Market Signals Strong as Year Winds Down

Dodge Data & Analytics released its 2015 Dodge Construction Outlook, a mainstay in construction industry forecasting and business planning. The outlook was presented at the 76th annual Outlook Executive Conference in Washington, D.C.

The report predicts that total U.S. construction starts for 2015 will rise 9 percent to $612 billion, a larger gain than the 5 percent increase to $564 billion estimated for 2014. Road and bridge construction is predicted to rise 3 percent in 2015.

“The construction expansion should become more broad-based in 2015, with support coming from more sectors than was often the case in recent years,” said Robert Murray, chief economist and vice president for Dodge Data & Analytics. “The economic environment going forward carries several positives that will help to further lift total construction starts. Financing for construction projects is becoming more available, reflecting some easing of bank lending standards, a greater focus on real estate development by the investment community, and more construction bond measures getting passed. While federal funding for construction programs is still constrained, states are now picking up some of the slack. Interest rates for the near term should stay low, and market fundamentals (occupancies and rents) for commercial building and multifamily housing continue to strengthen.”

Based on research of specific construction market sectors, the 2015 Dodge Construction Outlook details the forecast as follows.

  • Commercial building will increase 15 percent, slightly faster than the 14 percent gain estimated for 2014. Office construction has assumed a leading role in the commercial building upturn, aided by expanding private development as well as healthy construction activity related to technology and finance firms. Hotel and warehouse construction should also strengthen, although the pickup for stores is more tenuous.
  • Institutional building will advance 9 percent, continuing the moderate upward trend that’s been established during 2014. The educational building category is now seeing an increasing amount of K-12 school construction, aided by the financing made available by the passage of recent construction bond measures. Healthcare facilities are expected to show some improvement relative to diminished activity in 2014.
  • Single-family housing will rise 15 percent in dollars, corresponding to an 11 percent increase in units to 700,000 (Dodge basis). It’s expected that access to home mortgage loans will be expanded, lifting housing demand. However, the millennial generation is only gradually making the shift towards homeownership, limiting the potential number of new homebuyers in the near term.
  • Multifamily housing will increase 9 percent in dollars and 7 percent in units to 405,000 (Dodge basis). Occupancies and rent growth continue to be supportive, although the rate of increase for construction is now decelerating as the multifamily market matures.
  • Public works construction will improve 5 percent, a partial rebound following the 9 percent decline estimated for 2014. Highway and bridge construction should stabilize, and modest gains are anticipated for environmental public works. Federal spending restraint will be offset by a greater financing role played by the states, involving higher user fees and the increased use of public-private partnerships.
  • Electric utilities will slide 9 percent, continuing the downward trend that’s followed the exceptional volume of construction starts that was reported during 2011-2012. With more projects now coming on line, capacity utilization rates will stay low, limiting the need for new construction.
  • Manufacturing plant construction will settle back 16 percent, following the huge increases reported during both 2013 (up 42 percent) and 2014 (up 57 percent) that reflected the start of massive chemical and energy-related projects. Next year’s volume remains quite high by recent historical standards.

Housing Starts
Single-family housing production in October reached its highest level since November 2013 while the more volatile multifamily sector brought combined nationwide starts activity down 2.8 percent to a seasonally adjusted annual rate of 1.009 million units, according to newly released figures from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

“The rise in single-family starts is more proof that the economy is firming and consumer confidence is growing,” said Kevin Kelly, chairman of the National Association of Home Builders (NAHB) and a home-builder and developer from Wilmington, Del. “We expect continued upward momentum into next year.”

“The increase in single-family starts shows that the housing market continues to recover at a steady, gradual pace,” said NAHB Chief Economist David Crowe. “On the multifamily side, production is stabilizing above historic levels as demand for rental housing increases.”

The 2.8 percent decline in overall starts in October was due primarily to a 15.4 percent decline on the multifamily side, which brought that sector’s annual production pace to 313,000 units on a seasonally adjusted annual basis. Meanwhile, single-family starts posted a 4.6 percent gain to 696,000 units.

Regionally in October, combined housing production dropped in Northeast, Midwest and West, with respective losses of 16.4 percent, 18.5 percent and 10.9 percent. Total production rose in the South by 10.1 percent.

