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October 2013
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Rebound in Nonresidential Construction
May Be the Feel-Good Story of 2014


Economists are forecasting another so-so year for the U.S. economy overall in 2014. When searching for positives about the metals market, most experts are quick to point to “North America’s energy renaissance,” or the “accelerating auto industry.” In fact, what may turn out to be the most welcomed change for metals producers and distributors is the long-awaited resurgence of nonresidential construction.

Nonresidential, including commercial, industrial and infrastructure, uses more steel than any other sector. Construction of highways, strip malls, hospitals and schools consumes steel products ranging from rebar to structurals to plate to pipe. Not to mention large quantities of aluminum sheet and extrusions.

Nonresidential construction activity typically lags housing by one to two years. Thus the slow-but-unmistakable rebound in homebuilding bodes well for nonresidential in 2014. “Next year could be the breakout period,” says analyst Charles Bradford of Bradford Research in New York.

U.S. Census Bureau data shows there were 891,000 housing starts in August, on a seasonally adjusted annual rate, up from a recessionary low of 554,000 in 2009. The National Association of Home Builders reports that sales of newly built, single-family homes rose 7.9 percent in August.

The Architecture Billings Index, a much-watched leading indicator of construction, registered 53.8 in August, marking the 12th time in the past 13 months that design activity increased nationally, reports the American Institute of Architects. The strength in the recent index readings, coupled with the extended period that architecture firms have been reporting favorable conditions, points to an impending upturn in nonresidential activity, says Kermit Baker, AIA chief economist.

Nonresidential building is expected to finish this year with a modest 2.3 percent gain over 2012, but pick up from there. AIA forecasts a 7.6 percent increase in nonresidential spending in 2014, spurred by an 11.5 percent jump in commercial construction.

Other market fundamentals also appear hopeful. Vacancy rates are down and rental rates are up, indicating a need for new structures. Commercial property values are rising, as are average prices for new homes. Demographic trends will contribute long term as baby boomers retire to senior living and health care facilities, while their younger replacements go shopping for new homes. And the full effect of the energy boom on infrastructure development is yet to come.

While construction holds new promise for 2014, no one is suggesting the sector is completely in the clear. “We are only about halfway back to what would be considered a sustainable level of activity in a normal economy,” says NAHB Chief Economist David Crowe. “The ongoing housing recovery continues to be slowed by concerns about interest rates, as well as weak job growth and uncertainty about what’s happening in Washington.” 
 
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Monday, July 28, 2014