2021 North American Engineering and Construction Outlook Second Quarter
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FMI Managing Director Jay Bowman Discusses the US Construction Forecast
Key Takeaways
Total engineering and construction spending for the U.S. is forecast to end up 3 percent in 2019, compared to up 4 percent in 2018.
Spending growth in 2019 is expected to be led by public investment across both nonresidential buildings and nonresidential structures. Current top-performing segments forecast in 2019 include transportation (+9 percent), public safety (+6 percent), educational (+5 percent) and manufacturing (+5 percent). Forecast bottom-performing segments in 2019 include religious (-5 percent), multifamily (-5 percent) and lodging (-2 percent).
Key segments that were upgraded into our growth category going into 2019 include educational, manufacturing, and highway and street. Various others appear to be stabilizing this year, including three prior growth segments from 2018: single-family residential, amusement and recreation, and sewage and waste disposal. Both lodging and multifamily were adjusted into our down category this quarter with anticipated declines realized through the remainder of the year.
Total Construction Spending Put in Place 2018 and Forecast Growth
(2018-2023 CAGR) by Metropolitan Statistical Area
Source: FMI Forecast
Residential Construction Put in Place
Single-Family Residential
- Starts expected to rise slowly through 2020, alongside mounting affordability concerns
- Employment growth has moderated while wages continue to slowly rise
- Mortgage rates have reached 13-month lows in an effort to motivate buyers
- FHA is tightening lending standards
Drivers: Unemployment rate, core CPI, income, mortgage rate, home prices, housing starts, housing permits
Multifamily Residential
- Declining investment expected through 2020 as major cities recognize new capacity
- Millennial buying practices, alongside urbanization trends, continue to drive long-term opportunities
- Prices continue to rise
Drivers: Unemployment rate, core CPI, income, mortgage rate, home prices, housing starts, housing permits
Improvements
- Stalled moving activity expected through 2020
- Rising labor and material costs continue to postpone improvement projects
- Rising home prices and wages continue to fuel demand
Drivers: unemployment rate, core CPI, income, mortgage rate, home prices, housing starts, housing permits
Total Construction Put in Place
Estimated for the United States
Source: U.S. Census and FMI Forecast
Nonresidential Construction Index (NRCI) Scores
Q1 2011 to Q2 2019
(Scores above 50 indicate expansion; scores below 50 indicate contraction)
NRCI scores are based on a diffusion index where scores above 50 represent improving or expanding industry conditions, a score of 50 represents conditions remaining the same, and a score below 50 represents worse conditions than last quarter (or contraction).
The data in the NRCI is presented as a sampling of construction industry executives voluntarily serving as panelists for this FMI survey. Responses are based on their experience and opinions, and the analysis is based on FMI’s interpretation of the aggregated results.
