In 2012, you could have felt hopeful about the economy on any given day. Some days, you also could have felt the opposite. It was the year of the rocky recovery. But if you take a closer look at what happened in key construction sectors and the economy as a whole, you’ll find a fragile recovery gaining strength for 2013. Robert Murray, vice president of Economic Affairs for McGraw-Hill Construction sees it this way: “2013 is ‘setting the stage’ for a full-fledged recovery in 2014.”
Murray presented at the recent McGraw-Hill Construction Outlook Executive Conference held Oct. 23–24, 2012, in Washington, D.C. “Slow, but incremental” were descriptors frequently expressed at the conference by economic prognosticators who see the pieces falling into place for a recovery that takes hold. Much of what was shared is part of the 2013 Dodge Construction Outlook. Another group of forecasters brought together through Reed Construction Data has nearly identical findings. All agree that while global or domestic forces lurk to slow momentum, propulsion should come in 2013 as certain self-made roadblocks are removed.
While the financial community had been looking for some certainty during this prolonged recovery, one uncertainty was removed with the end of the 2012 election.
“With the presidential election over, business leaders can no longer use that excuse delaying decisions such as project starts,” said Kermit Baker, chief economist for the American Institute of Architects.
Baker served on a Nov. 8, 2012, webcast panel sponsored by Reed Construction Data, “Post Election: Where is Construction Headed?” The short answer is up.
Two other factors continued to slow growth: fear of the so-called fiscal cliff and related serious debt reduction. Both weighed heavily on the minds of economists and the business community. Yet, even with these drags, there is this encouraging statistic from McGraw-Hill’s Murray: “We have an upgraded construction forecast that moved from flat growth in 2013 to a 5 percent gain. That’s good.”
Reed Construction puts its estimate at 6.2 percent. Murray’s more conservative projection represents $484 billion total construction dollars being spent this year. Though 32 percent below a 2005 peak, if a sound deficit economic growth plan is put in place, economic acceleration could surpass growth forecasts for 2013. Even more, help could come if unemployment numbers fall.
“High unemployment numbers scare consumers and have a direct negative impact on construction,” said Beth Ann Bovino, senior economist at financial market information provider Standard & Poor’s (see Figure 2).
Seeking a steady road in 2013
If it seems 2012 was stuck in first gear, it was, as the gains of 2011 lost momentum. The slow pace of recovery after a sharp economic decline reaffirmed itself. A cycle of acceleration to deceleration became a familiar economic refrain. Consumer confidence followed suit.
“The recession was the longest and deepest since the 1930s,” Bovino said.
So now here we are at the start of 2013, and the Dodge report characterizes the near term this way: “The construction industry has stabilized—at a low level.”
Here’s how “stabilized” looked in 2012 and how the tea leaves read for 2013. Looking to construction employment, numbers during the first nine months of 2012 were up a slight 0.7 percent compared to 2011. Washington, D.C., led the way, with employment increasing by 22 percent. The industry has lost contractors during the downturn to other professions, retirement or a return to school. A labor shortage could result as construction returns.
Rider Levett Bucknall (RLB)—a global property and construction practice—declared (in its survey) the construction industry is on the road to recovery in major cities. The U.S. Department of Commerce reported construction activity up 9 percent through the first eight months of last year. And, for the first time since 2009, Engineering News-Record’s quarterly construction confidence surveys found respondents feeling confident in 2012.
Looking at the numbers, residential building was up an estimated 20 percent in 2012, strengthened by multifamily housing and a slow return on single-family construction. Though nonresidential construction was down 10 percent (in dollar terms), it, in effect, was flat. Commercial building gains of nearly 6 percent were offset by a pullback in institutional construction. Nonbuilding construction rose 3 percent in 2012, reflecting a 17 percent gain for electrical utilities that offset a 3 percent decline in public works projects. While economic growth will continue to be shaky for the first few months of 2013, the second half of the year will be stronger, according to both McGraw-Hill and Reed.
