CONSTRUCTION GIANTS: Economists hedge their bets on prospects for nonresidential construction

Leading economists expect spending for nonresidential construction to rise in 2015 by somewhere in the 6.4–7.7% range, and remain strong in 2016, according to BD+C's 2015 Giants 300 report.

August 05, 2015 |
GIANTS 300 REPORT: Economists hedge their bets on prospects for nonresidential construction

Owner’s rep Hill International oversees the massive pour for Miami’s Patricia and Phillip Frost Museum of Science. More than 120 truckloads of concrete were placed for a tank that will support four million pounds of sea water. Also on the Building Team: Grimshaw Architects (design architect), R&Q Architects (executive architect), DDA Engineers (SE), Fraga Engineers (MEP), and Skanska USA (GC). Photo: Miami Focus, courtesy Hill International

Uncertainties about the country’s economic growth, energy prices, and labor wage inflation could have the greatest near-term impact on nonresidential construction spending, according to three leading economists.

Kermit Baker, PhD, of the American Institute of Architects, Alex Carrick of CMD (formerly Reed Construction Data), and Ken Simonson of the Associated General Contractors of America shared their prognostications in a webcast April 30. The next day, the Census Bureau released its estimates for the value of nonresidential construction put in place for March 2015—up 4.7% from the same month a year earlier, to an annualized $611.8 billion.

TOP CONTRACTOR GIANTS

2014 GC Revenue ($)
1. Turner Construction $10,797,472,734
2. Whiting-Turner $5,597,753,589
3. Jacobs $5,113,403,000
4. Skanska USA $4,952,400,044
5. PCL Construction $4,305,526,733
6. Balfour Beatty US $3,959,465,341
7. Gilbane Building Co. $3,632,871,000
8. Structure Tone  $3,543,978,000
9. Clark Group $3,036,421,819
10. Lend Lease $2,682,278,000

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TOP CM/PM GIANTS

2014 CM/PM Revenue ($)
1. Jacobs $1,621,620,000
2. AECOM $684,032,000
3. Hill International $405,000,000
4. Gilbane Building Co. $172,129,000
5. Turner Construction $151,664,266
6. JLL $150,158,676
7. Structure Tone $122,000,000
8. JE Dunn Construction $115,458,840
9. Flintco $105,300,000
10. WSP | Parsons Brinckerhoff $89,068,351

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The trio painted a portrait of an economy that showed healthcare and education sectors, which account for two-thirds of institutional construction spending, still not fully recovered from the Great Recession. They projected lodging, amusement and leisure, and manufacturing to grow faster than construction spending as a whole.

The economists said they expect spending for nonresidential construction to rise in 2015 by somewhere in the 6.4–7.7% range. Construction spending should remain strong in 2016 before tailing off in the following two or three years.

Their expectations of industry projections were less optimistic than those of two construction giants. In its spring 2015 look at construction market conditions, Gilbane predicted nonresidential spending would be up 15.3% this year, even if starts were flat.

In its 2015 construction outlook, which it released in April, design-build and commercial real-estate development firm Leopardo pointed to several factors that could spark construction spending: low oil prices, which are keeping construction costs in check; a rise in public spending as a percentage of GDP, which in 2014 rose for the first time in years; and a downward slope in construction material costs, even for copper, which had risen nearly 73% from 2009 to 2014. Leopardo noted that nonresidential building markups have risen an average 6.6% a year since 2009, with school construction leading the pack.

Spending on education construction—which the Census Bureau estimated was off 3% in March—is one area where Carrick advised caution. He said he expects most of the demand for new construction to come from the lower grades.

Carrick said he was buoyed by economic strength in the high-tech knowledge sector; by the expansion of the Panama Canal, which is spurring development around U.S. tidewater ports; and by live/work mixed-use construction, which he said “is where the action is” on the nonresidential side. Carrick also called out energy extraction, notably shale oil, as a positive sign for the economy.

Simonson agreed that construction is benefiting from “the oil and gas revolution,” the Panama Canal expansion, and the recovery in the residential sector. But he said he’s watching three trends that could upset the apple cart: lower government spending on schools and infrastructure, online shopping’s impact on retail centers, and reductions in office space per employee, particularly in suburban markets.

EARLY WARNING SIGNS OF POTENTIAL THREATS

The economists sought clues from the first few months of 2015 about what track certain sectors might be on. CMD is enthusiastic about the growth in manufacturing construction spending, which Census estimated was up 50.3% YOY in March. Amusement and recreation, another potentially strong growth sector, was up 23.8% in March.

Carrick said he foresees “real growth” in the lodging sector, where spending was up 22% in March and where CMD projects 31% growth for all of 2015. CMD expects annual hotel occupancy rates to stay above 65% through 2017, compared to a 20-year average for 1994–2014 of 61.5%.

Baker’s spending projection—8% growth through 2016—is a bit more aggressive than Carrick’s or Simonson’s. One barometer he points to is the Architecture Billings Index, which is based on results from 750 leading firms. The ABI is “trending up,” he says, and 2015 could exceed 2008’s all-time high.

Baker’s optimism was tempered by an economy that, according to Commerce Department estimates, contracted by 0.7% in the first quarter, when monthly payroll gains were under 200,000. Baker said he also sees “wild cards” like energy prices and interest rates that could spike this year. The “biggest threat” to construction spending, he fears, could be the availability and cost of labor.

Between April 2006 and February 2015, construction employment shrank by 18%, to 6.3 million, with much of that loss on the residential side. A recent AGC poll found that 66% of its members were having trouble finding carpenters, and 43% couldn’t find project managers and supervisors.

The industry’s unemployment levels have been receding, from two million in March 2010, to 800,000 in March 2015. AGC estimates that 41 states and 249 metros added construction employment between March 2014 and March 2015. 

So far, labor shortages haven’t translated into higher wages but Simonson said he expects that to change this year and next. Carrick said he’s keeping an eye on labor bottlenecks in other industries, such as last year’s work stoppages by longshoremen and truckers at West Coast ports, to gauge what might happen in construction. 

 

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