2016 FMI’s Construction Outlook Third Quarter Report

Table of Contents

Third Quarter 2016 Construction Outlook

Construction Forecast ...... 1 Residential Construction ...... 3 FMI Nonresidential Construction Forecast ...... 6 Lodging ...... 6 Office...... 7 Commercial ...... 8 Health Care ...... 9 Education ...... 10 Religious ...... 11 Public Safety ...... 12 Amusement and Recreation ...... 13 Transportation ...... 14 Communication...... 15 Manufacturing ...... 16 Nonbuilding Structures ...... 17 Power ...... 17 Highway and Street ...... 18 Sewage and Waste Disposal ...... 19 Water Supply ...... 20 Conservation and Development ...... 21 Construction Put in Place Estimated for the U.S...... 22 Appendix ...... 23 1 3rd Quarter 2016 Report

THIRD QUARTER 2016 CONSTRUCTION OUTLOOK

CONSTRUCTION FORECAST

The construction industry has largely recovered from the recession, at least in terms of billions of dollars in construction put in place. Up until the last two years, it seemed like a very slow recovery, but then the return to growth blossomed. The acceleration of growth in the past couple of years wasn’t a complete surprise. However, fresh memories of the recession kept some companies from hiring until everyone else started hiring to the point where labor shortages in the industry became a big issue. Pent-up demand was set free in almost every construction sector.

So what do we see now for future growth? Continued slow great potential around the country if the will and the money growth in most areas, but, as noted above, those billions are there. add up. The economy is still adding jobs, buying homes and spending money on consumer and durable goods, but On the upside, it is a matter of being careful what you wish not as much as before the recession, or enough to boost the for, as firms still have trouble rapidly scaling up in some Consumer Price Index. specialized areas. A few contractors indicated to us in the NRCI survey that slower growth for a while wouldn’t be so The question that keeps coming up is, how long can we bad, as they have been working at capacity or above for a manage to maintain a slow economy. Is it as sustainable long time now. Others are happy to finally have found most as we’d like to think? When we asked participants in of the skilled workers they need for current levels of growth FMI’s quarterly Nonresidential Construction Index survey and hope to train and keep them busy. about the chance of a recession for the economy and the construction industry in Q3, 78% didn’t expect a recession until at least the first half of 2018, and 38% of those respondents don’t expect a recession for at least two years. Thirty-five percent of respondents expect 1 to 2% growth (CAGR) during the remaining expansionary period, while 32% expect 3 to 4% growth.

In addition to the important concerns about politics, global unrest and the general uncertainty these issues bring, there were several comments by industry executives in the NRCI Q3 report that mentioned overbuilding in certain markets around the country. Some hot spots in retail, multifamily, lodging and manufacturing are maxing out in the cycle, so it’s time to look for new markets. For many contractors working in infrastructure markets, demand is still pent-up due to lack of funding not needs, as we can see in the non- building sectors. Power still leads the way for growth, but areas like sewage and wastewater and water supply have 2 FMI’s Construction Outlook

GROSS DOMESTIC PRODUCT PERCENT CHANGE, QUARTERLY, SEASONALLY ADJUSTED ANNUAL RATE

Source: FMI Research Services

FMI CONSTRUCTION PUT IN PLACE ESTIMATED FOR THE UNITED STATES

Source: FMI Research Services 3 3rd Quarter 2016 Report

RESIDENTIAL CONSTRUCTION After four years of double-digit growth, we expect single-family housing to add 6% in 2016 to SINGLE-FAMILY HOUSING reach $246.9 billion. This growth is still far short of the pre-recession boom years, and that may be a good sign as purchasers avoid getting in over their heads in debt and take a more conservative approach to making the decision to buy a new home. That indecision is showing up in the growth 6% of multifamily housing and home improvements. After four years of a hot market for multifamily homes, we expect the rate of growth to cool in 2016 to just 7%. Still, that translates to $61.8 billion in new construction put in place. Many of those who might have once considered moving $246.9 Billion to a new home are now improving the home they live in to add rooms or just modernize and repair to the tune of $155 billion for 2016. MULTIFAMILY HOUSING Residential construction might be growing faster if there were more skilled labor in some regions of the country. Faster wage growth in the general population would help too. Higher prices may also slow the decision to buy a home, as the market is currently a seller’s market with the housing 7% inventory remaining quite low. The current inventory of houses for sale in the U.S. is just 4.1 months compared to 12.2 months at the height of the recession. (See Appendix for Monthly $61.8 Billion Supply of Houses in the U.S.)

