Nonresidential construction in full recovery mode

Submitted by digital on Fri, 07/24/2015 - 17:13
{"version":"0.3.0","atoms":[],"cards":[],"markups":[["a",["href","https:\/\/\/watch?v=zrtfXDk0L8A","target","_new"]],["em"],["a",["href","\/econ","target","_new"]]],"sections":[[1,"h2",[[0,[],0,"A more balanced market should produce healthy growth in 2015 and 2016"]]],[1,"p",[[0,[],0,"After several years of high hopes for stronger construction numbers\u2014and ultimately disappointing results\u20142014 turned out to be a pleasant surprise in terms of the volume of construction activity produced. Total spending on nonresidential building increased more than 7 percent for the year, with commercial and industrial activity each up by more than 15 percent for the year. Office\/hotel construction each grew by more than 18 percent and industrial activity by almost 16 percent, with retail activity the laggard but still posting a 12 percent spending gain. Institutional activity, however, remained unable to move into positive territory. Overall spending for this sector declined by 1 percent, with healthcare down 6 percent and education construction up a modest 0.6 percent for the year. "]]],[1,"p",[[0,[],0,"The expectations for this year are for each of the major sectors to see gains. According to the American Institute of Architects Consensus Construction Forecast Panel, overall spending on building is projected to increase almost 9 percent this year, with commercial activity up 12 percent and manufacturing up 22 percent. Institutional buildings will finally post a modest gain of just under 3 percent this year, still the best performance for these facilities since the downturn. Next year is expected to see further improvement in nonresidential construction activity, with overall growth of 8 percent. The growth rate for commercial and industrial activity is expected to be just at the double-digit level. Growth in institutional spending will increase to almost 6 percent\u2014double its 2015 pace\u2014with mid-single-digit gains expected in both the education and healthcare sectors. "]]],[1,"h3",[[0,[],0,"2015 Looks To Be Picking Up Momentum "]]],[1,"p",[[0,[],0,"In spite of challenging weather conditions across major regions of the country so far this year, the construction sector has performed surprisingly well to date. Through the first five months, overall nonresidential building activity was up 16 percent, paced by an 18 percent increase in commercial construction activity, and an unsustainable 55 percent increase in manufacturing construction spending. Recent manufacturing construction activity is heavily concentrated in the chemicals area, often related to the recent surge in domestic oil and natural gas production. Just as significant, institutional construction spending grew almost 5 percent, as compared to the same period in 2014. While the amusement and recreation category (often sports facilities) paced the gain, the much larger education and healthcare sectors also posted small gains in the year-to-date figures."]]],[1,"blockquote",[[0,[],0,"2014 turned out to be a pleasant surprise in terms of the volume of construction activity produced."]]],[1,"p",[[0,[],0,"The AIA\u2019s Architecture Billing Index (ABI) points to further growth in construction activity. The second half of 2014 showed very healthy ABI readings; however, the first four months of this year posted relatively soft ABI scores. The May figure of 51.9 showed some improvement, while June\u2019s 55.7 reading represents the strongest growth in design activity since mid-2007. Since the ABI leads construction activity by nine to 12 months on average, coming quarters would be expected to see relatively strong levels of construction. Moving beyond that, the AIA\u2019s new design contracts index, which measures new project activity coming into architecture firms, has also been very healthy, with scores that have generally been at or above those of the ABI over the past 12 months. "]]],[1,"p",[[0,[],0,"While the overall ABI has reported healthy readings, the various construction sectors have seen different trends recently, with the residential index declining, the commercial\/industrial index trending up, and the institution index seeing very strong growth. The slowdown in the residential index may suggest an impending flattening in the construction of high-end custom homes, as well as some cooling of the red-hot multifamily market. The commercial\/industrial ABI scores suggest continued growth but at a more modest level, while the strong acceleration in the institutional ABI points to impending strong growth for these facilities. "]]],[1,"h3",[[0,[],0,"Economic Trends"]]],[1,"p",[[0,[],0,"Most major U.S. economic indicators point to healthy growth in the coming quarters. Employers have added over 1.3 million net new payroll positions through the first six months of the year, suggesting that annual gains will be in the 2.5 to 3.0 million range, which is a very healthy pace of increase. The current pace of growth helped bring the national unemployment rate down to 5.3 percent in June, from 5.7 percent in January. The construction sector has added about 140,000 jobs so far this year, pulling the unemployment rate down to 6.3 percent in June for this sector from a rate of 8.2 percent a year ago and 9.8 percent in June 2013. The unemployment rate for construction has fallen so sharply that labor availability has become one of the most pressing concerns for the industry. "]]],[1,"p",[[0,[],0,"Even the sluggish housing sector is beginning to respond. Housing starts for the second quarter of this year averaged just fewer than 1.15 million units at a seasonally adjusted and annualized rate, after totaling just 1.0 million in 2014. While much of the growth has come from the multifamily side, job growth and incomes gains are likely to facilitate many renters moving into homeownership in the near future. "]]],[1,"p",[[0,[],0,"However, most of the economic news in recent weeks has focused on international events. Potential concerns include debt problems in Greece, a possible bubble in the Chinese stock market, and