While there are a few clouds on the horizon that should not be ignored, 2018 is shaping up to be a strong year for nonresidential construction, including commercial, industrial and institutional (CII). According to a recent report from the Associated General Contractors of America (AGC), “Expecting Growth to Continue: The 2018 Construction Hiring and Business Outlook,” construction firms appear to be optimistic about 2018, and they expect demand for all types of construction services to continue to expand.
“This optimism applies to both private- and public-sector construction demand, perhaps reflecting both optimism with current economic conditions, an increasingly more business-friendly regulatory environment, and optimism that the Trump administration will finally deliver on its promise to boost infrastructure investments,” the report states.
The report notes that there are some challenges, especially with regard to finding qualified workers, and the increased level of job competition for projects: “Despite these challenges, 2018 should prove to be a good year for the construction industry, especially if the newly enacted federal tax cuts provide the kind of economic growth many expect.”
When broken down by market segment, contractors are the most optimistic about the private office market segment (22 percent net positive), followed by retail, warehouse and lodging segments (21 percent), water/sewer and manufacturing (20 percent), K–12 schools (18 percent), hospital and highway construction (17 percent), public building and multifamily residential (16 percent), power (13 percent), higher education (11 percent), and federal construction (8 percent).
When broken down by region, contractors in the Northeast are most optimistic about water/sewer construction (33 percent), multifamily residential (19 percent), and hospital construction (18 percent). Contractors in the Midwest are the most optimistic about manufacturing construction (22 percent net positive), power (21 percent), and water/sewer construction (20 percent). Contractors in the South are most optimistic about private office construction (33 percent), retail, warehouse, and lodging construction (26 percent), and manufacturing construction (23 percent). Contractors in the West are most optimistic about highway construction (27 percent), public building construction (26 percent), and water/sewer construction (23 percent).
“I think that, in 2018, there will be a lot of rebuilding and renovations in areas of Texas, Florida and California devastated by hurricanes, flooding and wildfires,” said Ken Simonson, chief economist of the AGC.
Dodge Data & Analytics also weighed in a 2018 forecast. In December 2017, the Dodge Momentum Index was up 3.6 percent to 153.9, largely as a result of an 8.6 percent jump in the Institutional Building component of the Index. The Commercial Building component rose a slight 0.7 percent. (The Momentum Index is a monthly measure of the first report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. The Index began in 2000 with an index of 100.) The continued strengthening of the Index in 2017 suggested nonresidential building construction activity will advance further in 2018. And, according to the Index, commercial construction companies were anticipating a 2018 that would be even stronger than 2017, with the majority of companies reporting that they plan to expand their staffs.
This optimism was reinforced by Dodge Data & Analytics’ “2018 Dodge Construction Outlook,” which predicted that total construction starts for 2018 will advance 3 percent, to $765.2 billion, with gains for nonresidential building up 2 percent. (For more on the 2018 Outlook, click here.)
According to the Outlook, office construction should see further growth in 2018, helped by broad development efforts in downtown markets. Warehouse construction also is expected to increase as a result of demand arising from e-commerce. However, retail and hotel construction is expected to remain weak and even pull back. Institutional building is expected to advance 3 percent, while manufacturing plant construction is expected to decrease 1 percent in dollar terms, but experience moderate growth in terms of square footage.
According to Construction World’s “Forecasting Construction Industry Trends,” consumer spending continues to be the key driver in the rising number of commercial construction projects.
“Similarly, we are seeing parallel trends in office building and warehouse construction, with e-commerce on the upswing,” states the report. “Despite the decrease in traditional brick-and-mortar retail spaces, warehouses are on the rise due to the growing impact of e-commerce, creating greater needs for large-scale distribution centers. Hospitals and medical institutions are also gaining momentum with a growing number of project starts on the horizon.”
The report continues: “The number of stand-alone stores and shopping centers are decreasing with the rise of mixed-use buildings. A combination of retail, entertainment and residential structures are becoming a more popular avenue for commercial developers. This is due to growing customer preferences for everyday needs like grocery stores, shopping areas, entertainment and residential spaces to be in close proximity to one another. In addition, mixed-use structures reflect eco-friendly and sustainable values that many residents and businesses feel are a priority.”
Finally, it notes, “Hotel construction is on the down slope, as hotel revenues slowly dip, and consumers turn to other forms of rentals and short-term stay options.”