RESIDENTIAL CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 4 FMI’s Construction Outlook

RESIDENTIAL CONSTRUCTION IMPROVEMENTS PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 5 3rd Quarter 2016 Report

NEW PRIVATELY OWNED HOUSING UNITS STARTED Seasonally Adjusted Annual Rate

Source: Federal Reserve Economic Data

TRENDS: DRIVERS: „„ According to the U.S. Census Bureau, “National vacancy rates in the second quarter 2016 were 6.7 percent Unemployment rate for rental housing and 1.7 percent for homeowner housing, the Department of Commerce’s Census Bureau Core CPI announced today. The rental vacancy rate of 6.7 percent was not statistically different from the rate in the Income second quarter 2015 or the rate in the first quarter 2016. The homeowner vacancy rate of 1.7 percent was Mortgage rates not statistically different from the rate in the second quarter 2015 or the rate in the first quarter 2016.” (July Home prices 28, 2016) Housing starts „„ “The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divi- sions, reported a 5.1% annual gain in June, unchanged from last month. The 10-City Composite posted a Housing permits 4.3% annual increase, down from 4.4% the previous month. The 20-City Composite reported a year-over- year gain of 5.1%, down from 5.3% in May.” (S&P Down Jones Indices, August 30, 2016) „„ According to the U.S. Census Bureau, “Privately owned housing starts in July were at a seasonally adjusted annual rate of 1,211,000. This is 2.1 percent (±8.8%) above the revised June estimate of 1,186,000 and is 5.6 percent (±14.7%) above the July 2015 rate of 1,147,000.” (July 2016) 6 FMI’s Construction Outlook

FMI NONRESIDENTIAL CONSTRUCTION FORECAST

Lodging Although we expect 18% growth in 2016 compared with 30% in 2015, the pace of growth for lodging continues to be the highest among the construction categories we cover in this report. With an expected value of $25.6 billion for 2016, this market is well below its high of $35.8 billion in 2008, but we expect these numbers to be more sustainable with a mix of new venues and refurbishing established locations. It is not unusual for lodging construction to have large swings, and, at this time, new supply is beginning to surpass absorption, thus putting downward pressure on revenue per room and occupancy rates.

TRENDS: DRIVERS: „„ According to STR, “In year-over-year comparisons, the industry’s occupancy grew 4.3% Occupancy rate to 67.5%. ADR increased 4.2% to $121.22, and RevPAR rose 8.7% to $81.85.” (Hotel RevPar News Now, September 2, 2016) Average daily rate „„ “STR’s July 2016 Pipeline Report shows 529,665 rooms in 4,322 projects Under Con- Room starts tract in the United States. The total represents a 22.9% increase in the number of rooms Under Contract compared with July 2015.” (Construction Pipeline U.S., STR August 15, 2016) „„ Green building is more commonplace in remodels and retrofits.

LODGING CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 7 3rd Quarter 2016 Report

Office Office construction will follow a strong show of growth in 2015 (18%) with an expected 16% growth rate in 2016. Much of the growth has come from an increase in employment, especially in high-tech job markets. These high growth rates will drop to much lower rates in 2017 and beyond. Continued growth in the technical sector and in larger metropolitan areas like New York City will keep rents and absorption of new space high.

TRENDS: DRIVERS: „„ CBRE reports, “The vacancy rate decreased by 10 basis points (bps) to 13% in Q2 2016, the low- Office vacancy rate est level since Q1 2008. The decrease was entirely attributable to the suburban markets, which Unemployment rate recorded a 20-bps decrease in vacancy to 14.4%. The Downtown vacancy rate rose by 10 bps for the second straight quarter to 10.5%.” (CBRE Q2 2016 U.S. Office MarketView, July 22, 2016) „„ Trends that will likely change the future of offices include office sharing as more people work at home or on the road via the “cloud”; the younger generation is migrating toward active, vital metro areas and security, especially in tall buildings.

OFFICE CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

$80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000 Millions of Current Dollar s $- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: FMI Research Services 8 FMI’s Construction Outlook

Commercial The solid growth rate of 6% for commercial construction in 2015 will continue through 2016 before dropping to 4% and lower through 2020. Some of the fastest-growing areas in commercial retail construction have been drinking places and food services; however, building materials and garden supply stores are currently experiencing the highest growth rate. While many national chain stores continue to close properties and downsize new stores, new startup businesses are taking off in major metro areas. The marketing landscape for commercial construction is changing rapidly due to technology and growing options for consumer shopping. Disruption in traditional commercial construction is occurring not only for online shopping but also in the form of boutique startups and the future of smart stores both online and stick-built. This will create opportunities for contractors that can accommodate new design ideas. Growth in nonstore sales is also driving growth in warehouse space and data centers.

