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

 

FMI Managing Director Jay Bowman Discusses the Construction Forecast
Key Takeaways
  • Total engineering and construction spending for the U.S. is forecast to end up 6 percent in 2018, compared to up 4 percent in 2017.
  • Spending growth in 2018 is forecast to be led by select nonresidential and residential segments. Current top-three-performing segments forecast in 2018 include transportation (+10 percent), residential improvements (+9 percent) and office (+9 percent). The bottom-three-performing segments include power (-1 percent), sewage and waste disposal (+1 percent), and religious (+2 percent).
  • Second quarter adjustments indicate several additional stabilizing segments. Newly stabilized segments include commercial and health care, two prior growth segments from Q1; also religious; sewage and waste disposal; and water supply construction; all three of which were previously forecast as down last quarter. Lastly, power was moved from stable to down, and conservation and development was elevated from down to growth, based on reported actuals through Q1.

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 increased demand
  • Buyers are showing an increasing willingness to pay, indicating a seller’s market

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 is expected to increase due to the removal of residential tax incentives and rising interest rates

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 Construction Segment

 

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 Q2 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
  • Facilities are seen increasingly investing in IT, analytics and smart building features

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

Office
  • Corporate relocations and demand for mission-critical facilities are driving the overall trend
  • Reduced tax rates will increase investment levels through 2018
  • Rents are up, but speculative starts have slowed through Q1

Drivers: Office vacancy rate, unemployment rate

Commercial
  • 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 permits

Health Care
  • Aging populations and rising rate of chronic illness continue to drive outpatient facility investment
  • Repeal of the Affordable Care Act increases number of uninsured, cutting into profitability

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
  • 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 market, 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 national defense spending driven from 2018 Consolidated Appropriations Bill
  • 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 professional sports spending, including team relocations and significant golf course expansion plans
  • 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
  • Transportation agencies are generally increasing spending alongside an increased use of alternative delivery
  • Numerous large and complex projects are expected to break ground in the coming years (e.g., rail and airport)

Drivers: Population, government spending, transportation funding

Communication
  • Demand for bandwidth (alongside technology innovation) is increasing
  • 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
  • Manufacturing capacity utilization rates remain low

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

 

Nonbuilding Structures Construction Put in Place

Power
  • Generation spending is declining due to load demands, pressure to manage the cost of power, and a shortage of new power plant projects
  • 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
  • Staffing and resource limitations are a growing burden on state and local agencies
  • Public-private-partnership opportunities remain limited to select markets

Drivers: Population, government spending, nonresidential structure investment

Sewage and Waste Disposal
  • Limited local resources to plan, build, maintain or improve infrastructure
  • Some federal relief is expected through the 2018 Consolidated Appropriations Act, 2018
  • Residential construction and technology advancements will drive demand

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 Q1 2018, indicating construction spending may follow in upcoming quarters

Drivers: Population, industrial production, government spending

Conservation and Development
  • Increased federal spending is expected, driven from the Consolidated Appropriations Act, 2018
  • Hurricane cleanup efforts in Texas and Florida are ongoing

Drivers: Population, government spending

 


 

 

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