Sept. 17, 2014
Anticipation Builds for Construction Upturn
The construction sector is the largest consumer of steel, so for the steel industry to have done so well with mediocre support from its top market is a testament to the hidden strength of the economy's recovery. How much better will steelmakers and distributors fare when construction finally takes off? They may soon find out.
Speaking at the Metals Service Center Institute's annual forecast conference last week in Chicago, Kermit Baker, chief economist for the American Institute of Architects, presented a fairly optimistic outlook for the steel-intensive nonresidential construction market. "It has been slow to respond to the broader recovery, but it looks like we’ve finally turned the corner," he said.
Construction spending, both residential and nonresidential, represented 8.5 percent of the U.S. economy in 2006. That share bottomed at 5.1 percent in 2011 and has only inched back up to around 5.3 percent to date. The nonresidential spending portion has seen limited improvement over the past three years, from $337 billion in 2011 to a projected $368 billion this year. Spending in the first half of 2014 grew by a modest 3.6 percent, according to Census Bureau data.
But pointing to various market factors, Baker is convinced the construction market is poised to surge. AIA's Architecture Billings Index, which uses current design projects to predict construction activity 8-12 months in the future, recently hit its highest mark since before the recession. Its July reading of 55.8 reflects stronger gains in architectural billings than any period since mid-2007. The index indicates that business conditions have improved for firms in all regions of the country and in all the major construction sectors: residential, commercial/industrial and institutional, Baker said.
Employment is another positive indicator. Department of Labor data shows the construction sector has been adding jobs at a healthy pace of about 24,000 per month this year. Market data, such as property values, vacancy rates and rents, have reached a level that should encourage new construction investment.
Overall, AIA's Consensus Construction Forecast Panel expects 4.4 percent growth in total nonresidential construction this year, followed by a much stronger 8.1 percent gain in 2015. Double-digit increases in commercial construction, including hotels, offices and retail, will lead the way. Even institutional projects such as schools and health care facilities, which have been flat this year, will grow by nearly 6 percent next year, the panel of experts predicts.
"The fundamentals, by and large, are improving in every category. We are encouraged to begin seeing improved numbers on the institutional side," Baker said.
Longer term, demographics trends will dictate much of what gets built. The U.S. population is projected to add 24.5 million people by 2020, then another 24.6 million from 2020-2030. Nearly 60 percent of them will be "seniors" in the 65-84 age range, which assures enormous demand for construction of hospitals, elder care facilities, and the like. The second-largest group, about 25 percent of the total, will be made up of "millennials," those in the 25-44 age range, who will need a place to work, live and shop for their young families. Thus office, residential and retail construction is on the industry's radar.
In the near term, Baker said, nonresidential construction has been slow to materialize. But given the market's strong fundamentals, construction activity should respond quickly, beginning in 2015.