Steady construction growth forecasted for 2015

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["strong"],["b"],["em"],["i"]],"sections":[[1,"p",[[0,[],0,"Last year finished stronger than expected for the\nnonresidential building construction market. While severe weather conditions in\nmany part of the country got construction activity off to a slow start, a\nstrong finish pushed spending on buildings up an estimated 6 percent in 2014.\nCommercial construction spending increased by nearly 15 percent, and growth in\nindustrial construction increased by almost as much. However, the institutional\nsector continued to disappoint, as spending declined again for the year,\nalthough it appeared to be nearing a bottom."]]],[1,"p",[[0,[],0,"For the coming year, prospects look to continue to\nimprove, with overall growth projected to increase almost 8 percent. Commercial\nand industrial activity will again pace the upturn, with both sectors projected\nto grow at a double-digit pace. However, institutional activity is expected to\nreturn to the positive column, with spending gains of 5 percent. Next year is\nprojected to be almost a carbon copy of 2015, with overall spending gains\naround 8 percent, commercial\/industrial growth again in double digits, and\ninstitutional activity improving by another 5 percent."]]],[1,"p",[[0,[],0,"These are some of the key findings from the American\nInstitute of Architect Consensus Construction Forecast conducted in December\n2014. Based on projections from some of the country\u2019s leading nonresidential\nconstruction forecasters, the consensus is that this will be the year that the\nconstruction recovery finally reaches all of the major building sectors."]]],[1,"h3",[[0,[0],1,"Uncertainty clouds the economic outlook"]]],[1,"p",[[0,[],0,"The economy is strong enough at present to support\nadditional construction activity, and lenders seem less hesitant to provide\ncapital to the nonresidential construction sector than they did a few years\nago. Gross domestic product, the broadest measure of our economy, has been\ngrowing at around the 4 percent rate for the past three quarters. This level of\ngrowth encouraged companies to hire, as there was a net increase of almost\nthree million payroll positions in 2014, the largest yearly increase since\nbefore the dot.com recession last decade. This growth has pulled the national\nunemployment rate down to 5.6 percent, its lowest level since before this past\nrecession, while pushing up consumer sentiment scores. Rising corporate profits\nhave lifted stock prices to near record levels, which in turn have lifted\nbusiness confidence scores. And, finally, rising home values had helped boost\nlocal property taxes for many local governments, making them more willing to\nundertake expansion programs for schools and other municipal facilities."]]],[1,"p",[[0,[],0,"In spite of this impressive list of recent positive\ndevelopments that should enhance the construction outlook, there is a\ncomparable list of emerging concerns\u2014issues that are still unfolding and that\nin all likelihood will influence the construction outlook over the next few\nyears:"]]],[3,"ul",[[[0,[],0,"uncertainties in\ninternational economies "]],[[0,[],0,"potential labor\nshortages; "]],[[0,[],0,"lower energy\ncosts; "]],[[0,[],0,"rising interest\nrates; "]],[[0,[],0,"over for the\nresidential sector; and "]],[[0,[],0,"rising\nconstruction costs\u2014materials and construction labor."]]]],[1,"p",[[0,[1],1,"Uncertainties in\ninternational economies"],[0,[],0," "]]],[1,"p",[[0,[],0,"While the U.S. economy has outperformed\nexpectations in recent quarters, economies in much of the rest of the world\nhave not. One reason for this is falling oil prices, which are ultimately very\nhelpful for oil-importing countries but in the short run are detrimental to\nexporters. Additionally, weak international growth has helped push up the\ndollar relative to other currencies, which makes U.S. products more expensive\nabroad, thereby reducing U.S. exports."]]],[1,"p",[[0,[],0,"The International Monetary Fund recently released its\nWorld Economic Outlook update, which lowered projected international growth by\n0.3 percentage points both this year and next from its outlook of just three\nmonths ago. Still, international economic growth is forecast at 3.5 percent\nthis year and 3.7 percent next year, up from an estimated 3.3 percent in 2014.