TRENDS: DRIVERS: „„ The Department of Commerce reports, “Retail trade sales were virtually unchanged (±0.5%)* from Retail Sales June 2016, and up 1.9 percent (±0.5%) from last year. Nonstore retailers were up 14.1 percent CPI (±1.2%) from July 2015, while Health and Personal Care Stores were up 7.8 percent (±2.3%) from Income last year.” (U.S. Department of Commerce, August 12, 2016) Home prices „„ Consumer confidence rose to 101.1 in August, the highest number since September 2015 (103.0). Housing starts (The Conference Board, August 30, 2016) Housing permits „„ The Internet of Things (IoT) will be increasingly disruptive for commercial business, presenting both opportunities for new businesses and threats to traditional brick-and-mortar markets.

COMMERCIAL CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 9 3rd Quarter 2016 Report

Health Care Health care construction is making a steady recovery. FMI is forecasting $41.0 billion in construction put in place for 2016 and 5% growth in 2017. Traditional large hospital projects are returning to the drawing boards with fewer large hospital projects in the works. The bulk of the work will be renovation and additions as well as outpatient care. New facility designs are upping the game for a patient-centered environment as well as reducing concerns for the spread of supergerms. Construction will continue to become more collaborative and integrated with the various communities involved.

TRENDS: DRIVERS: „„ The Bureau of Labor Statistics reports, “Employment of registered nurses is projected to grow 16 Population change percent from 2014 to 2024, much faster than the average for all occupations.” younger than age 18 Population change „„ Veterans Administration hospitals rocked by poor management and patient care, old facilities and ages 18-24 huge construction cost overruns. Stock market „„ Health Facilities Management magazine says, the “industry is moving away from large-scale new Government spending construction, according to survey results. While 70 percent of respondents said they have projects currently under construction or planned in the next three years, a full three-fourths of those were Nonresidential structure investment expansions or renovations.” (2016 Hospital Construction Survey, Health Facilities Management)

„„ The new model for hospitals is the medical center with a cluster of offices including beds, which will deliver more of a patient’s needs. „„ The number of outpatient facilities will continue to grow, pressed by the need to lower health care costs and to improve health facility profits.

HEALTH CARE CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 10 FMI’s Construction Outlook

Education Education construction increased by 5% in 2015 to reach nearly $83.5 billion in construction put in place. We now expect 2016 will end on a lower note of just 3% growth. Similar to health care construction, new schools will be greener and take more advantage of new materials and technology to create a safer, brighter space for learning. However, there is also a darker side to the need for school renovation and construction. Schools increasingly need to have security measures in place due to increasing threats of terrorism and deranged people entering the school with weapons. There also need to be funding solutions to improve the deplorable conditions in inner-city schools in depressed areas like Detroit. In order to prepare students for future careers, all schools should include modern technology or be renovated and updated for modern computing and collaborative environments.

TRENDS: DRIVERS: „„ Significantly less funding from federal government and states for K-12 schools. Population change younger than age 18 „„ Enrollment growth of 2.5 million in the next four years. Population change ages 18- „ „ New designs for schools will be more flexible for changing classrooms and greater use of natural 24 light. Expect more use of modular building designs. Stock market „„ Greater attention to energy reduction and green building technologies. Government spending „„ Renovation and additions to current school buildings will continue to grow in comparison to new Nonresidential structure school projects. investment „„ Greater focus on safe schools, as the threat for shootings on campus continues to rise.

EDUCATION CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 11 3rd Quarter 2016 Report

Religious We expect the growth rate for religious buildings will be 5% to reach $3.9 billion. With more people working, there is more money available to support religious building, in some cases involving larger building projects. After the current growth spurt, we expect slow growth will return to this sector. Future uncertainty for growth is due to many changes in the religious landscape, including the mix of religious faiths in America and fewer people who consider themselves regular churchgoers, even if they still belong to a certain faith. Many new churches are small and established in existing buildings like those found in vacated shopping centers. With all of these challenges, it still appears that improvements in parishioners’ pocketbooks translate into higher tithes.

