Metal Architecture Home
Columns

Put-In-Place Construction Forecasts

2019 State of the Industry Report

Alex  Carrick

The following sets out, in text and graphs, ConstructConnect’s projections of U.S. put-in-place (PIP) construction activity. PIP statistics are published by the Census Bureau. They are analogous to work-in-process or progress payments as projects proceed.

(PIP statistics lag up-front ‘starts’ statistics, which are lump sum figures estimated when ground is broken. Also, the ‘starts’ set the table for later PIP numbers.)

Prospects for the U.S. economy remain quite solid based on outstanding jobs and income growth that will continue to fuel consumer spending. There are, however, several factors that suggest a gradual easing in the forward momentum:

  • The Federal Reserve would like to restore its policy-setting interest rate to ‘neutrality,’ implying a figure closer to 3.00 percent than its current level barely over 2.00 percent.
  • Tariffs on lumber, steel and aluminum from a limited number of countries and on a wide range of products from China are adding significantly to costs.
  • Shortages of labor are driving wages upward, which is positive for family finances, but sparks worry about inflation.
  • The federal government’s deficit is headed back up to $1 trillion.
  • Economic performance in much of the rest of the world has turned sluggish.

Grand Total Construction Spending

ConstructConnect is forecasting that U.S. put-in-place construction dollars will continue to climb nicely over the period ahead, out until at least 2021. The year-over-year annual gains will range from +4.0 percent to +5.0 percent. The advances in nonresidential work will be a little faster than for residential in 2019 and 2020, but there will be rough equivalency in 2021. The speed of increase in total dollar spending would be higher if it weren’t for recent pickups in construction material and labor costs that are causing some owners to place expansion plans on hold. In 2018, U.S. grand total construction activity will amount to just over $1.3 trillion dollars. By 2021, it will reach nearly one-and-a-half trillion dollars.

Residential

Sales of big ticket items have softened of late. Motor vehicle purchases have flat-lined and new housing starts have pulled back somewhat. After years of rapid price increases in residential real estate, and with mortgage rates on the rise, affordability has become less favorable. 2019 and 2020 will see a sideways pattern in home groundbreakings before there is a new upsurge in 2021. In the interim, many householders will satisfy their home improvement longings through renovation projects. Underlying accommodation needs are still healthy. America’s population is growing by 0.7 percent per year. As the graph on Residential activity illustrates, considerable pent-up demand developed from 2008 through 2015. But only in 2021 will total residential put-in-place construction spending finally ascend to match its pre-recession peak.

Lodging

As captured in the Lodging activity graph, capital spending by the accommodation sector is the most highly cyclical of all the type-of-structure categories. It features a ‘bandwagon effect.’ When one owner in the industry adds rooms or makes cosmetic changes to meeting facilities or dining areas, all others will rush to do likewise to retain patrons. Greater prosperity at home has been driving U.S. domestic tourism and business travel. Lower-cost gasoline and jet fuel since mid-2014 has also been a help. But the strength in value of the U.S. dollar relative to other international currencies has been putting a damper on visits by foreigners. From 2019 on, lodging put-in-place construction spending will move to the backside of its most recent cyclical peak.

Office Buildings

Traditionally, demand for office space has come from firms in finance, insurance, accounting, advertising, architectural and engineering services, and legal services. More recently, though, it’s been companies engaged in data management and software development that have been urgently seeking more space. According to CBRE, the lowest downtown office vacancy rates across the country are in San Francisco; Oakland, Calif.; Seattle; Boston; Manhattan; Charlotte, N.C.; and Austin, Texas. All those centers benefit from hosting large high-tech companies.

Future demand for office square footage will increasingly be driven by companies on the cutting edge of technology. The implications for rental contracts are already becoming apparent. Many prospective tenants are willing to share work space. Plus, they want greater flexibility in term lengths. They are expressing an aversion to 10-year lease commitments.

In a recent announcement, Amazon confirmed that its 50,000-job HQ2 office-space needs would be split between the outskirts of Manhattan and the edge of Washington, D.C. Nashville, Tenn., with a new center dedicated to providing excellence in customer relations, will also see a piece of the action. What’s not clear, however, is how much of the new space requirements will be satisfied by structures already in place as opposed to building or leasing new quarters.

It should also be noted that the December 2017 Tax Cuts and Jobs Act included tax incentives for individuals and corporations to invest in Opportunity Zones, to be situated in designated municipal lower-income districts. This proposal has been greeted with considerable enthusiasm.

Commercial (Retail and Warehouse)

The list of big-name retailers (e.g., Sears, Toys R Us), which have not successfully transitioned significant portions of their sales to the Internet, keeps growing lengthier. Forays into bankruptcy protection have been sweeping clean the display areas behind many storefronts. Furthermore, some of the newer giants, such as Walmart and Lowe’s, are closing outlets as well. Not only do these downsizings dim the outlook for new retail construction, they also present an ‘overhang’ problem. The empty space must first be filled before there will be much incentive to build new. Fitness gyms, car dealerships and grow-ops don’t provide the full answer.

On the flip side, though, fulfilling orders from e-commerce requires distribution centers. A proliferation of warehouse construction is lifting the ‘commerce’ PIP dollar volume above its long-term trend line. There’s a key component of such new space that warrants mentioning. It should be designed to accommodate extensive use of automation and robotics.

