“Contrary to election-year rhetoric, the economy is inching its way to improvement, and the construction industry has not stopped working,” according to the third quarter 2012 Construction Outlook report by FMI, the largest provider of management consulting and investment banking to the engineering and construction industry. Released today, the industry forecast is calling for an 8% increase in total construction put in place for 2013. Contributing to this positive forecast is more robust growth in residential construction, as well as a few strong markets in nonresidential and non-building construction.
The focus for 2013 will be on the movement of private money back into the markets. For the economy to grow at a faster rate with the fiscal cliff looming and state and municipal budgets still in repair mode, it will be the private markets that must lead the way. Total construction put in place for 2013 is forecast to be $892 billion, a solid improvement over the last few years, but still just edging out 2003 levels of construction activity.
Residential Construction Housing starts rose to 603,000 units a year as of September 2012. Single-family permits also rose to a 545,000-unit pace, or 6.7%, returning to levels not seen since July 2008.
Nonresidential Construction Trends and Forecasts by Sector:
- Lodging — Hotel developers will renovate before building new properties. Bank loans will be hard to justify until occupancy and room rates remain consistently high.
- Office — Through the first two quarters of 2012, the U.S. office sector has now absorbed 10.4 million square feet, 100,000 square feet less of net absorption than was generated over the first 6 months of 2011. (Jones Lang LaSalle, “Office Outlook United States, Q2 2012). This is not yet enough activity to compare with pre-recession highs, but we expect CPIP to improve 4 percent in 2013.
- Commercial — Expect more rethinking of commercial construction space to accommodate smaller stores and combining in-store sales with online shopping. Look for increasing multi-use projects.
- Health care — New health care construction will include a growing number of renovation projects to update current facilities for modern hospital design, using more technology in the rooms as well as for improving air quality and reducing energy usage.
- Education — Significantly less funding from states for K-12 schools.
- Religious — The lending environment continues to be a challenge for many congregations.
- Public safety — Despite overcrowding in prisons, we expect public safety construction to remain slow for the next couple of years, at least with only 1% growth in 2013 to $10.2 billion.
- Amusement and recreation —Money for sports stadiums will be hard to find from local government investment, and banks will be reluctant to lend to anyone who couldn’t already pay for the project from cash flow.
- Transportation — This remains a strong sector for construction. CPIP is expected to grow 6% in 2013 to a total of $38.2 billion for the year. This is due in part to The FAA Modernization and Reform Act that will provide $63.6 billion for the agency’s programs between 2012-2015.
- Communications — Growth in communication construction is being powered by an insatiable need for speed and to send and store large amounts of multimedia files over the Internet. One trend that might slow the growth in construction dollars is the trend to use mini cell “towers,” which are small, easily installed boxes that help to maximize spectrum.
- Manufacturing — Manufacturing construction is starting to make a comeback with both new growth in manufacturing output and with some companies repatriating their manufacturing capacity.
- Power-related — Power construction will continue to be one of the strongest growth sectors for construction. Worthy to note is U.S. Army Corps of Engineers has a proposal out for $7 billion in locally generated renewable energy through power purchase agreements.
- Highway — State budgets will continue to be strained and it will be difficult to get larger projects off the ground. Therefore, funds from the MAP-21 and TIGER grants make up a large percentage of construction put in place included in FMI’s 2013 forecast of $84.7 billion for highways and streets.
- Sewage and waste disposal — Waste-to-energy may be one of the best bets for future work in this sector if more municipalities can find ways to work with private investors.
- Water supply — Expect this sector to struggle to find funds for necessary remediation and construction. Strength in water supply construction will be found in pockets for industrial projects like the mining sector, power and industrial plants.
- Conservation and Development — The 2012 annual budget for the Department of Agriculture eliminates funding for the Resource Conservation and Development (RC&D) and Watershed and Flood Prevention Operations programs. New projects in this sector, like water system projects, will more likely come from cleanup for the mining and energy sector to comply with regulations.
To download a copy of the full report, click here. For reprint permission or to schedule an interview with the author, please contact Sarah Avallone at 919.785.9221 or savallone@fminet.com.
