U.S. construction is headed for another year of modest gains, with multifamily construction leading the way, according to forecasts from McGraw-Hill Construction and Reed Construction Data. Total construction starts in the United States will rise 6 percent to $483.7 billion in 2013, slightly higher than the 5 percent increase estimated for 2012, according to the McGraw-Hill forecast, presented at the 2013 Dodge Construction Outlook during the 74th annual Outlook Executive Conference.
“As reported by McGraw-Hill Construction, new construction starts in 2010 edged up 2 percent, followed by another 1 percent gain in 2011, and 2012 is headed for a 5 percent increase to $458 billion. This still leaves the volume of total construction starts 32 percent below the 2005 peak on a current dollar basis, and down about 50 percent when viewed on a constant dollar basis,” said Robert Murray, vice president of Economic Affairs, in an MHC release. “The modest gains experienced during the past two years have, in effect, produced an extended bottom for construction starts, in which the process of recovery is being stretched out.”
All slides from the Reed Construction Data 2013 forecast webinar, “Post-Election: Where is Construction Headed?”
Source: ©2010 Reed Construction Data, a division of Reed Elsevier INC.
Bernard Markstein, chief economist for Reed Construction Data, offered a slightly improved forecast in the firm’s December report, showing total construction spending up 9 percent for 2012, up another 9 percent in 2013, and up 9.3 percent in 2014. The projected gains follow steep recessionary declines, with total construction down 7.4 percent in 2008, 15.4 percent in 2009, 10.9 percent in 2010, and 3.3 percent in 2011.
“Overall, construction starts are up, and we have a positive outlook,” said Markstein, during the Reed Construction Data 2013 forecast webinar. “But, we’re not back to where we were. We’re still in a long recovery phase.”
Looking at the overall building segments, Reed Construction Data’s forecast showed nonresidential construction up 5.9 percent in 2012, up 5.4 percent in 2013, and up 6.7 percent in 2014.
“Nonresidential construction has struggled of late, but is expected to perform better throughout 2013 and 2014,” Markstein said during the webinar. According to Reed, total residential construction is forecast to be up 13.9 percent in 2012, up 16.3 percent in 2013, and up 12.3 percent in 2014.
The projected gains are also supported by the American Institute of Architects’ Architecture Billings Index. The ABI reflects the approximate nine-to-twelve month lag time between architecture billings and construction spending. The November index, released Dec. 19, marked the fourth straight month of gains, with a score of 53.2 (any score above 50 indicates an increase in billings). “These are the strongest business conditions we have seen since the end of 2007 before the construction market collapse,” said Kermit Baker, chief economist of the AIA, in the ABI release.
In the November ABI, all market segments reported scores above 50. Multi-family residential led the pack, with a score of 55.9, followed by mixed practice (53.9), commercial/industrial (52.0), and institutional (50.5).
According to the McGraw-Hill forecast, commercial building will increase 12 percent in 2013, at a faster pace than the 5 percent gain estimated for 2012. Both warehouses and hotels will benefit from lower vacancy rates, while store construction will feature more upgrades to existing space. The increase for office construction will be modest, as new privately financed projects continue to be scrutinized carefully by lenders.
Next year’s level of commercial building in current dollars will still be more than 40 percent below the 2007 peak.
Ken Simonson, chief economist for the Associated General Contractors of America, offered similar projections during the Reed Construction Data forecast webinar. “Lodging has finally bounced back,” Simonson said. “We’ve seen five years of drastically shrinking investment in hotels. The last 2.5 years have seen strong growth year-over-year in [revenue per available room]. As a result, we’re hearing about a lot more projects going forward.”
On the office and retail front, “These sectors are going to remain in the doldrums,” Simonson added. “There is still a lot of vacant space. Additionally, companies are shrinking the [office] space that they need, as they get rid of their computer rooms to go to the cloud, have employees share a working space, or have employees work remotely.”
Regional exceptions in office building will include Northern California and Seattle. “We see a few of these examples where we’re getting a ton of new employees and office space, but it’s not a widespread boom,” Simonson said.
Looking at retail, Simonson said he is seeing a trend toward smaller stores. “Retailers are tired of their big-box stores serving as showrooms—customers come in to look at products and then complete purchases online. They are squeezing into smaller spaces,” he said. “Both office and retail are going to see most of the construction spending going to remodel, not new starts.”
Institutional building will level off this year, following the steep 13 percent drop estimated for 2012, according to the McGraw-Hill Construction forecast. For educational facilities, K-12 construction will slip further, while college and university construction should at least stabilize. Healthcare facilities are expected to make a modest rebound after this year’s downturn, according to McGraw-Hill.
In the educational sector, “there was a pullback by the private sector as endowments fell. Now that the market has rebounded, endowments have increased, and the private [educational] building sector is moving forward,” Markstein said during the Reed webinar. However, public educational spending will continue to remain low until 2014, Markstein forecasted. “Nobody wants to bring up raising taxes,” he said. “In 2014, however, it will become obvious that the public sector has to get back in this. Parents will be complaining about poor facilities and crowded conditions, and we’ll start seeing bond issues going forward.”
Simonson agreed. “Private higher ed is growing well,” he said. “This segment was going great in ’08 until the meltdown when colleges had to roll up their spending plans. Now, we’re hearing about a lot more projects going forward.”
Residential, including multifamily
“Multifamily construction is a definite bright spot,” said Markstein during the Reed webinar. “It may even be close to a return to normal. This sector will continue to be strong going forward.”
According to McGraw-Hill, multifamily housing will rise 16 percent in dollars and 14 percent in units this year, marking healthy percentage gains yet slower growth than what took place during 2011 and 2012. Improved market fundamentals will help to justify new construction, with the real estate finance community continuing to view this structure type favorably.
“While the multifamily dollar volume is not as large [as single family], the recovery is good,” Markstein said.
“Multifamily could be the strongest of any construction segment next year,” Simonson added, during the webinar. “People looking to get their first house may not have time to buy a home, or don’t have the credit. Or, they would prefer to live closer in to the city where they don’t need a car, or don’t have a long commute,” Simonson said. “That kind of living means multifamily and rental housing.”
Single-family housing will grow 24 percent in dollars in 2013, corresponding to a 21 percent increase in units to 615,000. The positives for single-family housing have become more numerous: The pace of foreclosures has eased, home prices are stabilizing and mortgage rates are at record lows.
“Housing is clearly on a recovery path. We will see big percentage increases, but we are coming off a very low level,” Markstein said.
“Single-family construction is not going to retreat, but it remains a question mark,” Simonson added. “It may be a continuation of what happened [in 2012].”