say infrastructure (roads, bridges, water/wastewater) and government, educational facilities are among the best-performing markets this year. Yet only 7% say the FAST Act will impact their business. Perhaps it is time for more producers to look at the pavement beneath their trucks.
Streets, roads, parking lots
According to the National Ready Mixed Concrete Association (NRMCA), concrete streets and roads represent an untapped market in many regions. For this reason, NRMCA offers tools and resources —including a free Webinar series—to members and their partners to assist in promoting concrete roads and streets to local markets and transportation department decision-makers.
Another tool to help promote the use of concrete in road construction is a video showing the results of a 10-year pavement study conducted by the Ohio Department of Transportation (ODOT). On a section of U.S. Route 30 in Ohio, two eastbound lanes were placed with concrete while two westbound lanes were surfaced with asphalt. ODOT compared the cost and durability of each material and found concrete to be the clear winner. While the asphalt pavement required several repairs and resurfacing over the years, no repairs were needed for the concrete pavement. The video was released by PCA in March.
Additionally, the advantages of pervious concrete as a low-cost stormwater-management system have enabled producers to compete for the parking lot market, where asphalt has historically been the pavement of choice. For more on pervious concrete in parking lots, read this article published by TCP in November 2015.