the looming fiscal issues in Puerto Rico, while the impending nuclear deal with Iran offers an upside possibility to the U.S. economic outlook. Even with a host of potential problems, however, the U.S. stock market has not reflected much concern on this front, and Federal Reserve Board Chair Janet Yellen continues to warn that an increase in short-term interest rates could be implemented this year, signifying a basically healthy economy."]]],[1,"blockquote",[[0,[],0,"Spending on nonresidential building should total close to $360 billion [in 2015], approaching $390 billion in 2016."]]],[1,"p",[[0,[],0,"It seems that the Greek crisis is finally coming to a resolution. While the solution is certainly not pleasant for Greece or its citizens, it should avoid major international financial turmoil. However, the more serious situation at present is China. The recent sell-off in the Chinese stock market is creating concerns as to how weak the Chinese economy really is, and the effect of this weakness on the global economy. Finally, the emerging possibility of a nuclear deal with Iran is also increasing speculation regarding the future levels of oil production. Phasing out of sanctions against Iran and freeing up frozen foreign accounts would likely add to the worldwide supply of oil and depress oil prices even more, while the unfrozen accounts would offer international export opportunities to many companies. "]]],[1,"h3",[[0,[],0,"Regional Trends Show Improvement "]]],[1,"p",[[0,[],0,"Regional construction and real estate trends are almost uniformly positive, according to the recently released "],[0,[0],1,"Summary of Commentary on Current Economic Conditions by Federal Reserve District"],[0,[],0," (Beige Book) report released on July 15 by the Federal Reserve Board. According to this report, home sales increased for most districts, although Philadelphia and Dallas reported sales were mixed, and New York reported a decline in sales volume. Most districts noted home-price appreciation. Residential construction activity varied across most of the country. Commercial real estate activity increased at a modest pace for several districts, while non-residential construction, especially multifamily, was strong in many districts. "]]],[1,"p",[[0,[],0,"Several districts, including Chicago, St. Louis, and Kansas City, indicated that commercial real estate activity was mostly positive and that it continued to increase at a modest to moderate pace. Low and declining vacancy rates were highlighted by several districts, including Chicago, St. Louis, Kansas City, and Dallas. New York reported that availability rates varied by submarket and property type. Rents were noted as being up slightly, increasing, or rising in Philadelphia, Richmond, and Dallas. Some districts, like Philadelphia and Cleveland, indicated that nonresidential construction activity continued at its previous pace, while other districts such as Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City noted an increased level of nonresidential construction activity. Multifamily construction was described as strong, elevated, robust, and picking up by several districts, including New York, Richmond, Atlanta, Dallas, and San Francisco. Commercial real estate outlooks remained fairly favorable. Philadelphia was generally optimistic; Atlanta remained positive; Kansas City expected strengthening in the months ahead; and Dallas remained cautiously optimistic. "]]],[1,"p",[[0,[],0,"Finally, lending activity increased since the last report. Real estate lending was up in half of the districts. Consumer lending, particularly auto loans, rose in several districts. Districts that reported on delinquency rates indicated that they were low. Credit quality and credit standards were mostly unchanged since the previous report. "]]],[1,"h3",[[0,[],0,"Optimism Evident in the Construction Outlook "]]],[1,"p",[[0,[],0,"Driving the growth this year is the surge of construction of manufacturing facilities coupled with continued healthy gains in the major commercial sectors: spending on offices projected to be up 15 percent this year, hotels up 13 percent, and retail facilities up 10 percent. While growth in commercial and industrial construction activity is expected to pull back just a bit next year, spending on the construction of institutional facilities is projected to accelerate, with growth of under 3 percent this year forecast to double to almost 6 percent next year. Underlying the anticipated growth in institutional construction activity is improvement in the two major pillars of this sector: healthcare and education. The aging of our population, in conjunction with the ongoing implementation of the Affordable Care Act, is generating strong demand for healthcare facilities. On the education side, growing enrollments have generated need for more space, but fiscal constraints of municipal governments have often delayed required expenditures. However, with home values recovering, so is local property tax revenue, providing a solid financial base to build new schools and renovate older ones. "]]],[1,"p",[[0,[],0,"So expect the second half of 2015 as well as 2016 to be positive for construction activity. Spending on nonresidential building should total close to $360 billion this year, approaching $390 billion in 2016. That still would leave the industry more than 10 percent below its most recent high in 2008. However, if these forecasts are achieved, spending on nonresidential building would have increased over 25 percent between 2013 and 2016, putting the industry tantalizingly close to a full recovery from this past downturn. "]]],[1,"p",[[0,[1],0,"Kermit Baker, Hon. AIA, is the AIA\u2019s Chief Economist and part of the AIA Economics and Market Research Group, which provides AIA members with insights and analysis of the economic factors that shape the business of architecture. Learn more at "],[0,[2],1,"\/econ"],[0,[],1,"."]]]]}
According to the AIA's Consensus Construction Forecast panel, overall spending on building is projected to increase almost 9 percent in 2015.
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