\nHowever, the U.S. is in the unusual position of having one of the brightest economic\noutlooks, while recent growth centers like Russia (projected GDP of -3.0\npercent this year) and Brazil (a measly 0.3 percent growth projected for this\nyear) are under performing. The entire Euro Area is expected to see another\ndisappointing year of 1.2 percent growth, after a gain of just 0.8 percent last\nyear and a 0.5 percent decline in 2013."]]],[1,"p",[[0,[1],1,"Potential labor\nshortages"]]],[1,"p",[[0,[],0,"The pool of construction workers declined substantially during\nthe downturn, as construction workers moved to other industries or simply\ndropped out of the labor force. As the construction industry has recovered, it\nhas had difficulty attracting younger, more highly educated workers as well as\nimmigrants, who traditionally account for a large share of construction\nworkers."]]],[1,"p",[[0,[],0,"Recent surveys by both the National Association of Home\nBuilders and the Associated General Contractors of America point to an emerging\nserious labor problem. The NAHB 2014 survey found that almost half of builders\nnationally reported a shortage in labor availability, matching the share of\nbuilders reporting problems in 2004 and 2005 at the peak of the last cycle\u2019s\nhome building boom. The 2014 AGC survey found that 83 percent of construction\nfirms were having difficulty filling on-site craft worker positions, such as\ncarpenters, equipment operators, and laborers, while 61 percent were having\ndifficulty filling professional positions, such as project supervisors,\nestimators, and engineers."]]],[1,"p",[[0,[1],1,"Lower energy\ncosts"]]],[1,"p",[[0,[],0,"The recent sharp drop in oil prices will help some economies and\nsome industries, while hurting others. Large oil exporters such as Russia and\nSaudi Arabia will see significant declines in revenue, while major importers\nsuch as China and the U.S. will see a boost through lower energy costs. Within\nthe U.S. economy, industries and local economies dependent on oil production\nwill suffer, while energy-intensive manufacturers and virtually all consumers\nwill benefit from lower energy costs."]]],[1,"p",[[0,[],0,"Within the construction sector, building materials with\na large energy component (e.g., concrete) will benefit from lower costs\u2014as will\nproducts and materials that are transported long distances\u2014due to lower\ntransportation costs. Construction projects related to oil extraction, one of\nthe fastest-growing nonresidential construction categories in recent years,\nwill slow as lower energy costs limit the economic viability of many projects."]]],[1,"p",[[0,[1],1,"Rising interest\nrates"]]],[1,"p",[[0,[],0,"With the Federal Reserve having ceased its purchases of long-term\nbonds and securities for this cycle, and sending signals that it will begin\nraising short-term rates later this year, higher interest rates in the near\nfuture are almost a certainty. Higher interest rates mean higher borrowing\ncosts, which would\u2014absent stronger growth in the economy\u2014no doubt slow the construction\nrecovery."]]],[1,"p",[[0,[],0,"However, interest rate increases look to be moderate in\nthe near term. Long-term rates have headed back down recently in spite of the\nFed\u2019s actions, as nervous investors look to less risky alternatives to the\nvolatile stock market. Lower energy costs will continue to moderate inflation\nthroughout our economy, giving the Fed more discretion in dealing with the\ntiming of raising short-term rates."]]],[1,"p",[[0,[1],1,"Outlook for the\nresidential sector"]]],[1,"p",[[0,[],0,"In addition to being an important construction sector,\nthe residential market generally provides important insights as to the future\npath of nonresidential building activity. Home building, fortunately, is in the\nmidst of a healthy recovery. Housing starts nationally exceeded a million units\nin 2014, the first time they have been at this level since 2007."]]],[1,"p",[[0,[],0,"In spite of the progress to date, the housing market\ndoes point to some shortcomings in the construction sector. Over the past\nseveral decades, the U.S. has averaged between 1.6 million and 1.7 million\nhousing starts a year\u2014we have a long way to go to get back to anything\napproaching these levels. Secondly, the recovery to date has been heavily\nconcentrated on the multifamily side. Multifamily starts have more than tripled\nfrom their 2009 low, while single-family starts are up less than 50 percent. To\nachieve a full recovery requires more growth on the single-family side of the\nmarket, and rising house prices, tight credit, high debt levels, low income\ngrowth, and general nervousness about owning a home have held back this side of\nthe market."]]],[1,"p",[[0,[],0,"Rising construction costs: materials and construction\nlabor. With a recovering construction market comes the risk of volatility in\nconstruction material prices. Recently, the Bureau of Labor Statistics has reported\njumps in prices for aluminum (up 11 percent over the past year), cement (6\npercent), and gypsum products (5 percent). A national construction cost index\ndeveloped by Rider Levett Bucknall reports that construction costs increased\n5.2 percent for the year ending October 2014, up from 3.6 percent for the year\nending in October 2013 and 1.7 percent for the year ending in October 2012."]]],[1,"p",[[0,[],0,"Construction material costs, with the possible exception\nof petroleum-based products, are likely to continue to be volatile but\ngenerally drift upward in the coming quarters. However, inflation in\nconstruction labor costs is a greater concern because it is more difficult to\nreverse once it gains momentum. So far, there is little evidence of rising\nlabor costs in the construction industry, but it is still early in the\nnonresidential recovery cycle. Generally, the path to labor cost inflation is\nan increase in hours worked for payroll workers (which have been creeping up\nfor construction workers over the past few years), followed by increases in\npayrolls (which also have been growing since the end of 2011), and then,\nfinally, an increase in salaries. Average hourly earnings in the construction\nindustry increased an estimated 3.1 percent in 2014 after a 2.8 percent\nincrease in 2013, according to Department of Labor data, so labor costs have\nbeen largely contained to date. However, given the concern over future labor\nshortages, labor costs could easily begin to accelerate."]]],[1,"h3",[[0,[0],1,"Optimism prevails for the construction outlook"]]],[1,"p",[[0,[],0,"On balance, the construction outlook is buffeting\nbetween positive industry fundamentals like a healthy economy, strong job\ngrowth, and healthy levels of consumer and business confidence, and the\ncautionary conditions discussed above. However, with relatively strong year-end\nresults in 2014, the AIA Consensus Forecast Panel seems to be leaning toward\noptimism."]]],[1,"p",[[0,[],0,"The recent Architecture Billings Index scores would\nsupport this optimism. Since May of last year, ABI scores have been very\npositive, so the growth in design activity in 2014 can be expected to produce\nstrong growth in construction activity this year. The recent upturn in the\ninstitutional ABI reading also suggests that the construction market should be\nmore balanced this year, with all of the major sectors participating in the\nrecovery."]]],[1,"p",[[0,[],0,"Additionally, design activity at architecture firms\nshould continue to remain strong in the coming quarters. The AIA has been\ncollecting information on new design projects coming into architecture firms,\nand most months in 2014 saw healthy growth. This is also reflected in the\ngrowing backlogs at architecture firms\u2014the length of time for which current\nproject activity would keep the staff at a firm fully employed\u2014which averaged\n5.3 months on average in 2014, up from 4.9 months in 2013 and 4.5 months in\n2012."]]],[1,"p",[[0,[],0,"So, after a strong finish to 2014 in terms of\nconstruction spending, the momentum should continue through this year and next.\nThe almost 8 percent projected growth this year, and the slightly above 8 percent\ngrowth projected for next year, come from the same sources. The commercial\nmarket is projected to increase almost 12 percent this year, with double-digit\ngrowth anticipated in the office, retail, and hotel sectors. In 2015, growth is\nprojected to continue at almost the same pace, with another year of strong\ngains in all the major commercial sectors."]]],[1,"p",[[0,[],0,"Additionally, though, this year is expected to be the\nbeginning of a recovery in the institutional sector. Overall gains are expected\nto average around 5 percent both this year and next, with all the major\ninstitutional sectors participating. The largest component, education\nfacilities, should see around 5 percent growth this year and next, after\nrecording a modest 1 percent estimated gain last year. The expectations are\nsimilar for the other major institutional sector, healthcare, which saw a\nhigh-single-digit decline in spending in 2014. Spending for religious and\npublic safety facilities should see more modest gains this year and next, while\nthe amusement and recreation sector is expected to see some of the strongest\ngrowth within the institutional category."]]],[1,"h3",[[0,[],0,"About the author"]]],[1,"p",[[0,[],0,"Ker"],[0,[2],1,"mit Baker, Hon.\nAIA, is the AIA\u2019s Chief Economist and part of the AIA Economics and Market\nResearch Group, which provides AIA members with insights and analysis of the\neconomic factors that shape the business of architecture. "]]],[1,"p",[[0,[],0,"\n\n\n\n\n\n\n\n\n\n\n"],[0,[3],1," "],[0,[],0,"\n\n\n\n\n\n"]]]]}