FMI's Construction Outlook

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FMI's Construction Outlook 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
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