JANUARY ISSUE: Favorable Economy Drives 2015 Construction

Commercial building is on track to increase 15 percent in 2015, and multi-family housing to grow 9 percent in dollar value and 7 percent in units, says a recently released report by Dodge Data & Analytics.
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Commercial building is on track to increase 15 percent in 2015, and multi-family housing to grow 9 percent in dollar value and 7 percent in units, says a recently released report by Dodge Data & Analytics.

But since construction is usually a lagging indicator of the market, favorable economic conditions are a leading cause of this positive outlook, according to economists and construction experts, who agree that the U.S. economy is in better shape than most people realize.

Reason #1: According to the Bureau of Economic Analysis, U.S. real gross domestic product increased at an annualized rate of 3.9 percent in the third quarter of 2014. Previously, it estimated an annual expansion of 3.5 percent. In the second quarter, GDP increased at an annualized 4.6 percent.

“Whatever’s happening now in terms of job growth and expansion is the most stimulatory framework that’s ever existed, because the federal funds rate is essentially zero percent, so there’s even more reason to be optimistic about growth,” Alex Carrick, chief economist at CMD, told Commercial Property Executive. “All of that will translate eventually to stronger construction activity, particularly on the private-sector side.”
Reason #2: Residential and non-residential construction is finally catching up after the prolonged slump of the recession.

“Whatever’s happening now in terms of job growth and expansion is the most stimulatory framework that’s ever existed, because the federal funds rate is essentially zero percent, so there’s even more reason to be optimistic about growth,” Alex Carrick, chief economist at CMD, told Commercial Property Executive. “All of that will translate eventually to stronger construction activity, particularly on the private-sector side.”
Reason #2: Residential and non-residential construction is finally catching up after the prolonged slump of the recession.

Reason #3: In the most recent National Association of Home Builders/Wells Fargo Housing Market Index, released in November, builder sentiment increased 4 points to 58. “Any score over 50 shows more builders are optimistic about the future than pessimistic; 58 is a good indicator,” said Robert Denk, senior economist at NAHB.

Occupancies and rent growth continue to support multi-family development, although construction is growing at a slower place as the sector matures, according to Dodge Data & Analytics.

In the residential market, there is currently a “legacy effect,” according to Carrick. During the recession, foreclosures forced many homeowners to move to apartments. Although the single-family market is showing signs of improvement, the sector continues to lag as prospective homeowners remain cautious. “If you were thrown out of your home, you will be hesitant about jumping back into the single-family market,” Carrick explained.

According to Carrick, two primary sectors have been driving the economy. First, the energy boom, in which 10 states account for more than 90 percent of production. Those states can be grouped into three basic clusters: New Mexico, Texas, Oklahoma and Louisiana; Utah, Colorado and Wyoming; and California, Alaska and North Dakota. Shell Gas and Shell Oil are also contributing to the boom, as Europe’s largest energy company takes advantage of investor appetite for North America’s energy infrastructure.

“The numbers are starting to look better here in the second half of 2014. We expect that 2015 will be more of getting back on our feet,” Denk added.

Despite commodity prices that have slumped to their lowest levels since the global financial crisis—oil prices have fallen about 11 percent since June alone—they are seen as inconsequential to a spike in materials prices. If anything, lower energy prices are a boost to transportation costs by reducing them.
“Oil prices are coming down because that helps manufacturers use oil, natural gas to transport goods, or to heat and cool their processes,” said Carrick. “Transportation, heating (and) cooling costs will be down, which firms will appreciate.”

According to Denk, builders have always struggled with rising prices for commodities since the cost of materials like lumber, plywood and drywall typically moves independently of commodities costs.
The sole downside to lower oil costs is that the trend may dampen the oil boom, which might in turn delay or halt pricier projects in markets with strong energy industry ties, Carrick added.

Another nonresidential sector that might surprise people with a huge comeback is hotel/motel.
As employment increases—the economy added 321,000 jobs in November—and gasoline prices plummet, more people are inclined to travel for business and pleasure.

“Year-over-year employment in the hospitality industry is quite strong; it held up better than other categories,” said Carrick. “Several hospitality accommodation projects are in the pipeline.”
The PENTA Building Group, for one, is currently working on the MGM Grand Garden Arena in Las Vegas, as well as a number of Native American hospitality projects in Oklahoma, Phoenix and South California, which involve building gaming resorts on tribal land.

“We’re not seeing any negative pressure that’s affecting construction activity because of material (price) increases,” Glen Maxwell, vice president of preconstruction at The PENTA Building Group, told CPE. “Drop in oil prices is not consistent with slow growth of material prices; they seem to be moving in opposite directions.”
The main issue to watch during 2015 is the cost of labor. Average weekly construction earnings increased 2.8 percent in November. The unemployment rate in construction has fallen to 6.5 percent compared to 9 percent a year ago. Due to the housing bust, there’s still a shortage of drivers, carpenters, plumbers and electricians who went looking for jobs elsewhere. As a result, firms will now have to pay more to attract workers back to that field.

“Resources are being drawn back and so is the supply of workers and supply of materials,” Denk concluded. “It will be a push-and-pull, supply-and-demand set of forces through 2015-16.”