2016 Construction Forecast
The expansion for the construction industry has been underway for several years now. The construction start statistics show 2010 as the initial year of recovery, although a real recovery with a meaningful contribution from the housing sector did not take hold until 2012. There has been an increasing contribution from commercial building, and 2014 saw the institutional building sector (namely educational facilities) finally join the recovery process after a lengthy decline. Public works construction has registered some growth in the current decade, while manufacturing plants and electric utilities/gas plants have introduced a measure of volatility on a year-to-year basis. After bottoming out in 2009 at $426 billion, total construction starts by 2014 had climbed to $595 billion, a gain of 40%. This evolving expansion for the construction industry has taken place against the backdrop of a generally hesitant U.S. economy, with GDP growth hovering around 2%.
For 2015, total construction starts are estimated to climb 13% to $675 billion, which will be the strongest yearly gain so far in the current expansion. Much of this increase is coming from a huge 159% hike for the electric utility and gas plant category, reflecting the start of several massive liquefied natural gas (LNG) terminals in the Gulf Coast region, as well as renewed growth for new power plant starts. If the electric utility and gas plant category is excluded, total construction starts in 2015 would be up a more moderate 8%, slightly less than the corresponding 11% increase reported for 2014. The residential building sector in 2015 is providing a greater contribution to the construction expansion than last year, with its 2015 increase pegged at 18%. Single-family housing has moved beyond its 2014 plateau and is now seeing moderate growth, while the upward track for multifamily housing continues. Public works construction this year will edge up a modest 2%, as activity has settled back after its brisk pace in early 2015.
One noteworthy change for 2015 is that nonresidential building is now estimated to be flat to slightly down, which follows its substantial 24% jump in 2014. The primary reason behind this years pause for nonresidential building is the steep drop for the manufacturing plant category, which reported a surge of petrochemical plant starts in 2014 and is now seeing a decline for energy-related projects. At the same time, both the commercial and institutional segments of nonresidential building have decelerated in 2015. While economic factors remain generally supportive, last years gains for both commercial and institutional building possibly overshot their underlying growth trends.
The economic environment going into 2016 carries a mixture of headwinds and tailwinds. The Federal Reserve will move towards a more neutral monetary stance, with the initial increase in the federal funds rate anticipated to take place in December or early 2016. The increases are expected to be gradual, however, leaving the federal funds rate at about 1.5% towards the end of next year. Global economic conditions are anticipated to remain sluggisha negative for U.S. exports but a plus for helping to keep long-term interest rates and energy prices low in the near term. Political uncertainty as it relates to the U.S. Congress appears to be rising, yet the need to demonstrate the ability to govern may avert a return to the brinksmanship that occurred in 2013. On the plus side, the U.S. economy continues to register moderate job growth, lending standards are still easing, market fundamentals for commercialreal estate continue to improve, and more funding support is coming from state and local construction bond measures. Overall, the U.S. economy is expected to grow 3.1% in 2016, up from 2.5% this year.
For 2016, total construction starts are forecast to advance 6% to $712 billion. Gains are expected for nonresidential building, up 9%; and residential building, up 16%; while the nonbuilding construction sector slides 14% following this years substantial jump. If the electric power and gas plant category is excluded, total construction starts next year will be up 10%.
The pattern by more specific sectors is the following:
- Single-family housing will rise 20% in dollars, corresponding to a 17% increase in units to 805,000 (Dodge basis). Access to home mortgage loans is improving, and some of the caution exercised by potential homebuyers will ease with continued employment growth.
- Multifamily housing will increase 7% in dollars and 5% in units to 480,000, slower than the gains in 2015 but still growth. Low vacancies, rising rents, and the demand for apartments from millennials will encourage more development.
- Commercial building will increase 11%, up from the 4% gain estimated for 2015. Office construction will resume its leading role in the commercial building upturn, aided by more private development as well as construction activity related to technology and finance firms.
- Institutional building will advance 9%, picking up the pace after the 6% rise in 2015. The educational facilities category is seeing an increasing amount of K-12 school construction, supported by the passage of recent school construction bond measures.
- Manufacturing plant construction will recede an additional 1% in dollar terms, following the steep 28% plunge for 2015 that reflected the pullback for large petrochemical plant starts.
- Public works will be flat with its 2015 amount, as a modest reduction for highways and bridges is balanced by some improvement for the environmental public works categories. A new multiyear federal transportation bill is being considered by Congress, and is expected to achieve passage in late 2015 or during the first half of 2016. The benefits of that bill will show up at the construction site later in 2016 and into 2017.
- Electric utilities and gas plants will fall 43% after the sharp 2015 jump. The lift coming from new starts for LNG export terminals will be substantially less, and new power plant starts will recede moderately.
From the “2016 Dodge Construction Outlook.” Visit http://tinyurl.com/p4f4xto to purchase the full report.
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