Nonresidential Buildings Construction Put in Place
Lodging
- New capacity, alongside lower employment growth, is expected to stall short-term investment
- Occupancy rates and RevPar expected to remain healthy through 2020
- Increasing competition from nontraditional forms of lodging (e.g., Airbnb)
Drivers: Occupancy rate, RevPAR, average daily rate, room starts
Office
- Cost pressures and slowed employment growth are expected to weigh on demand
- Major corporate campus projects are driving the overall trend
- Demand for data center investment continues to expand rapidly
Drivers: Office vacancy rate, unemployment rate
Commercial
- Traditional retail continues to evolve with rising vacancy rates and ongoing closures/exits (e.g., Payless ShoeSource)
- Ongoing rise in e-commerce led by Amazon
- Demand for warehouse and distribution investment continues to expand
Drivers: Retail sales, CPI, income, home prices, housing starts, housing prices
Health Care
- Ongoing influence from M&A activity, senior living demand from the aging population and specialty care platforms
- “Microhospitals” (eight- to 12-bed facilities) are helping local markets meet demand for acute medical treatment
- Key indicators suggest strong future growth in southern and western states
Drivers: Population change, population change in ages 75 and up, uninsured population, government spending, nonresidential structure investment
Educational
- Increasing percentage of the U.S. population under 18 years old
- Local bond support has been on the rise
- Any upcoming federal infrastructure package is expected to include increased funding for schools
Drivers: Population change younger than age 18, population change ages 18-24, stock markets, government spending, nonresidential structure investment
Religious
- Increased wages and income levels bolster industry revenue growth
- Declining share of Americans donating to religious organizations
- Declining attendance over time
Drivers: GDP, population, income, personal savings
Public Safety
- High-growth metropolitans are in need of updated facilities and infrastructure
- National crime rates over the past 18-24 months are trending downward
- Legislation has ordered various states to either reduce the prison population or build new private prisons
Drivers: Population, government spending, incarceration rate, nonresidential structure investment
Amusement and Recreation
- Private investment and developments drive the overall trend
- Surge in recent investment is supported by public activity bonds
- Casino construction as a nationwide construction trend is decelerating into 2019
Drivers: Income, personal savings rate, unemployment rate, employment
Transportation
- Urbanization is influencing increased demand for connectivity
- Addressing crowding is a means to continue attraction in large, high-growth metropolitans
- The evolution of e-commerce is bolstering transportation investment nationwide
Drivers: Population, government spending, transportation funding
Communication
- Bandwidth needs remain high, providers work to bring new capacity online in efforts to keep up with public demand
- Connectivity has become a requirement for local economic growth
- Significant fifth-generation (5G) infrastructure needs
Drivers: Population, security/regulation standards, private investment, innovation/technology investment
Manufacturing
- Chinese trade negotiations continue to generate uncertainty
- Increased investment tied to domestic oil and gas production
- Past 18-24 months of increased orders, production and utilization rates will encourage short-term spending
- Leading indicators have softened through 2018 and into 2019
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 energy sources
- Slow but sustained growth in electricity consumption, technology adoption continues to drive investment
- T&D spending is expected to plateau in 2019 following two strong years
Drivers: Population, industrial production, government spending
Highway and Street
- Widespread increases in related state and local revenues
- Federal funding will experience some increase due to last year’s appropriations bill
- Overall spending growth is driven by a handful of the largest states
Drivers: Population, government spending, nonresidential structure investment
Sewage and Waste Disposal
- Passage of America’s Water Infrastructure Act in late 2018 and reauthorization of the Water Infrastructure Finance and Innovation Act (WIFIA) provide a substantial boost in funding
- Residential needs and technology advancements will drive overall demand
Drivers: Population, industrial production, government spending
Water Supply
- Passage of America’s Water Infrastructure Act in late 2018 and reauthorization of the Water Infrastructure Finance and Innovation Act (WIFIA) provide a substantial boost in funding
- Recent introduction of the Water Quality Protection and Jobs Creation Act of 2019 further supports ongoing clean water supply infrastructure spending
Drivers: Population, industrial production, government spending
Conservation and Development
- Increased USACE spending, driven from 2018 Consolidated Appropriations Bill
- EPA budget cuts limit spending growth
Drivers: Population, government spending
Jay Bowman is a principal with FMI. Jay assists a broad range of stakeholders in the construction industry, from program managers and general contractors to specialty trades and materials producers, with the identification and assessment of the risks influencing the strategic and tactical decisions they face. In this role, Jay’s primary responsibilities include research design and interpretation, based on developing an understanding of the context within which these organizations operate. Jay can be reached at jbowman@fminet.com.
Brian Strawberry is a senior economist with FMI. Brian’s expertise is in economic and statistical modeling. He leads FMI’s efforts in market sizing, forecasting, and building product/construction material pricing and consumption trends. The combination of Brian’s analytical skills and creative problem-solving abilities has proven valuable for many contractors, owners and private equity groups as well as industry associations and internal research initiatives. Brian can be reached at bstrawberry@fminet.com.
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