There’s an expansion underway for the construction industry, but depending on one’s perspective it can be viewed in a variety of ways. Looking at total construction, the pattern of recovery was slow and tenuous early on, with McGraw Hill Construction reporting that total construction starts edged up just 2% in both 2010 and 2011. Multifamily housing was showing signs of life and the stimulus-supported public works sector was moving at a decent clip, but other parts of the industry continued to languish. The year 2012 brought single family housing into the recovery process, and at that point it appeared that a more typical construction upturn was taking hold. Last year total construction starts advanced 10%, lifted by healthy percentage growth for housing. This also raised the expectation that nonresidential building with its commercial and institutional sectors would soon follow in 2013, but that’s only partially materialized.

For 2013, total construction starts are estimated to rise 5% to $508 billion, and the main driver of growth continues to be housing. For nonresidential building, there’s been some lift coming from its commercial sector, but the level of activity for the commercial categories remains very low. The institutional sector in 2013 has proven to be a drag on nonresidential building for yet another year, keeping the volume of nonresidential building close to the depressed amounts reported from 2009 through 2012. In effect, the process of turning the corner for nonresidential building has been stretched out, which is not surprising given the sluggish economic conditions.

The backdrop for the construction industry remains the hesitant U.S. economy. At the outset of 2013, it seemed that some of the uncertainty affecting economic activity would ease, given the fact that the presidential election had been decided and the fiscal cliff averted. There was some dampening from the tax hikes in January and the start of the sequester in March, but the economy seemed to be adjusting. However, the prolonged Congressional impasse in October over approving federal spending for fiscal 2014 and raising the debt ceiling has dealt another blow to the economy. While the October 16 budget vote ended the government shutdown and the likelihood of default, it has contributed to more uncertainty which may prove to be persistent. The October 16 agreement, after all, only keeps the government running through January 15 and raises the debt ceiling through February 7. On a hopeful note, there have been comments from Congressional lawmakers that they intend to avoid a repeat of what took place in October. For 2013, the U.S. economy is estimated to grow at just 1.6%, down from 2.8% in 2012.

Assuming the federal budget deliberations can proceed in a more orderly manner, then there are enough positive factors in the U.S. economy to enable it to grow in the range of 2.5% to 3.0%, with the working estimate for this Outlook being 2.7%. Job growth was moving at a reasonable pace during 2013, and less uncertainty could encourage firms to hire more workers.

Interest rates, while edging up, are still low. Market fundamentals for commercial building, such as occupancies and rents, are improving, and bank lending standards for commercial real estate development are easing gradually. And while federal spending restraint will prove to be a drag on publicly financed construction, the improved fiscal posture of states and localities will offset some of that drag. In this environment, it’s forecast that total construction starts will climb 9% to $555 billion, a bit faster than 2013 although still at a measured clip. The following are the main points by sector for the 2014 construction market:

• Single family housing will grow 26% in dollars, corresponding to a 24% increase in units to 785,000 (McGraw Hill Construction basis), and basically matching the gains in 2012 and 2013. The positives for single family housing are numerous — the pace of foreclosures has eased, home prices are rising, and mortgage rates remain near recent lows. However, the demand for housing will continue to be restrained by careful bank lending practices towards issuing mortgages.

• Multifamily housing will rise 11% in dollars and 9% in units. While growth continues, the percentage gains will be smaller than the previous four years, reflecting a maturing multifamily market. This structure type is still a favored investment target by the real estate finance community, which in the near term should lead to more high-rise residential buildings in major cities.
• Commercial building will increase 17%, a slightly faster pace than the 15% gain estimated for 2013. Warehouses and hotels will continue to lead the way, while stores and office buildings pick up the pace. The positives for commercial building are improving market fundamentals and more bank lending for commercial development. Next year’s activity in dollar terms will still be 28% below the 2007 peak.

• Institutional building will edge up 2%, turning the corner after five years of decline. For the educational building category, colleges are revisiting capital expansion plans, and passage of recent construction bond measures in several states should help K-12 construction projects. Healthcare construction is expected to remain flat, given continued emphasis on cost containment.
• Public works construction will drop 5%, pulling back after a 3% gain in 2013 that was lifted by the start of several large highway and bridge projects. More focus on deficit reduction will limit federal support for environmental public works, although the improved fiscal position of state and local governments will help to cushion the extent of the public works decline.

• Electric utilities will retreat 33%, continuing the 55% correction estimated for 2013 that followed the current dollar high reached in 2012. Capacity utilization is down sharply, limiting the near term need for new generating capacity. The need for transmission line work remains strong.

Economic Environment

The construction industry is making progress towards getting up to cruising speed — it’s just taking a while to get there and the progress to date has been selective. Total construction starts in 2012 advanced 10% to $485 billion, picking up the pace following the meager 2% gains reported in both 2010 and 2011. Finally, after an extended process of “turning the corner,” the construction industry seemed to be showing more signs that a recovery was actually taking hold. Residential building last year climbed a robust 31%, as single family housing joined the upturn already underway for multifamily housing. Commercial building, while still down almost 50% from its 2007 peak, was able to climb 12% in 2012. However, the institutional building sector fell 9% in 2012, and when combined with a 25% drop for manufacturing-related construction, the result was a 5% decline for total nonresidential building. The 2012 increase for total construction was helped by 7% improvement for nonbuilding construction, as a 4% gain for public works was accompanied by a 16% hike for electric utilities.

During 2013, residential building is on track for another year of healthy growth, rising 25%. Commercial building continues to strengthen gradually from low levels, and manufacturing-related construction is edging up (in dollar terms, if not square footage).

However, institutional building has continued to weaken, extending its lagged behavior relative to commercial building. While it’s estimated that total nonresidential building will advance in 2013, the gain will be a modest 4%. Public works this year is being supported by a number of large highway and bridge projects, but electric utilities are now in steep decline, which will lead nonbuilding construction to drop 15%. The result is that total construction starts for 2013 are now estimated to reach $508 billion, up 5%. It’s useful to note that if electric utility starts are excluded, the increases for total construction would be 9% in 2012 and 12% in 2013.

Other measures of construction activity have registered moderate growth so far in 2013.

The construction put in place series issued by the U.S. Department of Commerce increased 6% during the first seven months of 2013, benefitting from some of the gains shown by construction starts during 2012, since construction spending will follow the pattern of construction starts. Construction employment during the first eight months of 2013 was up 3% compared to last year. 

The full 2014 Dodge Construction Outlook Report is available for purchase at www.construction.com or by calling 1-800-591-4462.

Prepared October, 2013
Robert A. Murray
Vice President, Economic Affairs
McGraw Hill Construction
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