TRENDS: DRIVERS: „„ The lending environment continues to be a challenge for many congregations. GDP Population „„ Establishing a capital campaign is becoming increasingly common. Income „„ Many churches are seeing tremendous declines in contributions and tithes. Personal savings rate „„ PEW Research Center reports the share of people “who describe themselves as Christians has dropped by nearly eight percentage points in just seven years, from 78.4% in an equally mas- sive Pew Research survey in 2007 to 70.6% in 2014. Over the same period, the percentage of Americans who are religiously unaffiliated – describing themselves as atheist, agnostic or ‘nothing in particular’ – has jumped more than six points, from 16.1% to 22.8%.” (“America’s Changing Religious Landscape,” PEW Research Center, May 12, 2015)

RELIGIOUS CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 12 FMI’s Construction Outlook

Public Safety Spending for public safety construction declined 8% in 2015 to $8.7 billion, and we expect a 5% decline for 2016 to 8.3 billion. For 2017, we forecast a return to growth of 1%. The private prison sector took a serious blow when the federal government recently announced the results of a long investigation that showed: “Private prisons ‘simply do not provide the same level of correctional services, programs and resources; they do not save substantially on costs; and as noted in a recent report by the Department's Office of Inspector General, they do not maintain the same level of safety and security,’” according to Deputy Attorney General Sally Yates. (CNN Money, August 18, 2016)

TRENDS: DRIVERS: „„ “Since 1999, the size of the private prison population grew 90%, from 69,000 prisoners in 1999 to Population 131,300 in 2014. The use of private prisons was at a maximum in 2012, when 137,200 inmates Government spending (almost 9% of the total U.S. prison population) were housed in private facilities.” (“Prisoners in Incarceration rate 2014,” Bureau of Justice Statistics, September 2015) Nonresidential structure „„ The recent announcement by the Deputy Attorney General will only affect 5% of privately housed investment prisoners among the “195,000 inmates in federal prisons.” However, it will likely set a trend for states to review their own prison systems and privatization agreements. (Ibid.)

PUBLIC SAFETY CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 13 3rd Quarter 2016 Report

Amusement and Recreation Amusement and recreation construction growth pole-vaulted to reach record heights with 19% growth in 2015. That is the equivalent of more than 21 stadiums that cost a billion each, plus cost overruns. For 2016, we expect the boom to take a breather, growing at just 8% to reach $21.5 billion. Sports venues are promoted as job creators with the ability to revitalize many dilapidated areas around a city. The market for amusement and recreation will continue to grow as large professional teams try to keep up with the Joneses. With the addition of domes and retracting roofs as well as bars, restaurants, shopping, luxury boxes and on and on, sports venues are creating the model for a future of climate-controlled cities.

TRENDS: DRIVERS: „„ The Rams return to Los Angeles will mean a new home for the team. The recently announced Income 70,000-seat stadium for the Los Angeles Rams will be a mixed-use project in Inglewood, Califor- Personal savings nia. (prnewswire.com, July 14, 2016) Unemployment rate „„ The San Diego Chargers are negotiating a new stadium in the center of San Diego. „„ Ohio Stadium is planning a $42 million renovation project. „„ A dedicated soccer stadium is being built in Orlando for the Orlando City Soccer Club expansion franchise. The opening is planned for the 2016 season. „„ The Washington Redskins are looking at new stadium designs with over 10 years left on their current lease. „„ Competition in the gaming sector will draw business away from some existing gambling centers, such as Atlantic City and Las Vegas, as well as from other public arenas.

AMUSEMENT AND RECREATION CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 14 FMI’s Construction Outlook

Transportation Transportation construction achieved a solid 8% growth in 2015, but we now expect it to slow to 1% in 2016. The boom in petrochemical manufacturing plants, particularly in the Gulf Coast region, will take advantage of the completed Panama Canal expansion and boost transportation infrastructure in both the South and West to accommodate increased activity from Panamax vessels. The passing of the FAST Act was seen as a welcome event for needed transportation infrastructure construction; however, there are still many questions surrounding funding of the Act and new regulations.

TRENDS: DRIVERS: „„ According to the Association of American Railroads (AAR) report for September 7, 2016, “total Population combined weekly rail traffic in North America was 703,721 carloads and intermodal units, down Government spending 4%. . . . North American rail volume for the first 35 weeks of 2016 was 23,157,141 carloads and Transportation funding intermodal units, down 6.9% compared with 2015.” „„ “The 2015 FAA forecast calls for U.S. carrier passenger growth over the next 20 years to average 2.0 percent per year, slightly lower than last year’s forecast. The sharp decline in the price of oil in 2015 is a catalyst for a short-lived uptick in passenger growth.” (FAA Aerospace Forecast Fiscal Years 2015-2035)

TRANSPORTATION CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 15 3rd Quarter 2016 Report

Communication Communication construction put in place dropped from 19% growth in 2015 to 0% in 2016, but is expected to recover to 4% in 2017 to reach $21.4 billion.

The trend for communications is likely to be more integration and mergers in order to capture market share. The current trend is for building more data centers and beefing up security and privacy against potential interlopers and severe weather events. The increasing need for data storage is not driven just by corporate and government use. The trend continues to merge telecommunications for entertainment and data that will be offered by a few competing service providers. Add to this the growing internet of things (IoT) that will connect smartphones and computers to anything that has a chip and the ability to connect to the internet such as automobiles, manufacturing equipment, personal monitoring devices and kitchen appliances.

