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Construction Forecast 2016

For the first time since 2008, the value of all construction work done in the U.S. last year topped $1 trillion, according to data from the U.S. Census Bureau. Increased financial security among consumers has boosted confidence and spending, creating more demand for new structures and fueling improvements to existing ones.

Construction spending rose 10.5 percent in 2015, but growth will temper to 8 percent this year as the industry grapples with workforce shortages, increasing regulatory burdens and rising health care costs, among other obstacles, said Chris Daum, president and CEO of FMI, which provides management consulting and investment banking services to the construction industry.

“2016 will challenge contractors’ growth plans, and there will always be new challenges to face,” he said in a news release announcing the company’s most recent outlook for the construction industry. “However, economic factors for construction are about the best we have seen since the recession, and we are looking for continued progress in 2016.”

Commercial building paces progress

Associated Builders and Contractors (ABC) projects 7.4 percent growth in spending for nonresidential construction in 2016 as the industry continues its solid recovery despite a weak global economy, said Anirban Basu, chief economist for the trade association, in a news release.

“ABC’s leading indices each suggest that 2016 will be another solid year for the typical U.S. nonresidential construction firm," Basu said. “According to the most recent survey, overall contractor confidence has increased with respect to both sales (67.3 to 69.4) and profit margins (61 to 62.9).”

The most notable improvements in growth last year were lodging (up 23 percent) and office construction (up 19 percent), according to FMI. More frequent business travel and better room rates combined to bring lodging back from overbuilt prerecession levels, while increases in employment—especially in high-tech job markets—have helped office construction bounce back in the past two years.

FMI predicts 17 percent growth for lodging in 2016 as supply catches up with demand and the current pace of construction slows. Contractors expressed the most optimism for lodging (21 percent net positive) in the 2016 outlook from the Associated General Contractors of America (AGC), followed by hospitals (19 percent), offices (19 percent), multifamily residential (14 percent) and higher education (13 percent).

Majority of contractors plan to hire

AGC also reported 44 states and Washington, D.C., added construction jobs in 2015, a sign that companies have found ways to expand their headcounts to meet rebounding demand. Moreover, 71 percent of construction firms plan to increase their payrolls in 2016, while just 6 percent foresee a reduction in their headcounts.     

“The construction industry will continue to recover in 2016 as many firms add to their headcount amid growing demand in a range of private and public sector markets,” said Stephen Sandherr, CEO of AGC, in a news release. “The industry also faces a number of challenges that have the potential to dampen, and possibly even undermine, the sector’s recovery.”

A growing shortage of skilled labor has contributed to project delays, and as a result the average contractor backlog stood at 8.5 months by mid-2015, according to ABC. Rising health care expenses also have become a concern, as 79 percent of companies report the cost of providing health care for their employees increased in 2015, per AGC.  

“What is particularly striking about the findings on worker shortages is that they are consistent with the responses from last year’s outlook,” said Ken Simonson, AGC’s chief economist, in the news release. “In other words, after a year of raising pay and increasing benefits, contractors remain as worried about the lack of qualified workers as they were at the beginning of 2015.”

Single-family housing gains ground

Sales of newly built single-family homes jumped 14.5 percent in 2015 to 501,000 units, the highest level since 2007, according to data from the U.S. Department of Housing and Urban Development and the Census Bureau.

“Relatively low interest rates and an improving economy are motivating buyers to make a new-home purchase,” said David Crowe, chief economist for the National Association of Home Builders (NAHB), in a Jan. 27 news release. “Builders are upping their inventory in response to heightened consumer interest.”

Housing inventory, in fact, has reached its highest level since October 2009, Crowe said; but the 5.2-month supply as of December 2015 remains well below the historical norm of 6.1 months dating back to 1963, according to FMI.

NAHB forecasts 1.26 million total housing starts in 2016, which would be a 13.4 percent increase from the 1.11 million starts in 2015. The trade association expects single-family production to challenge 840,000 units in 2016, an 18 percent jump from the 711,000 units produced in 2015.

Using the period of 2000 to 2003 as a healthy benchmark, single-family starts averaged 1.34 million on an annual basis, Crowe said at the 2016 International Builders’ Show in Las Vegas. The ongoing recovery should see single-family starts climb steadily from 55 percent of normal production at the end of the third quarter 2015, up to 87 percent of normal production by the end of 2017, he added.

Multifamily faces different challenges

NAHB anticipates 417,000 multifamily starts in 2016, which would be a 5 percent gain from 397,000 units last year. Multifamily construction has accelerated to its fastest pace in 30 years, but still has not been sufficient to meet surging demand, the Harvard University Joint Center for Housing Studies said in its 2015 report on rental housing.

“Record-setting demand for rental housing due to demographic trends, the residual consequences of the foreclosure crisis, and an increased appreciation of the benefits of being a renter has led to strong growth in the supply of rental housing over the past decade both through new construction and the conversion of formerly owner-occupied homes to rentals,” said Chris Herbert, managing director of the Center, in a news release.

Rental vacancy rates have reached their lowest point since 1985, according to the Center, and inflation-adjusted rents are rising 3.5 percent annually. With renter incomes stagnant, 2015 was another record-setting year in terms of the number of renters paying more than 30 percent of their income on housing costs, the Center noted.

“…The crisis in the number of renters paying excessive amounts of their income for housing continues because the market has been unable to meet the need for housing that is within the financial reach of many families and individuals with lower incomes. These affordability challenges also are increasingly afflicting moderate-income households,” Herbert said in the release.

Remodeling continues to make strides

The Center also reported that residential remodeling should benefit from healthy gains in 2016, according to its Leading Indicator of Remodeling Activity (LIRA), which projects annual spending growth for home improvements will accelerate from 4.3 percent in the first quarter of 2016 to 7.6 percent in the third quarter.

By then, the level of annual spending in nominal terms should surpass its previous peak in 2006, the Center noted.  “In most markets across the country, rising house prices are bringing more homes to the market and increasing sales, which is a large driver of home improvement activity,” Herbert said in a news release.

NAHB estimates house prices will increase 4.6 percent in 2016 and 4.3 percent in 2017 after making similar strides this year. This trend should further boost financial security among consumers and allow more homeowners to tap into their home equity to fund remodeling projects, NAHB noted.  

“The remodeling market has steadily improved in recent years with homeowners incorporating larger, more discretionary projects into their home improvement priorities,” said Abbe Will, a research analyst in the Remodeling Futures Program at the Center, in a news release.

“The real test this year will be whether the industry can clear ongoing bottlenecks in labor availability and consumer financing concerns to fully meet this increased demand,” she added.

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