ABC’s Q2 Construction Backlog Indicator Reports Commercial Construction Up

Associated Builders and Contractors reported that the Construction Backlog Indicator, which reflects the amount of commercial and industrial construction work under contract, but not yet completed, rose 3.9 percent during the second quarter of 2013 and now stands at 8.2 months, up from 7.9 months the previous quarter.

Anirban

Associated Builders and Contractors reported that the Construction Backlog Indicator, which reflects the amount of commercial and industrial construction work under contract, but not yet completed, rose 3.9 percent during the second quarter of 2013 and now stands at 8.2 months, up from 7.9 months the previous quarter.

Additionally, construction backlog is up 6.6 percent compared to the same time last year.

“The uptick in commercial construction is attributable to the continued expansion in consumer spending. Though GDP/output growth remains modest, the pace of job growth has been better, a source of income growth,” Anirban Basu, Associated Builders and Contractors’ chief economist, told Commercial Property Executive. “Moreover, a significant number of American households have refinanced their mortgages and until very recently, the financial markets had been performing brilliantly. This has also served to expand spending power.”

According to the report, rising home prices represent another source of support for household wealth and confidence. As a result, retail vacancy in many categories has been falling, creating opportunities for developers in the process.

The Northeast, South and West all experienced construction backlog expansion, with the strongest region comprising a group of states stretching from Texas right to the Canadian border.

“These are natural resource intensive states, with many of them participating fully in America’s energy production renaissance (e.g., Texas, North Dakota),” Basu added. “States that were hard hit by the housing downturn are also now racing back, including Arizona, Florida, California and Georgia.”

Still, there are geographies of concern, including states in the industrial Midwest that continue to record slow rates of economic expansion and construction job creation, such as Illinois, with its many fiscal problems and a struggling housing market in Chicago, is among the weakest economies in the nation.

Larger firms continue to capture market share. Backlog among surveyed contractors associated with more than $100 million in annual revenues is now approaching 12.3 months, which represents roughly a 50 percent increase in backlog since late 2009.

Basu said that today’s competition is being waged along many dimensions that favor large contractors, including resources available to comply with government regulations and an ability to attract talent entering the construction industry due to the firms ability to take the largest projects and their embracing of the latest productive and expensive technologies.

“In the past, we’ve often associated market responsiveness with smaller firms because their organizational structure allows them to make decisions more quickly,” Basu said. “Today, larger firms are organizationally leaner, which positions them to reduce costs and speed up decision-making—and ultimately makes them more competitive against smaller firms.”

According to Basu, the U.S. economy should pick up during the second half, with growth ticking above 2 percent for the latter half of the year. Next year is shaping up to be even better, though rising interest rates, Detroit’s bankruptcy, volatile financing markets, the next debt ceiling debate and upheaval in the Middle East remain some of the many potential stumbling blocks.

While publicly financed construction will remain somewhat problematic, private construction activity could pick up substantially next year, allowing 2014 to potentially represent the long-awaited beginning of sustained nonresidential construction spending recovery.

“I believe 2014 may end up being the first solid year of recovery for nonresidential construction since the end of the recession,” Basu said. “With the exception of a period during which the 2009 stimulus package made its temporary impact felt, the nonresidential segment of the U.S. economy has largely defied recovery. Though certain sub-sectors have performed well, others, including several heavily publicly financed segments, have not.”