TRENDS: DRIVERS: „„ Communications infrastructure will continue to be challenged with keeping up with the technol- Innovation/technology ogy as 4G moves to 5G and 4K video is already to move to 5K, pushing bandwidth and storage Global mobility capacity. Population „„ “Mini towers” for increasing coverage and spectrum will proliferate rapidly in the next five years. Security/regulatory „„ Google’s Google Fiber arm is deploying high-speed gigabit connections in selected metro areas. standards „„ Data security is critical for large businesses and governments in the face of potential disasters and Private investment threats from hackers and foreign enemies.

COMMUNICATION CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 16 FMI’s Construction Outlook

Manufacturing Manufacturing construction took a heavy hit during the Great Recession, but it has more than caught up as of 2015 with a whopping growth of 33% for the year and a more modest 2% growth expected for 2016. In either case, new records are being set for manufacturing construction investment. Currently, at just 75.4 for July 2016, manufacturing capacity utilization has yet to top the long-term average of 78.5. Continued low energy prices will hold down capacity additions in the oil and gas sector, but help those relocating or expanding in other areas of manufacturing, including the current boom in the petrochemical areas. The completion of the Panama Canal expansion project is expected to decrease costs and increase shipments from Gulf Coast ports between the U.S. and Asia.

TRENDS: DRIVERS: „„ With little change since last quarter, manufacturing capacity utilization rates are at 75.4% of capac- PMI ity in July 2016, which was below the historical average of 78.5 (1972-2015). Industrial production „„ The U.S. Department of Commerce reports, “Shipments of manufactured durable goods in July, up Capacity utilization three of the last four months, increased $0.4 billion or 0.2 percent to $232.9 billion. This followed Durable goods orders a 0.5 percent June increase.” (August 25, 2016) Manufacturing inventories „„ “New orders for manufactured durable goods in July increased $9.7 billion or 4.4 percent to $228.9 billion, the U.S. Census Bureau announced today. This increase, up following two con- secutive monthly decreases, followed a 4.2 percent June decrease. Excluding transportation, new orders increased 1.5 percent. Excluding defense, new orders increased 3.8 percent.” (U.S. Census Bureau, August 26, 2015) „„ The PMI for August 2016 was at 40.4% according to The Manufacturing ISM® Report On Busi- ness®.

MANUFACTURING CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 17 3rd Quarter 2016 Report

NONBUILDING STRUCTURES

Power After declining sharply in 2015, losing 14%, we expect growth to improve 8% in 2016 to reach $93.9 billion for construction put in place. The power industry is in flux due to changing fuel supplies using more natural gas and less coal as well as variable rates of growth in alternative energy sources like solar and wind. Power plants must be updated to keep up with changing requirements as well as to manage distributed generation sources. The power industry will continue to consolidate as the average consumer reduces power use, but growth will be slow but steady in 2017 through our 2020 forecast horizon.

TRENDS: DRIVERS: „„ Power companies are placing greater emphasis on flexibility to respond to peak needs alongside Industrial production hydropower, solar and wind-generating facilities. Population „„ According to The Edison Foundation, “The United States currently has enough solar capacity Nonresidential structure installed to power approximately 4.6 million homes. Solar is the fastest-growing source of renew- investment able energy in the U.S. Already it reduces carbon dioxide emissions by 23.5 million metric tons each year—the equivalent of taking 4.9 million cars off the road.” (“Key Trends Driving Changes in the Electric Power Industry,” The Edison Foundation, Institute for Electric Innovation, December 2015)

POWER CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 18 FMI’s Construction Outlook

Highway and Street Highway and street construction increased 7% in 2015 to $90.1 billion. FMI forecasts just 1% growth for 2016 moving up to around 2% from 2017 through 2020. The Fixing America's Surface Transportation (FAST) Act for highway and transportation funding removed some uncertainty for highway funding; however, we do not expect a significant jump in spending over current levels. The onus will still be on states and communities to find funding for many of their highway and bridge repair needs, and funding for FAST is seen by many as tentative, as it is not based on a fuel tax.

