U.S. Construction Outlook Heading into 2017
by Jonathan McGaha | January 3, 2017 12:00 am
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.
Residential Construction
In residential construction, the multifamily homebuilding segment has returned to a level of starts on par with before the Great Recession. Single-family ground breakings, 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 multifamily market, but the latter may show a liveliness that will catch many by surprise.
Retail
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 percent versus an ugly extreme of 10 percent 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 percent per year since 2000. As result, many brick-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.)
GDP growth in the third quarter of this year (annualized) was recently upgraded to +3.2 percent from +2.9 percent by the Bureau of Economic Analysis (BEA). As GDP continues to expand and the jobs market becomes tighter yet, with positive implications for earnings, retail construction will continue to fuel on-site construction activity.
Warehouses
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.
Office Buildings
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 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.
Manufacturing
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 incoming presidential 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, Canada, in the Ontario and Quebec industrial and home heating marketplaces.
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 U.S. 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 Nov. 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.
Schools
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 10 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 other purposes. Examples will include closed shop fronts 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.
# # #
Alex Carrick is chief economist for CMD, Norcross, Ga. He is an awarded author of thousands of articles and is regularly quoted by major news outlets.
Source URL: https://www.metalarchitecture.com/articles/us-construction-outlook-heading-into-2017/