Building Momentum

Societal trends favor construction of multi-unit residential buildings, which is good news for steel, say leading analysts.

By Tim Triplett, Editor-in-Chief

Construction is one of the strongest sectors in the U.S. economy. Mills and service centers are likely to see increased sales of beams, hollow structural sections and other structural steel products in the second half of the year, say the experts. What they can expect with pricing and profits is less certain.

“Construction should be a significant contributor to economic growth in the remainder of 2016 and beyond,” says Ken Simonson, chief economist for the Associated General Contractors of America, Arlington, Va. “Right now the biggest challenge for contractors in many parts of the country is that they are worried about finding enough qualified workers to meet demand.”

Construction spending in March totaled $1.138 trillion at a seasonally adjusted annual rate, 8.0 percent higher than in March 2015. Spending on multifamily residential construction jumped 34.6 percent year-over-year, while single-family spending rose 13.4 percent compared to last March. On the private nonresidential side, construction spending was up 9.3 percent from a year earlier. The power segment, including oil and gas related construction, gained 2 percent, while manufacturing declined 2 percent for the year. Public construction spending was up 6.7 percent in March from 12 months earlier. The biggest public segment—highway and street construction—increased 18.8 percent year-over-year as new federal surface transportation investments enacted last year began to impact demand, AGCA reports.

Construction suffered the longest and deepest slide of any sector during the last recession. Its decline began two years earlier, and its rebound began two years later, than any other part of the economy, Simonson notes. “Construction is still playing catch-up, even though the industry has been expanding and hiring workers at more than twice the rate of the nonfarm economy. Total spending is still 6 percent below the peak in February of 2006.”

The current rate of growth may be unsustainable, he adds, because the industry is having so much difficulty finding experienced and qualified workers. The labor shortage is affecting all types of construction, both homebuilding and nonresidential. “Contractors have been turning to other industries and first-time workers to fill the gap, but it’s unclear how long that can go on before companies have to begin turning down projects.” Such labor issues could eventually constrain demand for structural steel and other construction materials.

Private nonresidential construction categories are generally strong with the exception of manufacturing. The leader last year, manufacturing construction is flat this year and will be negative next year, he predicts. “Companies have stopped announcing new projects. As the current ones finish up, I think there will be a drop in manufacturing-related construction.”

On the public side, spending on both highway and education projects is up due to changes in funding on both the federal and state levels. In December, Congress passed the FAST Act (Fixing America’s Surface Transportation), which included a modest boost in federal funds that will go to the states for highway work. “More importantly, it’s a five-year bill that gives states the confidence they will be reimbursed if they award long-term contracts. It won’t be the stop-start process of short-term funding we have seen repeatedly in the last few decades.” Also renewed were tax credits for solar and wind energy projects. Funding on the state and local level is also improving. “The rise in residential and commercial property values over the past few years is finally showing up in assessments and tax receipts,” Simonson adds. Total construction spending in the U.S. is on track to grow by 6-8 percent this year, but will slow to 4-6 percent growth next year, he predicts, accounting for the decline in manufacturing, the labor issues and other factors.

The American Institute of Architects in Washington reports that its Architecture Billings Index registered 51.9 in March, up from 50.3 the previous month (any score above 50 indicates an increase in billings). The ABI is a leading economic indicator of nonresidential construction spending 9-12 months in advance. The March score reflects an increase in design services, which is predictive of future construction.

Construction activity—and thus steel demand—will vary by region. The March ABI predicts activity will be strongest in the South (52.4), Northeast (51.0), and West (50.4), and weakest in the Midwest (49.8). By sector, multi-family residential is expected to be strongest (55.7) and institutional weakest (48.0), with commercial/industrial also expanding modestly (51.8).

“The first quarter was somewhat disappointing in terms of the growth of design activity, but fortunately expanded a bit entering the traditionally busy spring season. The Midwest is lagging behind the other regions, but otherwise business conditions are generally healthy across the country,” says AIA Chief Economist Kermit Baker. “As the institutional market has cooled somewhat after a surge in design activity a year ago, the multi-family sector is reaccelerating at a healthy pace.”

Alex Carrick, chief economist for ConstructConnect, a Cincinnati-based construction market research and consulting firm, says demographic trends favor multi-family mixed-use construction, as both baby boomers and millennials seek to live in an urban setting. For many aging boomers, it’s a matter of downsizing and living in an apartment or condo with no grass to mow. For young millennials, it’s about living close to work and having ready access to mass transit, restaurants and entertainment. “Boomers and millennials are really taking to the notion of living downtown,” Carrick says.