TRENDS: DRIVERS: „„ ARTBA’s Transportation Investment Advocacy Center™ (TIAC) reports that, in the eight states that Population voted on gas tax increases, legislators do not appear to have been punished politically for their Government spending votes. The perception is that voters realize that something needs to be done to fund needed bridge Nonresidential structure and highway repair and are willing to pay for it. investment „„ According to Finance and Commerce, “About $163 billion is needed annually over a six-year period for highways, bridges and transit systems, yet only about $105 billion is being invested, ac- cording to a December report from the American Association of State Highway and Transportation Officials and the American Public Transportation Association.” (finance-commerce.com/2015/04)

HIGHWAY AND STREET CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 19 3rd Quarter 2016 Report

Sewage and Waste Disposal Construction put in place for sewage and waste disposal construction grew 7% in 2015, but we now expect it to slow to -3% to end 2016 before returning to a slow growth rate for 2017 through 2020. A significant percentage of the work to replace or build new metropolitan sewage and waste disposal is being done under court-ordered consent decrees. The EPA, in its recent “EPA National Enforcement Initiative: Keeping Raw Sewage and Contaminated Stormwater Out of Our Nation's Waters” report (March 2016) lists 38 cases going back to the earliest in 1978 up to today. The total “Estimated Cost to Bring CSS (SSS) into Compliance” is $31,079,834,799, averaging $839,995,535 per case. That figure does not include the costs to the EPA and municipal defendants for legal fees or fines, nor does it include cost overruns to complete the projects. Only four of the cases have met final obligations, and about a dozen won’t be completed for more than a decade.

TRENDS: DRIVERS: „„ Growth, driven by aging infrastructure and regulation, is on the horizon, but the length of the Population horizon is still unknown. Slow water infrastructure markets in the aftermath of the recession con- Industrial production tinue to build the backlog of necessary work as existing infrastructure ages. Government spending „„ In need of replacement and upgrades, the 16,000 wastewater systems nationwide discharge more than 850 billion gallons of untreated sewage into surface waters each year. „„ Combined sewer systems (stormwater and sewage) serve roughly 950 communities with about 40 million people. Most communities with CSOs are located in the Northeast and Great Lakes. „„ The Clean Water State Revolving Fund (CWSRF) programs have provided more than $5 billion annually in recent years to fund water-quality protection projects.

SEWAGE AND WASTE DISPOSAL CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 20 FMI’s Construction Outlook

Water Supply Water supply construction grew 2% in 2015. However, growth is expected to drop by 4% by the end of 2016 and return to just 1% growth in 2017.

In some regions of the nation, specifically California, water is the new oil. Like oil, one of the concerns for water besides scarcity is storage and conveyance to the right place according to need. More people will be asked to pay more for water as water becomes a scarcer commodity, considering increased population, agricultural and industrial needs. Whether one believes in global climate change or not, states will need to be strategic and proactive in both freshwater needs and sewage disposal and recycling.

TRENDS: DRIVERS: „„ According to a GAO report, “after irrigation, energy production was the second-greatest concern Population of state water managers in terms of affecting water available for other uses.” (“Fresh Water,” GAO, Industrial production May 2014) While new fracking operations have slowed due to low oil prices, water use will con- Government spending tinue to be of concern, especially since much fracking work occurs in areas with lower water supplies. „„ Green construction practices, such as controlling runoff to help increase groundwater, will become the norm for improvements and new construction.

WATER SUPPLY CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 21 3rd Quarter 2016 Report

Conservation and Development Conservation and development construction grew 9% in 2015. We expect that growth to slow to 5% in 2017. The president’s 2017 budget for the Civil Corp of Engineers allots $1.09 billion for construction. “By program area, the 33 funded construction projects consist of 17 flood risk management projects (two funded for completion), nine aquatic ecosystem restoration projects, six commercial navigation projects (three funded for completion) and one hydropower project (funded for completion).” (President's Fiscal 2017 Budget for U.S. Army Corps of Engineers Civil Works released, PRNewswire, February 9, 2016, from U.S. Army Corps of Engineers.)

