As 2016 came to a close, industry economists offered their informed predictions for the U.S. construction industry in the year ahead.
Dodge Data & Analytics’ 2017 Dodge Construction Outlook predicts that total U.S. construction starts for 2017 will advance 5 percent to $713 billion, following gains of 11 percent in 2015 and an estimated 1 percent in 2016. Gains of 8 percent are expected for both residential building and nonresidential building, while nonbuilding construction slides a further 3 percent.
“The U.S. construction industry has witnessed signs of deceleration in 2016, following several years of steady growth,” said Robert Murray, chief economist for Dodge Data & Analytics. “Total construction starts during the first half of this year lagged behind what was reported in 2015, raising some concern that the current construction expansion may have run its course.
“However, the early 2016 shortfall reflected the comparison to unusually elevated activity during the first half of 2015, lifted by 13 very large projects valued each at $1 billion or more, such as a $9 billion liquefied natural gas export terminal in Texas and a $2.5 billion office tower in New York City,” Murray said. “As 2016 has proceeded, the year-to-date shortfall has grown smaller, easing concern that the construction industry may be in the early stage of cyclical decline. Instead, the construction industry has now entered a more mature phase of its expansion, one that is characterized by slower rates of growth than what took place during the 2012-2015 period, but still growth. Since the construction start statistics will lead the pattern of construction spending, this means that construction spending can be expected to see moderate gains through 2017 and beyond.”
Murray indicated a number of positive factors that suggest the construction expansion has room to proceed, including the following:
- the U.S. economy in 2017 is anticipated to see moderate job growth,
- market fundamentals for commercial real estate should remain generally healthy,
- more funding support is coming from state and local bond measures,
- energy prices appear to have stabilized, and
- interest rate hikes will be gradual and few.
Construction starts by sectors
According to Dodge Data & Analytics, single family housing will rise 12 percent in dollars, corresponding to a 9 percent increase in units to 795,000 (Dodge basis). Access to home mortgage loans is improving, and some of the caution exercised by potential homebuyers will ease with continued employment growth and low mortgage rates. Older members of the Millennial generation are now moving into the 30 to 35 year-old age bracket, which should begin to lift demand for single family housing.
Multifamily housing will be flat in dollars and down 2 percent in units to 435,000 (Dodge basis). This project type now appears to have peaked in 2015, lifted in particular by an exceptional amount of activity in the New York City metropolitan area, which is now settling back. Continued growth for multifamily housing in other metropolitan areas, along with still generally healthy market fundamentals, will enable the retreat at the national level to stay gradual.
Commercial building will increase 6 percent on top of the 12 percent gain estimated for 2016. Office construction is showing improvement from very low levels, lifted by the start of several signature office towers and broad development efforts in downtown markets. Store construction should show some improvement from a subdued 2016, and warehouses will register further growth. Hotel construction, while still healthy, will begin to retreat after a strong 2016.
Institutional building will advance 10 percent, resuming its expansion after pausing in 2015 and 2016. The educational facilities category is seeing an increasing amount of K-12 school construction, supported by the passage of recent school construction bond measures. More growth is expected for the amusement category (convention centers, sports arenas, casinos) and transportation terminals.
Manufacturing plant construction will increase 6 percent, beginning to recover after steep declines in 2015 and 2016 that reflected the pullback for large petrochemical plant starts.
Public works construction will improve 6 percent, regaining upward momentum after slipping 3 percent in 2016. Highways and bridges will derive support from the new federal transportation bill, while environmental works should benefit from the expected passage of the Water Resources Development Act. Natural gas and oil pipeline projects are expected to stay close to the volume that’s been present in 2016.
Electric utilities and gas plants will fall another 29 percent after the 26 percent decline in 2016. The lift that had been present in 2015 from new liquefied natural gas export terminals continues to dissipate. Power plant construction, which was supported in 2016 by the extension of investment tax credits, will ease back as new generating capacity comes on line.
A closer look at transportation markets
In 2017, transportation infrastructure construction is expected to reach $247.8 billion, up 1.3 percent from $244.5 billion in 2016, driven largely by increases in highway and bridge private construction activity supporting residential and commercial developments, according to Alison Premo Black, Ph.D., chief economist, American Road & Transportation Builders Association (ARTBA). This total includes public and private investment for highways, bridges, public transit, rail, ports and waterways, airport runways and terminals, as well as private investment for roads, streets, driveways, and parking lots in residential and commercial developments, and support work by state departments of transportation (DOTs) and local governments for highway and bridge planning and design work, routine maintenance, and right of way purchases.
Black noted that although the December 2015 enactment of the federal Fixing America’s Surface Transportation (FAST) Act law provided stability for public highway investment, the increases that will be realized in the federal program funding levels are modest, just above anticipated growth in inflation and project costs.
Many state DOTs did not obligate their federal funds in time for many projects to get started during the 2016 construction season, Black said. Nearly half (46 percent) of the FAST Act funds for FY 2016 were obligated in the last quarter of the federal fiscal year, between July and September 2016; 20 percent of the federal funds available to the states were not obligated until September 2016.
Another factor impacting the ARTBA forecast, Black said, is that Congress passed a continuing resolution in December that holds all FY 2017 federal discretionary spending — including the transportation programs — at the current level until March 31, 2017.
