'Healthy outlook' for nonresidential construction in 2015
The sun seems to be coming up for the nonresidential construction industry
The sun seems to be coming up for the nonresidential construction industry. The U.S. Commerce Dept. reports that construction spending for nonresidential projects through November 2014 rose 4.2% from the year before, with lodging, office, commercial and sewage/waste disposal construction rising 11.3%, 14.7%, 8.4% and 13.6%, respectively. The American Institute of Architects says in its most recent Architecture Billings Index that 10 out 12 months last year saw increased demand for design services, which “points to a healthy outlook” for the industry.
“Business conditions continue to be the strongest at architecture firms in the South and the Western regions,” says AIA Chief Economist Kermit Baker. “Particularly encouraging is the continued solid upturn in design activity at institutional firms, since public sector facilities were the last nonresidential building project type to recover from the downturn.”
For 2014, Dodge Data & Analytics reports that nonresidential building climbed 17% to $208.2 billion, following the 11% gain that was reported in 2013.
Construction consultant firm FMI in its “2015 U.S. Markets Overview” notes that while forcasts continue with solid growth in the construction industry, it does not expect to see construction spending levels of the “prerecession boom” until 2017.
“That’s some distance away in dog years, but soon enough for many companies to continue thinking about how and where they will ramp up their businesses, especially when it comes to having sufficient capacity to perform new work,” the report explains. “After dropping 54% in the dark days of 2010, lodging is making a strong comeback, which we expect will moderate by 2016. Office construction is also presenting signs of growth, especially in ‘A’ markets in large cities.”
FMI predicts a 12% growth in lodging construction, with renovation activity strong even as new lodging starts increase. Solid growth will continue in this segment through 2016, and moderate between 5% and 6% through 2018, with the largest amount of growth in upscale properties and event locations.
For office construction, dropping unemployment rates and rising gross domestic product figures will see an increase of 7% in 2015. “Net absorption of office space in the United States, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total … 50.7 million sq. ft. in 2015,” notes the National Associaton of Realtors.
In 2014, the commercial building group advanced 15%, led by a 28% increase for the office category that featured the start of such projects as the $2.3 billion office portion of the $2.5 billion Apple corporate headquarters in Cupertino, Calif., and the $806 million office portion of the $933 million Comcast Innovation and Technology Center in Philadelphia, reports Dodge Data & Analytics.
FMI predicts a modest 6% growth in commercial construction this year and 5% in 2016, primarily due to the retail sector, which has some challenges with being responsive to customers and getting them back in stores. Online sales hit a record over the 2014 holiday season and the ecommerce market will grow to $494 billion billion in 2018, representing 8.9% of total retail sales, reports EMarketer.
“Growth in e-commerce will continue to outpace overall expansion in retail in coming years as consumers shift spending from brick-and-mortar stores to websites and mobile apps,” it notes.
For manufacturing construction, FMI predicts an 8% increase in 2015. “Improving energy supplies, a ready labor force and deteriorating geopolitical situations around the globe make returning to the United States a more desirable option,” the report explains.
Dodge Data & Analytics says the manufacturing building category surged 74% in 2014, lifted by the start of numerous energy-related plants located in the Gulf Coast region of Texas and Louisiana.
The FMI report notes that health-care and educational construction will continue to struggle in the next few years, as possible changes may be coming in many aspects of education and health-care delivery. Health-care construction dropped 7.5% from November 2013 to November 2014, while spending on education construction only rose 3.2% in the same period. FMI forecasts 2015 growth at 4% for health care and 3% in education.
“Ambulatory health care centers and renovations to existing facilities in order to be competitive and keep up with changing technologies and patient needs will continue to be the focus for (health-care) construction,” the report says. “One of the biggest hurdles to new (education) construction continues to be state and local budgets. After taking large cuts during the recession, it has been a difficult battle to get back to previous levels of spending.”
However, Dodge Data & Analytics says that the institutional building group for all of 2014 increased 8%, marking the first gain since 2008. The educational facilities category rose 12% and featured greater activity for these major segments – K-12 school construction up 18%; and college and university construction up 19%. The health-care facilities category in 2014 did not participate in the broad upward trend, as it slipped 1%.
In green construction, energy-efficiency is still the main driver. The U.S. Department of Energy’s new water heater regulations that take effect April 16 require increased energy efficiencies from these appliances, which manufacturers have been delivering to the market over the last couple of years. Business owners have upgraded heating and cooling equipment because of the increased fuel prices over the last few years, as well as the bitter cold in the winter of 2013-2014. With lower fuel prices this year, it remains to be seen if this will still be a driver for consumers.
Water conservation in drought-stricken states remains a serious issue, but may not be as important to those businesses in other states.
Infrastructure still a problem
While there is a dire need of infrastructure spending in this country, funding these projects has been a problem for decades.
“Like aging baby boomers, our infrastructure is developing a hardening of its arterials both above and below the ground,” the FMI report notes. “Cities and towns across the nation are literally fighting in the trenches to solve problems with underground plumbing for water, wastewater, stormwater and gas. These unseen systems are becoming more noticeable and making headlines.”
The report cites the Los Angeles water main break that spewed 8 to 10 million gallons of water into the streets during one of the worst droughts in California. Algae-related toxins found in Lake Erie forced Toledo, Ohio, which uses the lake as its water source, to ban water use for several days.
Organizations that study and report on the nation’s water infrastructure — the U.S. Environmental Protection Agency, the American Water Works Association, the American Council of Engineering Companies and the American Society of Civil Engineers — “all agree the need for maintaining and upgrading our water and wastewater systems far outstrips current investment and in 20 years, investment in water-related infrastructure will be over a trillion dollars in the hole, so to speak, on spending to meet our needs,” FMI notes.
But water and wastewater development could be the next big growth market if the funding can be found by communities, governments and private investors to fund new systems and upgrades to waterworks.
In the spring of 2012, Chicago Mayor Rahm Emanuel announced the formation of the Chicago Infrastructure Trust, which would tap private money to improve sewers, highways, transit systems, bridges and other public capital assets. However, only one project has been greenlighted to date — $25 million for upgrades to city buildings designed to reduce Chicago’s energy costs over time. Investors would pay for the retrofits up front and, in return, they’d get to keep a portion of those savings.
The Clinton Global Initiative announced May 2013 that it had teamed up with the U.S. Conference of Mayors to create a task force that will address the infrastructure issues facing cities, specifically exploring ways to utilize urban infrastructure banks and entice private capital to invest in public infrastructure. Seventeen big-city mayors serve on the task force, with Emanuel as chair.
If this idea takes off, we could see a transformation in the country’s massive infrastrucure problem. More projects means more employed workers, especially in the plumbing and pipefitting trades.