Gross domestic product (GDP) was up 2 percent in early 2012, slipped in the spring to 1.3 percent, then returned to 2 percent in the third quarter. For comparison, the last three months of 2011 were at 4.1 percent. If 2012 patterns continue, 2013 GDP should be at 2.2 percent, a “subdued growth pace” as characterized by Murray. Since those projections, revised figures had October 2012 growth at 2.7 percent (see Figure 3).
Making some assumptions
In the Dodge report, forecasters based their 2013 GDP growth on the assumption that policy-makers would avoid allowing Bush-era tax cuts to expire, spreading out automatic spending cuts over several years and extending cuts for middle-class taxpayers. The push for deficit reduction at the federal level travels downstream to state and local governments, which continue to focus on reducing spending. This creates a challenging environment in the financing of projects and for the construction industry. The outlook also anticipates that, with President Obama’s re-election, an emphasis on infrastructure work will continue.
Although the fiscal cliff was somewhat resolved at the time of this writing, the Congressional Budget Office predicted that if the United States went over the fiscal cliff such financial belt-tightening would “lead to economic conditions in 2013 that will probably be considered a recession.” Bovino put the possibility of a double dip at between 20 to 25 percent. Unemployment would rise to 9 percent and GDP would fall 0.5 percent. It is likely construction starts would take a hit and decline by an estimated 5 to 7 percent (see Figure 4). The bottom line, “a more accommodative stance [from lawmakers] will be necessary if there’s to be any easing of the fiscal drag stemming from spending cuts and tax hikes,” the Dodge report states.
Both McGraw and Reed factored the European debt crisis into their economic assumptions and view it as a low risk. The European Central Bank took steps to mitigate the crisis. By summer 2012, the consensus view was that the debt crisis was being contained for now.
Other economic factors in play
Inflation and gas prices seem to be nonfactors in negatively affecting economic growth in 2013.
“Despite the recent pickup in oil prices, broader price measures show that inflation has been holding at manageable levels,” the Dodge report states.
Low-term interest rates remain low. Last October, a 10-year Treasury bill stood at a 1.7 percent interest rate. Thirty-year mortgage rates fell as low as 3.36 percent in 2012. The Fed indicated it intended to hold short-term interest rates near zero through at least the middle of 2015. It is also buying large quantities of mortgage bonds ($40 million each month) until there is significant job market improvement. For such actions to work, Dodge feels “pervasive uncertainty” from businesses and consumers alike must dissipate.
During the first half of 2012, Congress addressed the reauthorization of the multiyear federal transportation bill, which had expired in September 2009 and was extended in a stop-gap measure over 33 months. Called “Moving Ahead for Progress in the 21st Century (MAP-21),” the bill was signed by President Obama in July and is authorized for two years. The bill speeds up highway and transit project approval while consolidating federal surface transportation programs. It includes some trimming. The Federal Highway program was reduced 5 percent to $39 billion; the U.S. General Services Administration (GSA) new construction was cut 39 percent; the Department of Defense (DOD) military construction fell 8 percent; and major construction projects for the Veterans Administration dropped 45 percent. Congress made some progress for 2013 appropriations, keeping 2012 funding levels through March. If automatic spending cuts were to play out, the Dodge outlook surmises transportation projects would be less vulnerable than environmental projects.
Now that federal stimulus is largely history, the Dodge outlook reports, “The lift from the stimulus act for buildings as opposed to infrastructure projects was modest.” From 2009 through the third quarter of 2012, the “stimulus-related” projects in the McGraw-Hill Construction database totaled public works ($42.7 billion), buildings ($17.7 billion) and electric utilities ($3.6 billion).