DRIVERS: Population Government spending

CONSERVATION AND DEVELOPMENT CONSTRUCTION PUT IN PLACE Forecast as of Q3 2016

Source: FMI Research Services 22 FMI’s Construction Outlook

Construction Put in Place Estimated for The United States Millions of Current Dollars 3rd Quarter 2016 Forecast (based on Q2 2016 Actuals)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 RESIDENTIAL BUILDINGS Single-Family 109,984 133,668 171,837 194,091 233,049 246,945 258,425 267,312 275,029 288,176 Multifamily 17,821 25,758 35,169 46,250 57,533 61,776 64,476 65,916 67,583 70,474 Improvements* 124,842 116,631 122,210 134,519 149,673 155,187 157,800 161,391 162,971 165,974 Total Residential 252,646 276,057 329,217 374,860 440,255 463,908 480,700 494,619 505,582 524,624 NONRESIDENTIAL BUILDINGS Lodging 9,129 10,836 13,484 16,738 21,728 25,601 26,971 27,409 27,765 28,207 Office 36,011 37,800 37,979 46,582 55,188 63,883 67,002 69,458 70,893 71,776 Commercial 42,816 47,335 53,159 62,841 66,924 70,838 73,645 75,037 76,138 77,845 Health Care 40,204 42,544 40,689 38,647 40,734 41,043 43,090 45,974 49,271 52,094 Educational 84,985 84,672 79,060 79,681 83,517 86,400 90,462 96,273 102,431 107,419 Religious 4,239 3,846 3,590 3,386 3,667 3,857 3,919 4,039 4,125 4,211 Public Safety 10,407 10,431 9,506 9,437 8,729 8,313 8,387 8,751 9,092 9,496 Amusement and Recreation 15,995 15,480 15,207 16,773 19,878 21,498 22,658 23,192 23,680 23,814 Transportation 34,737 37,862 39,459 42,043 45,566 45,936 47,726 50,222 52,235 53,957 Communication 17,685 16,165 17,783 17,298 20,507 20,567 21,414 22,465 23,449 24,100 Manufacturing 40,559 47,741 50,548 58,648 78,178 80,057 83,234 85,785 88,135 90,110 Total Nonresidential Buildings 336,767 354,712 360,464 392,074 444,616 467,993 488,508 508,606 527,214 543,029 NONBUILDING STRUCTURES Power 75,185 97,434 93,317 101,216 87,167 93,941 99,202 104,049 108,809 111,163 Highway and Street 79,322 80,546 81,364 84,220 90,068 91,272 93,181 95,878 97,886 99,410 Sewage and Waste Disposal 22,710 22,261 22,425 23,321 25,064 24,403 24,967 25,739 26,802 28,187 Water Supply 14,163 13,218 13,597 13,334 13,563 13,011 13,187 13,611 14,281 15,136 Conservation and Development 7,538 6,228 5,967 7,310 7,985 8,374 8,808 9,417 10,095 10,851 Total Nonbuilding Structures 198,918 219,687 216,670 229,401 223,847 231,001 239,345 248,695 257,873 264,747 Total Put in Place 788,331 850,456 906,351 996,335 1,108,718 1,162,903 1,208,553 1,251,919 1,290,669 1,332,400

*Improvements includes additions, alterations and major replacements. It does not include maintenance and repairs.

Construction Put in Place Estimated for The United States Change From Prior Year – Current Dollar Basis 3rd Quarter 2016 Forecast (based on Q2 2016 Actuals)

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 RESIDENTIAL BUILDINGS Single-Family -3% 22% 29% 13% 20% 6% 5% 3% 3% 5% Multifamily 2% 45% 37% 32% 24% 7% 4% 2% 3% 4% Improvements* 3% -7% 5% 10% 11% 4% 2% 2% 1% 2% Total Residential 0% 9% 19% 14% 17% 5% 4% 3% 2% 4% NONRESIDENTIAL BUILDINGS Lodging -22% 19% 24% 24% 30% 18% 5% 2% 1% 2% Office -5% 5% 0% 23% 18% 16% 5% 4% 2% 1% Commercial 7% 11% 12% 18% 6% 6% 4% 2% 1% 2% Health Care 2% 6% -4% -5% 5% 1% 5% 7% 7% 6% Educational -4% 0% -7% 1% 5% 3% 5% 6% 6% 5% Religious -20% -9% -7% -6% 8% 5% 2% 3% 2% 2% Public Safety -7% 0% -9% -1% -8% -5% 1% 4% 4% 4% Amusement and Recreation -6% -3% -2% 10% 19% 8% 5% 2% 2% 1% Transportation -9% 9% 4% 7% 8% 1% 4% 5% 4% 3% Communication 0% -9% 10% -3% 19% 0% 4% 5% 4% 3% Manufacturing -2% 18% 6% 16% 33% 2% 4% 3% 3% 2% Total Nonresidential Buildings -3% 5% 2% 9% 13% 5% 4% 4% 4% 3% NONBUILDING STRUCTURES Power -4% 30% -4% 8% -14% 8% 6% 5% 5% 2% Highway and Street -4% 2% 1% 4% 7% 1% 2% 3% 2% 2% Sewage and Waste Disposal -13% -2% 1% 4% 7% -3% 2% 3% 4% 5% Water Supply -8% -7% 3% -2% 2% -4% 1% 3% 5% 6% Conservation and Development 5% -17% -4% 23% 9% 5% 5% 7% 7% 7% Total Nonbuilding Structures -5% 10% -1% 6% -2% 3% 4% 4% 4% 3% Total Put in Place -3% 8% 7% 10% 11% 5% 4% 4% 3% 3%