Health Care

From the graphs on Health Care activity and Educational activity, it’s clear that the patterns of PIP construction spending on both health care and educational facilities have been more consistent than one might suppose. The swings up and down versus the trend lines have been relatively modest. (For both types of structure, there is no data prior to 2002.) After the introduction of the Patient Protection and Affordable Care Act (PPACA) in 2010, there were half a dozen years of uncertainty over whether it would survive numerous political and court challenges. With future revenue streams up in the air, hospital investment stalled.

A Supreme Court ruling finally verified PPACA’s legitimacy, but in 2016 there was a change at the summit in Washington. Once again, the existence of Obamacare came under extreme stress. With the Democrats retaking control of the House in the 2018 midterms, owners in the health care field may now feel more confident about proceeding with plans.

Beyond chronic care for the oldest among us—i.e., by 2020, all surviving baby boomers will have ridden out 55 birthdays or more—there will also be spikes in demand for hip and knee replacements, cataract surgery, and other forms of acute care that can often be provided in medical clinics and other outpatient facilities.

Educational Facilities

At the level of higher education, today’s minimal unemployment rate of 3.7 percent is a disincentive to college and university enrollments. Why stay in school when one can easily find a job and earn a decent living in the high-octane workplace? Also, the negative tone towards immigration being adopted by Washington is discouraging the entry into America of foreign students. On a more positive note, though, corporations in the private sector have become eager to enter into partnerships with academia to establish research facilities. And endowment funds for financing projects have ballooned thanks to exceptional returns on stock market investments and generous donations from rich alumni.

With respect to kindergarten-to-grade 12 (K-12) construction work, a key determinant will be the single-family versus multifamily contest for dominance. If young families opt for single-family housing in the suburbs, a wide range of accompanying infrastructure, including lower- and middle-grade educational facilities, will be needed. If, instead, they choose to stay in city cores, then schooling is more likely to be set up in previously abandoned, and therefore already available, space.

Amusement and Recreation

For a string of years after the 2008-09 recession, Americans were reluctant to open their purses and wallets to spend on frivolous pursuits. They were more concerned with paying down debt and restoring a rosier bloom to their financial affairs. Plenty of jobs and rising incomes during the last several years have allowed stray thoughts of fun to re-emerge and take hold once again. But how we derive entertainment has changed dramatically. For example, where once cinema complexes were sprouting up everywhere, viewing enjoyment is now mostly derived at home from binge watching programs that are downloaded or digitally streamed.

Construction from downstream sources of entertainment may have diminished, but don’t overlook the upstream ‘wellhead.’ We’re living in a golden age of video and audio production. The supply of studio space is being challenged. In the U.S., the major entertainment production centers are Hollywood, New York, Atlanta and Nashville.

In another corner of amusement and recreation, an era of big stadium construction projects (e.g., in Atlanta, San Francisco, Los Angeles and Las Vegas) has mainly receded due to work completions. But there is still some upcoming activity to anticipate—e.g., a National Hockey League arena in New York and a racetrack or two.

Transportation

The curve for transportation PIP construction spending in the Transportation activity graph shows a steady upwards progression, with a more pronounced take off from 2018 on. There’s a good chance the 2019 to 2021 figures will understate what eventually occurs. Many U.S. cities are planning new commuter lines or expansions to their existing rapid transit systems—e.g., Denver, Minneapolis-St. Paul, Charlotte and Seattle.

In railroad work, a construction manager was recently appointed to oversee the planned bullet train to run between Houston and Dallas. Included in ConstructConnect’s Top 10 construction starts list for September 2018 was the Long Island Railroad expansion for almost $2 billion.

In airport construction, the dollar amounts being discussed are staggering. Every major international airport in the U.S. has a capital spending program in the billions of dollars. The estimate of the work to be undertaken at JFK Airport in New York has climbed to $15 billion. Airport construction spending goes towards passenger gates, runways, de-icing facilities, on-site LRT systems, and access roads and expressways.

Manufacturing

The intent behind the large corporate tax cuts (36 percent down to 21 percent) and the imposition of tariffs has been to stimulate ‘capex,’ especially by American manufacturers. Given faster depreciation write-offs as well, those measures may be effective with respect to machinery and equipment purchases. But there’s an obstacle standing in the way of favorable decisions to enlarge plant footprints. Capacity utilization rates in industrial sub-sectors, with only a few exceptions, are still too low. A usage rate of at least 80 percent is the usual benchmark for considerations of plant expansions. Only the metal fabrication, paper and motor vehicle production sectors have surpassed that 80 percent threshold.

Manufacturing investment is being lifted higher, however, by a segment of industry with its roots in energy. Spurred on by deregulation and an abundant supply of inexpensive oil and gas, there has been a groundswell in the building of petrochemical plants, with an even more abundant array of LNG projects waiting in the wings. It will be interesting to observe the impact of the midterm elections on the regulatory control environment that has been placed on pause and retracted over the past two years.


Alex Carrick is chief economist for Cincinnati-based ConstructConnect. He is an awarded author of thousands of articles and is regularly quoted in major news outlets.