The spring 2012 “Fiscal Survey of the States,” issued by the National Association of State Budget Officers, indicates “many state budgets are not fully back to prerecession levels,” though they are strengthening. The winding down of the stimulus represented $4.5 billion in stimulus support during 2012 and an estimated $500 million for 2013. The fiscal survey shows year-end balance figures for all 50 states. In 2011, balances grew to 7.2 percent. Experts generally view 5 percent as a necessary fiscal cushion. Estimates for 2012 arrived at 6.5 percent. This year, the number should rise to 7.8 percent. Spending restraint is still the norm, and it affects construction projects. A renewed attention to public-private partnerships continues as a way to fund construction projects (see Figure 5).
Financing loosens up
Private lending showed some easing in the second quarter of 2012. In the Fed’s July 2012 survey of bank lending officers, 10 percent of the respondents had eased lending standards to large and medium-sized firms for commercial and industrial loans. Lending officers saw an 8 percent increase in demand for such loans. This was the sixth quarter in a row that some easing was reported.
“Loans are coming back gradually, hesitantly but incrementally,” Murray said. Increased demand for commercial real estate was reported for seven straight months in 2012. Waiting on details of regulatory reform to emerge could add some financing restraint.
In other promising news, the Mortgage Bankers Association states commercial and multifamily loans in the second quarter of 2012 were up 25 percent from 2011 and increased by 39 percent the previous quarter. Looking at loan activity during the first half of 2012 by property type, hotels were up by 147 percent; offices up 66 percent; industrial up 47 percent; healthcare up 33 percent; retail up 29 percent; and multifamily up by 21 percent.
The residential thaw
The housing market has traditionally helped economic downturns recover in seven of the last eight recessions, according to the Dodge outlook. That hasn’t been the case in this recovery, due to the housing bubble collapse. However, economists see a corner turned.
“I think a recovery is underway,” Murray said. “Many of the excess created during the housing bubble have now been largely worked off and demand is improving.”
Housing starts bear this out. Total housing starts for 2012 are expected to reflect a 22 percent increase after tepid 5 and 3 percent gains in 2010–2011. That represents 760,000 starts (see Figure 7).
In 2013, starts are expected to reach 900,000 units. A number close to 1 million is considered an important milestone to a normalizing housing market.
“Even if you aren’t involved in residential work, the health of this sector is a barometer to the economy,” said Bernard Markstein, chief economist, Reed Construction Data.
Drilling down the numbers
Further evidence of a housing recovery involves foreclosure numbers. The high rate of foreclosures remains a problem, but it did significantly improve in 2012. According to First American CoreLogic, the national inventory of foreclosed properties fell in August 2012 to 1.3 million homes, less than half the peak level. That month, completed foreclosures dropped to 57,000, a 24 percent decrease from August 2010. Far fewer home sales were also the result of distress (e.g., short sales) falling to 22 percent of all sales in August 2012. That was a 31 percent reduction from a year earlier. The National Association of Realtors reported that existing single-family home sales increased by 7.8 percent that same August to a seasonally adjusted rate of 4.82 million units (see Figure 8). Sales were 9.3 percent higher as well. For the sixth straight month in August, housing values rose, too. Household debt also is dropping from record highs.
New single-family housing starts totaled 551,000 units in September 2012, their highest level since March 2010. That also represents a 5 percent increase from August and 31 percent from the year before. The projection for 2012 as a whole is 24 percent (or 510,000 units). The Joint Center for Housing Studies of Harvard University estimates higher than Dodge by almost 25 percent (or 750,000 starts). In 2013, Dodge sees the single-family category advancing to 615,000 and the value of construction jumping 24 percent to $153 billion. It’s a start of what will take several years of healthy gains.
While existing home sales were up in all regions of the country in 2012, August-to-August comparisons showed sales increasing 18 percent in the Midwest and 11 percent in the Northeast and South. In fact, sales in these regions rose consecutively over 14 months. The West saw an increase of 4 percent. Meanwhile, new home sales rose for seven consecutive months in the same time frame. The strongest sales came from the West where sales surged 65 percent. The Northeast wasn’t far behind, at 56 percent. The Midwest and South were smaller, at 17 percent and 11 percent, respectively.