*Improvements includes additions, alterations and major replacements. It does not include maintenance and repairs. 23 3rd Quarter 2016 Report

APPENDIX

CONSUMER PRICE INDEX All Urban Consumers 12-Month Percent Change 24 FMI’s Construction Outlook

CONSTRUCTION UNEMPLOYMENT RATES

EMPLOYMENT AND UNEMPLOYMENT RATE COMPARISON 25 3rd Quarter 2016 Report

MONTHLY HOUSING SUPPLY

Federal Reserve Economic Data, https://research.stlouisfed.org/fred2

CONSTRUCTION AS A PERCENTAGE OF GDP 26 FMI’s Construction Outlook

CONSTRUCTION SPENDING AND NOMINAL GDP

VALUE OF PUBLIC CONSTRUCTION PUT IN PLACE – SEASONALLY ADJUSTED RATE

(Millions of dollars. Details may not add to totals due to rounding.)

Value of Construction Put in Place—Seasonally Total Construction Put in % of Total Construction Put Total Construction Put in % of Total Construction Put Adjusted Annual Rate (Millions of Dollars) Place (July 2015) in Place (Q3 2015) Place (Q3 2016 Forecast) in Place (Q3 2016)

*Public Construction $297,593 27% $278,190 24%

*State and Local $275,090 25% $256,523 22%

*Federal $22,503 2% $21,667 2%

FMI Forecast: Private Construction Put in Place $811,125 73% $884,460 76%

FMI Forecast: Construction Put in Place $1,108,718 100% $1,162,650 100%

* from U.S. Census Bureau Construction Spending CONFERENCE BOARD CONSUMER CONFIDENCE INDEX Benefits Basis A Construction Market Forecast From ______FMI’s Research Services Group Can: „„ Historical information in FMI’s standard ______Construction Market Forecast is based on „„ Supply the market-oriented, economy-driv- building permits and construction put in en dimension essential for preparing, imple- place data as provided by the U.S. Com- menting and monitoring strategic plans. merce Department. Forecasts are based on „„ Be a significant aid in defining, targeting, econometric and demographic relationships implementing and monitoring other critical developed by FMI, on information from corporate decisions, such as long- and short- specific projects gathered from trade sources, term sales goals or redirecting resources (i.e., and on FMI’s analysis and interpretation of on a geographic or a product-line basis). current and expected social and economic „„ Provide the basis for estimating submarkets. conditions. „„ Provide the basis for comparing performance among markets. Other Reports ______„„ Provide the basis for identifying activities that „„ Reports on state and federally financed J. Randall (Randy) Giggard are beneficial or detrimental to performance. highway construction are available for most Managing Director counties or combinations of counties. Research Services Features „„ Custom reports on a wide variety of con- Each Standard Construction Market Forecast: struction-related topics can be prepared by ______FMI. Randy Giggard is responsible for design, „„ Details construction put in place in three management and performance of primary „„ Reports are based on multiple sources and residential building, 11 nonresidential build- and secondary market research projects are appropriate for preliminary analytical and ing and five nonbuilding structure categories. and related research activities, including planning purposes but contain little or no It covers the current year, eight previous economic analysis and modeling, direct observation of the area described and years and five forecast years. It is available for construction market forecasting and are not guaranteed by FMI to be accurate. any county in the U.S. or any combination of database management. Randy’s particular counties, metropolitan statistical areas, states, expertise is in the areas of market sizing and regions, etc. modeling, competitive analysis, sales and For more information, „„ Includes both construction values and an- market performance evaluations, buying nual percentage changes. Delivery time de- call 919.785.9268. practices and trends analysis. pends on the size of the request but is usually only a few days. It can be delivered in printed Randy holds undergraduate degrees in or electronic form and in most major text or mechanical engineering from Southern spreadsheet formats. Graphs can be provided Illinois University and in English from at additional cost. Illinois State University and a master's of marketing and management policy from About FMI’s Research Services Group Northwestern University. As the construction industry becomes increasingly competitive, market intelligence becomes an important tool for the building industry. A more complete understanding of the market, market trends, T 919.785.9268 customer perceptions, buying practices, competitor profiles and other market influencers will enhance Email: [email protected] craft labor studies. www.fminet.com Since 1953, FMI has provided consulting and training services specialized for the construction industry. FMI’s market research includes both secondary and primary research designed to meet clients’ specific needs. Both types of research are used to provide accurate assessments in a timely, efficient and concise manner for clients. Typical project work performed includes customer buying practices, competitive analyses, market-size modeling, market forecasts and trends, channel performance analyses, customer satisfaction surveys and sales performance evaluations. Industry Focus. Powerful Results.™ We serve clients involved with engineering & construction, infrastructure and the built environment

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