Mixed-use developments often combine multiple-unit apartment or condo buildings with first-floor retail and offices for a wide range of uses, from hotels to health-care facilities. Such projects consume a lot more steel than single-family homes, which is positive for metals suppliers.

Single-family homebuilding, now at an annualized rate around 1.2 million units, still has a way to go to reach the long-term average of 1.6 million units. Multi-unit residential, on the other hand, is booming, Carrick says. “It has come back to around 400,000 units annually, which is as high as it was before the recession.”

Carrick is less concerned than others about the potential impact of a labor shortage on construction. Bureau of Labor Statistics data shows that average earnings by construction workers have grown at a 2-3 percent rate, on par with the rest of the U.S. workforce. Higher wages would indicate that the industry is trying to recruit more manpower. “Anecdotally, contractors say they are having a hard time attracting workers, but this is what they always say. It’s hard to get real worked up about this until wages really go through the roof, and that has not happened so far,” Carrick says.

Infrastructure spending is on the upturn, but only marginally so. Passage of the FAST Act by Congress commits some additional federal spending for roads and bridges, but not that much more than the prior short-term measures, Carrick says. It does relieve some of the uncertainty and should clear the way for states to commit more dollars to jointly funded projects.

In Canada, the new Trudeau administration plans to double infrastructure spending in the next decade, largely as a means of replacing jobs lost in the oil fields and other commodity sectors. The unemployment rate in Canada is 7.1 percent, compared to 5 percent in the U.S. Infrastructure improvements should not be viewed as a burden, Carrick adds, but rather as an opportunity to improve a nation’s productivity as it competes with other countries to achieve wealth and prosperity for its citizens.

The price of oil, at around $48 a barrel as of mid-May, would need to top $70 to trigger significant new drilling and new energy-related construction. “Even then, a lot of companies would be cautious about what they commit to because they have been burned so badly. They will have to see that those prices are pretty firm,” Carrick says.

The OPEC nations have flooded the world market with oil in the hopes of driving the price down, and driving some competitors out of business. Their actions have had the unintended consequence of making their competitors more efficient, Carrick says. “Some drillers have really gotten their costs down. A few are making money, even at $35 a barrel. The North American industry has hung in better than the Saudis ever thought it would.”

ConstructConnect forecasts 7.4 percent growth in overall construction starts this year, up from 5 percent in 2015. Much depends on how well the U.S. economy fares in the second half. GDP will do well to top 2 percent this year, Carrick says. “For three or four years in a row the first quarter has been difficult. It’s hard for the economy to get on track when the rest of the world is behaving so sluggishly.”

Like other commodities, the price of steel has declined dramatically in the past year due to excess supplies around the world. Experts point to the slowdown of the economy in China, consumer of about 40 percent of all commodities worldwide, as the main culprit. But steel, along with oil and other goods, saw a promising uptick this spring. “A lot of commodities have been showing some life over the last quarter. I think we are probably through the worst of this collapse in the raw materials sector, though it’s a little early to say we are out of the woods with these commodity prices,” Carrick says.

John Anton, principal economist with the IHS Pricing and Purchasing Service, says the price of structural steel—medium sections including I-beams and H-beams—has held up best of all the long product categories.

Prices have declined over the past year and a half, but have rallied in the past couple of months by approximately $100 per ton. But Anton does not expect that to last.

Nearly all long products made in the U.S. are produced from scrap. Thus where scrap goes, structural steel follows. Prices for billet, pig iron and slabs are poised to decline on the world market, taking scrap down with them. “Scrap will come down over the second half of the year and with it basically anything from an electric furnace. Scrap will retreat pretty rapidly within the next three months,” he predicts.

Looking at construction over the long term, societal changes are giving businesses less costly alternatives to brick-and-mortar projects. Retailers can turn to ecommerce and use the Internet to boost sales. With online banking, banks no longer need a branch in every neighborhood. The “sharing economy” has spawned home-sharing app Airbnb, which will ease demand for new hotel rooms, and ride-sharing app Uber, which will ease demand for new cars. “To expand production or sales you used to have to build a new plant or a new store. Today, there are other options than adding square footage,” Carrick notes.


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Tuesday, December 12, 2017