A boost in multifamily
A key sector leading the way to a construction market recovery is multifamily housing. Its recovery came sooner than single-family, with a 15 percent gain in 2010 and another 34 percent in 2011 (see Figure 9). Numbers dipped a bit in the first nine months of 2012 to 27 percent, but market fundamentals indicate continuing gains. The Miami area was the true leader in 2012, showing a 135 percent growth from 2011 in its multifamily housing starts. The largest was the high-end $231 million Brickell CitiCentre Condominiums, part of a $500 million mixed-use project that includes offices, hotel, retail and parking facilities (see Figure 10).
This year is projected to grow another 14 percent to 285,000 units. Much of the multifamily housing gains have been a reflection of apartment development due to the slower-to-recover single-family homes market. Dodge does see condo strength returning notably in larger metro areas. In the first nine months of 2012, 17 multifamily projects with a construction value of $100 million or more broke ground, up from the previous period in 2011.
Over the coming year, New York will be a center for multifamily construction (see Figure 10). In 2012, two of the top 17 condo projects ($200 million, 65-unit Baccarat Luxury Hotel and Condominiums and the $140 million, 97-unit Watershed Condominiums) were in New York City. A $110 million luxury senior living development in Denver and a $132 million condo project in Key Biscayne, Fla., are set to break ground this year. In 2012, gains slowed for this sector. Starts in the West were far more modest at 18 percent. They soared to 83 percent in 2011. The South was at 28 percent, the Midwest at 12 percent, and the Northeast at 6 percent. Projections for this year show the West at 17 percent with the Northeast picking up to match that rate. Starts in the Midwest are expected to be 13 percent and the South at 12 percent.
In 2011, housing starts were at their lowest levels in 45 years (McGraw-Hill Construction Statistics). Though 2012 and projected 2013 numbers reveal real improvement, the climb to health will take several years.
A measured commercial market
Though essentially true of the entire construction market, the key to unlocking growth in the commercial building sector involves removing economic uncertainty. In 2012, new commercial buildings rose an estimated 17 percent or 376 million square feet (see Figures 11, 12 and 13). That marks a recovery that began in 2011 and represents a 35 percent increase in starts from 2010. The forecast for 2013 is lower, but still positive. A modest rise of 12 percent, or 419 million square feet, is expected. In dollars terms, that equates to $55.9 billion. Building “alterations” took up some of the slack, a common factor during downturns. This work is on track to better $50 billion for 2012. Reed Construction Data analysts added that billings at architecture firms, a leading indicator of construction activity, have been firming in recent months (see Figure 14). Here’s a breakdown of new commercial construction in 2012.
Some noted projects began in the first nine months of 2012. Though a slight pullback from 2011, Walmart began construction on $1.3 billion in new store projects, many valued at $1 million or more (see Figure 15). That represents a square footage gain of 21 percent, or 13.7 million square feet. Target had fewer developments in 2012 but spent more. The retailer began construction on 37 projects valued at $1 million or more, totaling $175 million. Macy’s started five projects greater than $1 million, including a $400 million renovation of its Herald Square flagship store in Manhattan.
While retailers remain cautious, 2012 was expected to see retail construction starts grow by 15 percent or 96 million square feet. Against a backdrop of wavering consumer confidence, retail sales managed an 8 percent gain in 2012. “Cautious optimism” is how Dodge characterizes 2013 for this sector. This year’s outlook for retail construction is expected to show an 18 percent increase or 133 million square feet.
The commercial warehouse market improved dramatically two years ago as Lowe’s and Macy’s invested in notable warehouse spaces; 1.4 million and 1.3 million square feet, respectively. Overall construction starts for this sector rose 28 percent to 62 million square feet. Last year, Amazon started development on nearly 7 million square feet of space. Some slowing of growth is expected in 2013. Construction contracting should rise 10 percent to 95 million square feet but could pick up if the pace of the recovery heats up (see Figure 16).