Issuance of building permits registered a 4.8 percent gain to a seasonally adjusted annual rate of 1.08 million units in October. Multifamily permits rose 10 percent to 440,000 units while single-family permits increased 1.4 percent to 640,000 units.

Regionally, the Northeast and Midwest registered overall permit losses of 21.5 percent and 11.4 percent, respectively. The South and West posted respective gains of 8.8 percent and 21.6 percent.

Metro Markets
Markets in 59 of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity in the third quarter of 2014, according to the National Association of Home Builders/First American Leading Markets Index (LMI).

This represents a year-over-year net gain of seven markets. The index’s nationwide score moved up slightly from .89 in the second quarter to .90, meaning that based on current permit, price and employment data, the nationwide average is running at 90 percent of normal economic and housing activity. Meanwhile, 66 percent of markets have shown an improvement year-over-year.

“The markets are recovering at a slow, gradual pace,” said NAHB Chairman Kelly. “Continued job creation, economic growth and increasing consumer confidence should help spur pent-up demand for housing.”

Baton Rouge, La., continues to top the list of major metros on the LMI, with a score of 1.39 – or 39 percent better than its last normal market level. Other major metros leading the list include Austin, Texas; Honolulu; Oklahoma City and Houston. Rounding out the top 10 are Los Angeles; San Jose, Calif.; Salt Lake City; New Orleans and Charleston, S.C. — all of whose LMI scores indicate that their market activity now equals or exceeds previous norms.

Keeping Momentum
The Dodge Momentum Index rose in October, climbing to 125.5 (2000=100) for the month, up 7.6 percent from October’s reading of 116.6 according to Dodge Data & Analytics.

The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year.

The Momentum Index had declined in each of the previous three months, and the increase in October returns the Index to the rising trend seen during the first half of this year. The Momentum Index now stands 18 percent above last year, which indicates that overall healthy economic growth is working its way through to the construction sector.

The October rise in the Momentum Index was the result of greater planning activity for its two main segments – institutional building, up 8.8 percent for the month; and commercial building, up 6.8 percent.

There were six commercial building projects exceeding $100 million that entered into planning during the month:

  • The $200 million Potomac Yard Office Building in Alexandria, Va.
  • The $200 million Waterfront Office Development in Austin, Texas.
  • A $150 million warehouse in Eastvale, Calif.
  • The $125 million Hudson Hotel in Philadelphia.
  • A $100 million Phase 2 rehabilitation of the Constitution Gardens in Washington, D.C.
  • The $100 million Stadium Walk in Atlanta.

Construction Spending
The U.S. Census Bureau of the Department of Commerce announced that construction spending during September 2014 was estimated at a seasonally adjusted annual rate of $950.9 billion, 0.4 percent (±2.0 percent) below the revised August estimate of $955.2 billion. The September figure is 2.9 percent (±2.1 percent) above the September 2013 estimate of $924.2 billion.

During the first 9 months of this year, construction spending amounted to $710.1 billion, 6.1 percent (±1.3 percent) above the $669.3 billion for the same period in 2013.

Spending on private construction was at a seasonally adjusted annual rate of $680.0 billion, 0.1 percent (±1.0 percent) below the revised August estimate of $680.8 billion. Residential construction was at a seasonally adjusted annual rate of $349.1 billion in September, 0.4 percent (±1.3 percent) above the revised August estimate of $347.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $331.0 billion in September, 0.6 percent (±1.0 percent) below the revised August estimate of $333.0 billion.

In September, the estimated seasonally adjusted annual rate of public construction spending was $270.9 billion, 1.3 percent (±3.1 percent) below the revised August estimate of $274.4 billion. Educational construction was at a seasonally adjusted annual rate of $62.8 billion, 0.1 percent (±5.3 percent) above the revised August estimate of $62.8 billion. Highway construction was at a seasonally adjusted annual rate of $79.9 billion, 3.7 percent (±6.9 percent) below the revised August estimate of $82.9 billion.

Regards,
Mark Kuhar, Editor
Rock Products Magazine
Mining Media International
Member: Construction Writers Association

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