Construction Dive also weighed in on 2018: “Although not construction-specific, [the new tax law] certainly will have a significant impact on businesses. The public construction sector will benefit from private-activity bond (PAB) financing, and contractors structured as C-corporations and pass-through entities will benefit from tax relief.”
Sustainability and resiliency
One important trend to monitor in 2018 is that of sustainable, resilient and green construction.
“With the seemingly endless string of natural disasters we have experienced over the past several months […] millions of people’s lives in communities all over the United States have been impacted in unprecedented ways,” said Yvette E. Pearson, associate dean for accreditation and assessment for Rice University, Houston, in an American Society of Civil Engineers roundtable. “With the frequency and severity of these events increasing, civil engineers must provide leadership in building back better—both sustainably and resiliently.”
In addition, according to the U.S. Green Building Council (USGBC), rather than build duplicate replacement structures, more owners are likely to focus on the USGBC offerings and demand resilient site and structure features. In November 2017, for example, the USGBC announced that it would adopt construction standard RELi, which awards points for resilient features, such as adaptive design for extreme weather events and their resulting hazards, communications and first-aid resources. RELi also includes some of the USGBC’s Leadership in Energy and Environmental Design (LEED) criteria in its points system.
Issues of concern
While most reports for 2018 look optimistic, three significant concerns are the continuing labor shortage, possible increases in some material prices and interest rates, which may rise and reduce demand for new construction among customers.
“Although there are opportunities for growth, this is being constrained by lack of skilled workers,” said Mir M. Mustafa, executive director, business development at the National Electrical Contractors Association. “While the impact of this shortage varies from state to state, there is, overall, a huge demand for workers in all types of nonresidential construction work throughout the country.”
Simonson expanded on the materials costs problem.
“Materials costs ended a years-long slide in late 2016 and rose at a moderate rate in most of 2017,” he said. “Those increases are likely to accelerate a bit further in 2018, as global demand picks up and construction continues to grow, albeit slowly and unevenly.”
However, Simonson doesn’t foresee a return to the severe, widespread escalations and occasional shortages that cropped up before the last recession.
2018 and beyond
While most forecasts only cover 2018, the American Institute of Architects’ (AIA) semiannual “Consensus Construction Forecast,” which has been conducted for 18 years, takes both 2018 and 2019 into account.
“Despite labor shortages and rising material costs that continue to impact the construction sector, construction spending for nonresidential builds is projected to increase 4 percent this year and continue that pace of growth through 2019,” according to the forecast.
“Rebuilding after the record-breaking losses from natural disasters last year, the recently enacted tax reform bill, and the prospects of an infrastructure package are expected to provide opportunities for even more robust levels of activity within the industry,” said Kermit Baker, AIA’s senior economist. “The Architecture Billings Index and other major leading indicators for the industry also point to an upturn in construction activity over the coming year.”
According to AIA, commercial/industrial is expected to increase 4.4 percent overall in 2018 (in specific: office space, 4.6 percent; retail, 4.4 percent; hotels, 4.1 percent; and industrial facilities, 3.3 percent). Institutional is expected to increase 3.8 percent overall in 2018 (in specific: education, 4.0 percent; healthcare facilities, 4.0 percent; public safety, 3.6 percent; amusement/recreation, 3.3 percent; and religious, –1.1 percent).
In 2019, a bit of a reversal is expected from 2018 forecasts, with institutional growth expected to exceed commercial/industrial growth. Commercial/industrial is expected to increase 2.9 percent overall (in specific: office space, 3.0 percent; retail, 3.5 percent; hotels, 0.8 percent; and industrial facilities, 5.2 percent). Institutional is expected to increase 4.3 percent overall (in specific: education, 4.9 percent; healthcare facilities, 4.0 percent; public safety, 3.9 percent; amusement/recreation, 2.4 percent; and religious, 0.9 percent).
Conclusions for ECs
“The year 2018 should represent moderate growth, and this may continue into 2019 and 2020,” Mustafa said. “However, compared to the last two years, which saw rapid growth, the next two or three years are not likely to be as strong.”
Contractors should not get carried away. They should focus on business practices that emphasize being lean and efficient.
“They need to become even mindful of operating efficiently and continue to focus on productivity, including finding ways to utilize new technologies,” he said.
About The Author
ATKINSON has been a full-time business magazine writer since 1976. Contact him at [email protected].