According to CB Richard Ellis, “The continuing improvement in warehouse fundamentals has generated an active pipeline for both build-to-suit and speculative projects.”
The disappointing unemployment rate has held back office construction, yet office vacancy rates are dropping. According to CB Richard Ellis, big-city office vacancies fell to 15.5 percent in the third quarter of 2012. The Dodge report states, “Despite the improvement in availability, development of new office buildings remains an uneasy proposition and will be restrained in the near-term.”
There were bright spots in 2012.
Data centers have remained an important contributor to office construction in 2012, according to McGraw and Reed. Two of the largest included the $200 million Clifton (N.J.) Cloud Connection Center and a $200 million data center for AT&T in Kings Mountain, N.C.
Publicly funded office projects also played a favorable role. The Department of Defense began construction of the $106 million Social Security Administration Building in Baltimore. A $101 million remodel of the A.J. Celebrezze Federal Building in Cleveland and the $85 million Air Force Technical Applications Center at Patrick Air Force Base in Florida are other examples.
Panasonic built new corporate headquarters in Newark, N.J., costing $120 million. Hyundai invested in a $99 million expansion of its headquarters in Fountain Valley, Calif., and Endo Pharmaceuticals began work on a $65 million world headquarters near Philadelphia. A number of other corporate campus projects and notable smaller office building projects were slated to break ground by year-end 2012. Though a mixed picture in the short term, if employment gains strength, office construction contracting is expected to rise 8 percent, or 64 million square feet, in 2013 (see Figure 18).
In addition, other notable smaller office building projects were announced in 2012. Cox Enterprises in Atlanta is constructing a 578,000 square foot corporate office building. A new 300,000-square-foot office building for MRP Realty is slated in McLean, Va. These are just three examples.
Two years ago marked “a significant recovery for hotel construction,” the Dodge outlook reported. The upturn continued in 2012. Oahu, Hawaii, led with a gain of 19 percent. Nashville gained 11 percent. According to Smith Travel research, “revenue per available room” (revpar) grew another 7.3 percent through the first eight months of 2012 from an even stronger 8.2 percent in 2011. Revpar and occupancies are key indicators of the hotel market’s health. Occupancies averaged 63 percent in 2012, a 1.7 percent increase from 2011. These healthy fundamentals fueled hotel construction starts that grew by 23 percent or 33 million square feet in 2012. The largest project, valued at more than $100 million, was the Four Seasons Luxury Resort at Disney World in Orlando, Fla. Other projects valued in the hundreds of millions of dollars also began in 2012.
In 2013, it is expected hotel momentum will cool, growing 12 percent or 37 million square feet. Several large projects are expected to break ground this year including major 500-room hotels in Boston and Philadelphia.
Reed Construction Data projects annual construction spending increases in the commercial sector between 6 to 10 percent through 2017.
Impaired growth for institutional buildings
Institutional construction starts dropped 15 percent in 2012. The drop however will lessen to 2 percent (271 million square feet) or $87 million in 2013. Markets that typically fund major sectors of institutional construction (federal, state and local governments) have pulled down construction funding.
Here’s a summary: In 2012, education construction activity continued to lose momentum. New high school construction starts declined in square footage by 24 percent in the first nine months. Primary and junior high building starts dropped 12 percent and college university starts fell 14 percent. By the end of 2012, an additional fall of 19 percent (107 million square feet) was expected. This year will mark the fifth straight year of decline in this area, though a more moderate 6 percent decline is predicted (see Figure 19).
“However, 2013 could be a turning point for the fiscal condition of state and local governments,” states the Dodge report. “Once [the fiscal cliff] issue has been resolved, confidence should significantly improve.”
State private-financed higher education construction starts could continue to be a bright spot.
Religious buildings construction shrank 14 percent in 2012, steeper than 2011. This year is expected to be the same, with some 12 million square feet of new construction and some expected strengthening in 2014.
