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FMI U.S. Construction Outlook:
Third Quarter 2018 Report

 

FMI Managing Director Jay Bowman Discusses the Construction Forecast

Key Takeaways

1
Total engineering and construction spending for the U.S. is forecast to end up 6 percent in 2018, compared to up 5 percent in 2017.
2
Spending growth in 2018 is forecast to be led by select nonresidential and residential segments. Current top-three-performing segments forecast through year-end 2018 include transportation (+13 percent), public safety (+10 percent) and conservation and development (+10 percent). The bottom three- performing segments include religious (-4 percent), power (+2 percent) and manufacturing (+2 percent).
3
Several segments appear to be strengthening into the third quarter of 2018. These include lodging and water supply, both of which have outperformed expectations and are now considered growth segments through 2018. Additionally, power spending has increased in recent months, and the segment has been promoted from a down segment into our stable territory at 2 percent growth through 2018.
4
Two segments that were downgraded this quarter are educational and religious. Educational spending has been shifted downward to stable at only 3 percent growth. Religious spending has been downgraded from a stable segment to down, with an expected 4 percent decline through the year-end.

 

Total Construction Put in Place
Estimated for the U.S.

 

Residential Construction Put in Place

Single-Family Residential
  • Low unemployment rates, wage improvements, inventories, tax restructure and increasing interest rates are all driving short-term demand
  • Buyers are showing an increasing willingness to pay, indicating a seller’s market
  • Rising interest rates are expected to limit mid- and long-term forecast growth rates

Drivers: Unemployment rate, core CPI, income, mortgage rate, home prices, housing starts, housing permits

Multifamily Residential
  • Vacancy rates remain low, and prices continue to rise, particularly in dense urban cores
  • Rental demand continues to increase and prices continue to rise
  • Rental vacancy rates appear to be stabilizing

Drivers: Unemployment rate, core CPI, income, mortgage rate, home prices, housing starts, housing permits

Improvements
  • Constrained (and rising) home sales are driving above-average improvements
  • Demand remains strong due to rising home prices, increasing wages and low unemployment

Drivers: unemployment rate, core CPI, income, mortgage rate, home prices, housing starts, housing permits

 

Total Construction Spending Put in Place 2017 and Forecast Growth (2017-2022 CAGR) by Metropolitan Statistical Area

 

 

Nonresidential Construction Index (NRCI)
Scores Since Inception Q1 2010 to Q4 2018

(Scores above 50 indicate expansion; scores below 50 indicate contraction)

 

Nonresidential Construction Put in Place

Lodging
  • Low unemployment, income growth and competitive rates are driving demand for leisure travel
  • Business travel is projected to rise through 2018, but a looming trade war could decrease demand for international travel
  • Private equity firms are becoming increasingly prevalent across the industry
  • Facility owners are seen investing in IT, analytics and smart building features

Drivers: Occupancy rate, RevPAR, average daily rate, room starts

Office
  • Net absorption remains positive, and low vacancy rates in major metropolitan areas (e.g., New York City and San Francisco) will continue to bolster demand
  • Corporate relocations and demand for mission-critical facilities are driving the overall trend
  • New deliveries are expected to remain elevated through the next 12 months, into 2019

Drivers: Office vacancy rate, unemployment rate

Commercial
  • Overall vacancy has increased with over 2,500 closures through 2018 by Sears, Bon-Ton, Toys “R” Us and others
  • Ongoing rise in e-commerce, gas prices and interest rates continues to shape commercial spending
  • Increased warehouse and distribution center spending continues, driven by outdated facilities alongside new technological and logistics needs

Drivers: Retail sales, CPI, income, home prices, housing starts, housing prices

Health Care
  • Aging populations and rising rate of chronic illness continue to drive outpatient facility investments
  • Increased use of green building techniques is driving demand for workers with appropriate skills/experience

Drivers: Population change, population change in ages 75 and up, uninsured population, government spending, nonresidential structure investment

Education
  • Projected increase in the percentage of U.S. population under 18 years old
  • Public school enrollments expected to rise in most states, with concentrations in the South and West
  • College and university budgets have struggled to keep up with the rate of inflation
  • Any upcoming federal infrastructure package is expected to include funding for schools

Drivers: Population change younger than age 18, population change ages 18-24, stock markets, government spending, nonresidential structure investment

Religious
  • An increase in the use of rented or shared worship space
  • Declining share of Americans donating to religious organizations
  • Declining religiosity among U.S. population

Drivers: GDP, population, income, personal savings

Public Safety
  • Increased defense spending driven from 2018 Consolidated Appropriations Bill and the National Defense Authorization Act
  • State and local governments face fiscal constraints
  • High-growth metropolitans need updated and/or new facilities (e.g., overcrowded prisons)

Drivers: Population, government spending, incarceration rate, nonresidential structure investment

Amusement and Recreation
  • Uptick in sports spending resulting from team relocations, a wave of soccer stadiums and signi cant golf course expansions
  • Casino construction is a trend seen nationwide in efforts to boost state and local tax revenues

Drivers: Income, personal savings rate, unemployment rate, employment

Transportation
  • Urbanization is influencing increased demand for connectivity
  • Agencies are increasing spending alongside an increased use of alternative delivery
  • Owners are more often bundling projects as construction costs steadily rise

Drivers: Population, government spending, transportation funding

Communication
  • Bandwidth needs remain high, as providers work to bring new capacity online in efforts to keep up with public demand
  • Connectivity is becoming a requirement for economic activity and growth (e.g., HQ relocations, data and distribution centers, etc.)

Drivers: Population, security/regulation standards, private investment, innovation/technology investment

Manufacturing
  • Tax overhaul and new tariffs create several considerations for manufacturers; pros and cons vary by industry
  • Continued low-capacity utilization and vacancy rates, coupled with increasing demand, suggest improving investment conditions

Drivers: PMI, industrial production, capacity utilization, durable goods orders, manufacturing inventories

 

Nonbuilding Structures Construction Put in Place

Power
  • Continued shift from coal to natural gas and renewable fuel sources will alter future project mix, including plant decommissioning
  • T&D spending remains stable, driven by regulatory requirements, grid hardening and powerline upgrades (e.g., distributed generation)

Drivers: Population, industrial production, government spending

Highway and Street
  • Federal funding is flat, but states are successfully passing increased gas taxes and user fees
  • State and local agencies are working to develop in-house expertise in alternative delivery, and projects are increasingly using design-build
  • Public-private-partnership opportunities remain limited to select markets, fragmented by inconsistent legislation and oversight

Drivers: Population, government spending, nonresidential structure investment

Sewage and Waste Disposal
  • Some federal relief is seen through the 2018 Consolidated Appropriations Bill
  • Residential construction and technology advancements will drive demand, but local resources remain a long-term limitation

Drivers: Population, industrial production, government spending

Water Supply
  • Similar to sewage and waste disposal, funding sources are limited, but increased federal relief is expected
  • Engineers in this space have been busy through the first half of 2018

Drivers: Population, industrial production, government spending

Conservation and Development
  • Increased USACE spending driven from 2018 Consolidated Appropriations Bill
  • Hurricane cleanup efforts are getting underway in the Carolinas and are still ongoing in Texas and Florida
  • Recent EPA budget cuts are expected to limit future growth through 2019 and 2020

Drivers: Population, government spending

 

 

 

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