Under this approach, the $900 million increase in highway investment authorized by the FAST Act and included in the House and Senate FY 2017 transportation funding bills is delayed at least until next spring. Similarly, the $510 million to $670 million public transportation funding increases in the House and Senate transportation measures are delayed. Existing funding levels for these and other programs will continue.
Forecast highlights by mode
• Public and private highway, street, and related construction — After two years of real growth, the value of public highway, street, and related work by state DOTs and local governments fell nearly 2 percent in 2016 and is expected to decline another 1 percent in 2017.
Recent increases in state gas taxes and user fees, as well as a number of local funding initiatives approved on the Nov. 8, 2016, ballot, should help support some local markets during the next few years. Voters in 24 states approved 267 ballot measures in 2016, which will support $207 billion in highway, bridge, port, and transit spending over the next 40 years.
Public-private partnerships will continue to be important to state and local markets that have revenue streams to support these projects, according to ARTBA. Five major projects came to financial close in 2016, totaling more than $3.3 billion in investment. The projects were in Arizona, Washington, Georgia, Texas, and Virginia.
Based on historical data, the private highway, bridge, parking lot, and driveway markets will increase from $58.9 billion in 2016 to $62.5 billion in 2017, and will continue to grow during the next five years as overall construction activity increases in those sectors.
• Bridges and tunnels — The public bridge and tunnel construction market is expected to be down slightly in 2017 to $32.9 billion from a record $33.3 billion in 2016, before resuming real growth in 2018 and beyond. The national outlook is being driven by activity in nine states, which accounts for 53 percent of the market: California, Florida, Illinois, New Jersey, New York, Pennsylvania, Texas, North Carolina, and Ohio. Recent contract awards are down in many of these states, in part because of some major projects that got underway in 2015.
• Railroad, subway, and light rail — Public transit and rail construction is expected to grow from $19.3 billion in 2016 to $20.3 billion in 2017, a 5 percent increase. Subway and light rail investment is expected to grow 3.7 percent to $7.7 billion, just below the record level of $7.8 billion in work that was set in 2015.
The FAST Act provided a boost for public transportation investment. In addition to a dozen major subway and light rail projects underway, there were four new construction starts in 2016, including work in Washington State, Washington, D.C., Texas, and California.
• Airport terminals and runways — The value of airport construction will grow slightly, increasing from $13.1 billion in 2016 to $13.2 billion in 2017, according to ARTBA’s forecast model. Airport terminal and related work is expected to increase from $8.3 billion in 2016 to $8.4 billion, an increase of 1.5 percent. Runway work is forecast to remain flat at $4.8 billion.
• Ports and waterways — Port and waterway investment is expected to be $2.1 billion in 2017. Construction activity in 2016 was also $2.1 billion, down from $2.3 billion in 2015.
Congress completed final action in December 2016 on the Water Resources Development Act, which identifies nearly $9 billion in navigation, flood control, and environmental restoration projects that are eligible for Congress to fund, and could help boost the market sector. The act, part of the Water Infrastructure Improvements for the Nation (WIIN) Act, authorizes dredging projects in eight ports to deepen navigation channels.
ARTBA’s proprietary econometric model takes into account a number of economic variables at the federal, state, and local level. The forecast measures the public and private value of construction put in place, published by the U.S. Census Bureau. The ARTBA estimate for the private driveway and parking lot construction market are separate.
Nonresidential construction sector
Associated Builders and Contractors (ABC) forecast slower growth in the U.S. commercial and industrial construction industries in 2017. While contractors are vulnerable to rising commodity prices and potential interest rate increases in 2017, the middling consumer-led recovery should still lead to modest growth in construction spending and employment.
“The U.S. economy continues to expand amid a weak global economy and, despite risks to the construction industry, nonresidential spending should expand 3.5 percent in 2017,” said ABC Chief Economist Anirban Basu. “For more than two years, the Federal Reserve has been able to focus heavily on stimulating economic growth and moving the nation toward full employment. However, as commodity prices, including energy prices, firm up and labor costs march higher, the Federal Reserve will need to be more concerned about rising inflation expectations going forward. Associated increases in interest rates could have significantly negative impacts on certain asset prices, including stocks, bonds, commercial real estate, and apartment buildings.
Increases in commodity prices could translate into further stagnation in construction spending volumes if the purchasers of construction services are not prepared for related cost increases, Basu said.
“Additionally, data from the U.S. Bureau of Labor Statistics indicate that construction job openings stand at a 10-year high and that average hourly earnings for construction workers rose above $28 per hour in 2016,” Basu said. “The demand for construction workers is positioned to remain high and is likely to increase already significant wage pressures.”
Nevertheless, Basu offered a bullish scenario: “According to the Bureau of Economic Analysis, the average age of all fixed assets, including structures such as factories and hospitals, stands at 23 years — the oldest on record tracing back to 1925 — and there is a collective awareness among American enterprises that they will need to replace much of their capital stock in future years. In addition, now rising energy prices could produce more investment and rising earnings — potentially translating into better support for asset prices, ongoing hiring, and consumer spending.
“Despite some headwinds, many construction firms continue to report that they remain busy and ABC’s most recent Construction Confidence Index revealed that while construction firm leaders are not quite as confident as they were in prior quarters, most continue to expect growth in sales, margins and staffing levels.”