Amusement-related construction saw its fifth straight year of declines. Convention centers show the biggest decline, with 32 percent during the first nine months of 2012. Indoor sports arenas were actually up 12 percent and theaters increased by 28 percent. This year, the amusement sector should see an overall gain of 7 percent or 34 million square feet.
Transportation terminal projects fell an estimated 5 percent in 2012, dropping to 17 million square feet and leveling at $6 billion. The prediction for 2013 is an increase of 3 percent or 18 million square feet. Renovation work will be a driver. MAP-21 legislation and public-private partnerships are expected to help fuel the increase.
Momentum in healthcare construction stalled in 2012 offering only 15 projects valued at $100 million. Total construction starts in this sector showed a 16 percent drop in 2012 or 63 million square feet. The dollar value of starts dropped 12 percent to $20 billion. Looking deeper, the construction of hospitals (a 25 percent decline) lagged behind clinics and assisted living/nursing homes facilities. Starts are expected to slowly rebound this year, perhaps by 2 percent to 64 million square feet. Drivers such as aging facilities and a growing demand for healthcare services from an aging baby boom population will play a role. Murray expects the market to be back strong in a few years. A clear picture of Medicare, Medicaid and overall healthcare reform will play a role in providing some clarity, as well (see Figure 20).
Financing for public buildings— police and fire stations, courthouses, detention facilities and military buildings—remains challenging. For 2012, this sector represented 20 million square feet, a 24 percent reduction from 2011 (see Figure 21). The winding down of federal stimulus dollars, the Base Realignment and Closure (BRAC) program, and a reduction in GSA projects played a big role in the dampening of this sector. The forecast for 2013 is another drop of about 6 percent or 19 million square feet. Public/private financing will be a key to future growth in this segment.
While plant construction was on the upswing in 2010 and 2011, it “paused” in 2012. A total contracting drop of 3 percent—or 52 million square feet—was expected. In dollar terms, that represents a loss of $11.8 billion. The effects of the global economic slowdown and lack of U.S. company investment affected growth.
“With capacity utilizations still relatively high, there’s incentive for manufacturers in 2013 to revisit plant expansion plans,” said the Dodge report.
The forecast for 2013 shows a plant construction increase of 6 percent or 56 million square feet and an 8 percent increase in dollar terms of $12.8 billion (see Figure 22).
Ups and downs in public works and electric utilities
In 2012, public works stood at $100.6 billion—a 3 percent decline but much improved from the 14 percent decline in 2011. Electric utility construction was expected to reach $51 billion in 2012, a record high. Boosts came from nuclear power plant construction in Georgia and South Carolina. Upgrades to plants in California and Louisiana added to the tally.
This year, declines will diminish to 1 percent or $100 billion. Improvements will come through large highway and bridge projects forecast to rise 3 percent this year with help from MAP-21 and other financing. In rail-related projects, 2012 was a rebound year as construction activity rose an estimated 32 percent or $21.3 billion. That was after a 42 percent decline the previous year. Commuter and light rail played a big role. Looking to airport infrastructure, the approved Federal Aviation Administration (FAA) Modernization and Reform Act of 2012 was authorized. Through the FAA’s Airport Improvement Program, it offers grant funding of $3.5 billion annually through 2015 for airport capital projects.
Electric generation construction is forecast to fall 31 percent this year to $35 billion. Its record high of $51 billion in 2012 was based in part on nuclear power plant construction and renovation. Because of decreasing capacity utilization, there’s now less incentive to add generating capacity (see Figure 23).
McGraw-Hill Construction reports green-generated energy has grown from $10 billion in 2005 to $85 billion in 2012 (residential and nonresidential). Tax incentives continue but for how long? The business energy investment 30 percent tax credit for renewable energy production has a few more years. It will sunset in 2016. The Wind Energy Production Tax Credit was set to expire on Dec. 31, 2012, but was extended on Jan. 1.
With roadblocks removed, the fundamentals are in place and many of the construction market sectors are on the ascent going into 2013. This year, momentum should be strong.