by American Subcontractors Association

“The economic environment so far in 2017 can be characterized as “good but not great,” and it’s estimated that real GDP this year will be up 2.2 percent,” Dodge Data & Analytics Chief Economist and Vice President Robert A. Murray said during the 79th annual Outlook Executive Conference in Chicago, Ill.

Dodge Data & Analytics, which released its 2018 Dodge Construction Outlook, reported that the U.S. construction industry is now “fully into the mature stage of its expansion, one that’s characterized by slower rates of growth as activity approaches a cyclical peak.” “After rising 11 percent to 13 percent per year from 2012 through 2015, total construction starts advanced a more subdued 5 percent in 2016,” Murry said. “That deceleration has continued into 2017, with construction starts exhibiting an up-and-down pattern on a quarterly basis, often typical of a market that’s in the process of either approaching or rounding a peak.”

Total construction starts in 2017 are estimated to climb 4 percent to $746.5 billion, Dodge Data & Analytics reported, and nonresidential building will advance 10 percent, lifted by the strength shown by its institutional segment. Residential building will rise 4 percent in 2017, with moderate growth for single family housing outweighing reduced activity for multifamily housing. Running counter will be nonbuilding construction, sliding 7 percent with another steep decline for electric utilities/gas plants while public works stays essentially flat.

Murray noted that an important question entering 2017 was whether the construction industry had the potential for further expansion. “Several project types,” he said, “including multifamily housing and hotels, have pulled back from their 2016 levels, but the current year has seen continued growth by single family housing, office buildings, and warehouses. In addition, the institutional segment of nonresidential building has been quite strong, led especially by transportation terminal projects in combination with gains for schools and healthcare facilities. As for public works, the specifics of a $1 trillion infrastructure program by the Trump Administration have yet to materialize, so activity continues to hover around basically the plateau for construction starts reached in 2015. Slower activity has been reported this year for highways and bridges, as well as environmental public works, but new pipeline construction starts are topping even the elevated pace reached in 2016.”

Murray added that job growth is not moving quite as fast as last year, but long-term interest rates remain low. “The damage caused by Hurricane Harvey to southeast Texas and Hurricane Irma to Florida was substantial, particularly as it relates to single family housing, but the negative impact at the national level in terms of slower job growth and higher gas prices should be short-lived,” he said. “Some of the caution by firms towards investment seems to be easing, and the stock market through October continued to reach new highs. The Trump Administration’s tax reform proposal is now being considered by Congress, with its shape and the likelihood of passage still unfolding.”

For 2018, Dodge Data reported, it’s estimated that economic growth will be 2.6 percent. Dodge Data expects job growth to continue at a moderate pace, and the lowering of the corporate tax rate through tax reform “may provide a near term lift.” Long-term interest rates will “see some upward movement, but not substantially.” Market fundamentals for commercial real estate won’t be quite as strong as this year, but funding support for construction will continue to come from state and local bond measures.

Dodge Data predicts total construction starts in 2018 to advance 3 percent to $765.2 billion. Gains are predicted for residential building, up 4 percent; and nonresidential building, up 2 percent; while nonbuilding construction stabilizes after two years of decline. The pattern of construction starts by more specific segments is the following:

• Single family housing will rise 9 percent in dollars, corresponding to a 7 percent increase in units to 850,000 (Dodge basis). Continued employment growth has eased some of the caution shown by potential homebuyers, while older Millennials in their 30s are helping to lift demand for single family housing. A modest boost will also come from rebuilding efforts in Texas and Florida after Hurricanes Harvey and Irma.
• Multifamily housing will retreat 8 percent in dollars and 11 percent in units to 425,000 (Dodge basis). This project type appears to have peaked in 2016, helped by widespread growth across major metropolitan markets. That strength has begun to wane in 2017, given slight deterioration in market fundamentals (rent growth, occupancies) and a more cautious bank lending stance.
• Commercial building will increase 2 percent, following a 3 percent gain in 2017, and continuing to decelerate after the sharp 21 percent hike back in 2016. Office construction should see further growth in 2018, helped by broad development efforts in downtown markets, and warehouse construction is supported by greater demand arising from e-commerce. However, store construction will remain weak, and hotel construction will continue to pull back from its 2016 peak.
• Institutional building will advance 3 percent, maintaining its upward track after this year’s 14 percent jump.
• Educational facilities should see more substantial growth next year, lifted by the passage of recent school construction bond measures. The robust volume of transportation terminal projects in 2017 may not be repeated in 2018, but activity should stay at a high level.
• Manufacturing plant construction will recede 1 percent in dollar terms, after surging 27 percent this year due to the start of several massive petrochemical projects. Next year should still see moderate growth in square footage terms.
• Public works construction will improve 3 percent, slightly more than the 1 percent growth in 2017. Highways and bridges should be helped as federal funding rises to the levels called for by the FAST Act, while the environmental categories will partly reflect reconstruction efforts related to Hurricanes Harvey and Irma. Additional benefit may come from the infrastructure program proposed by the Trump Administration, should it achieve passage in some form.
• Electric utilities and gas plants will drop 13 percent, falling for the third year in a row after the exceptional amount reported in 2015. Power plant construction starts will ease back as new generating capacity comes on line.

The 2018 Dodge Construction Outlook can be ordered via the Dodge Data & Analytics store or by calling (800) 591-4462.

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