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FMI U.S. Construction Outlook:
Second Quarter 2019 Report

 

FMI Managing Director Jay Bowman Discusses the U.S. Construction Forecast

Key Takeaways

Total engineering and construction spending for the U.S. is forecast to end up 1 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 conservation and development (+9 percent), transportation (+8 percent), water supply (+8 percent), public safety (+7 percent), office (+6 percent), and highway and street (+6 percent). Forecast bottomperforming segments in 2019 include religious (-6 percent), single-family residential (-5 percent) and residential improvements (-4 percent).
Only one segment, sewage and waste disposal, was upgraded into our growth category through the second half of 2019. Conversely, educational and manufacturing have both been downgraded from growth to stable. Last, both single family residential and residential improvements have now been downgraded from stable to down. All three residential segments are now expected to end this year lower than 2018 spending levels.

 

Total Construction Put in Place
Estimated for the United States

Source: U.S. Census and FMI Forecast

 

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
  • Rising home prices, debt levels and slow wage growth have resulted in significant affordability concerns
  • Homebuyers are weary of the current economic climate, with mortgage rates expected to continue a slow decline
  • Employment growth has slowed, but remains positive

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

Multifamily Residential
  • New construction activity across several major urban markets appears to have cooled
  • Prices continue to rise, but remain mostly attractive and attainable relative to affordability constraints in single-family homes
  • Millennial buying practices and urbanization trends continue to drive long-term opportunities

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

Improvements
  • Stalled moving activity expected through 2020
  • Labor constraints remain paramount while material price escalation has become mixed
  • Rising home prices and wages continue to fuel demand, balanced, however, by higher real estate taxes

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


Nonresidential Construction Index (NRCI) Scores
Q1 2011 to Q3 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
  • Business travel, occupancy rates and RevPar expected to remain healthy through 2020
  • Recent capacity additions, alongside slower employment growth, will continue to stall investment growth
  • Transportation infrastructure projects support elevated spending in select markets
  • Competition from nontraditional forms of lodging (e.g., Airbnb)

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

Office
    • Shift from major corporate campus projects to public office spending is driving the overall trend
    • Widespread labor constraints and slowed employment growth are expected to weigh on future spending
    • Demand for data center investment continues to expand rapidly

Drivers: Office vacancy rate, unemployment rate

Commercial
  • Traditional retail continues to evolve with high, albeit plateaued, vacancy rates and ongoing closures/exits
  • Continuing rise in e-commerce led by Amazon, eBay and others
  • Renovations assist in upholding annual spending levels
  • Demand for warehouse and distribution continues to expand with a shift to last-mile logistics

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

Health Care
  • Ongoing influence of M&A activity, senior living demand from the aging population and specialtycare platforms“
  • “Microhospitals” (eight- to 12-bed facilities) are helping local markets meet demand for acute medical treatment, driving average segment project sizes lower
  • New technologies and services expected to temper long-term demand (e.g., telehealth and wearables)

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

Educational
  • K-12 spending growth expected to outpace college/university spending
  • Rising tax revenues and local bond support are strengthening public funding sources
  • Increasing percentage of the U.S. population under 18 years old

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
  • Rising tax revenues and local bond support
  • High-growth metropolitans are in need of updated facilities and infrastructure
  • National crime rates are trending downward

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

Amusement and Recreation
  • Rising employment, business travel and transportation infrastructure support increased spending through 2019
  • Surge in recent investment is supported by public activity bonds
  • Sports and convention centers continue to drive growth through 2019, declines expected thereafter

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 large-scale transportation investment nationwide
  • Expect strong short-term and midterm growth across the Northeast and Midwest

Drivers: Population, government spending, transportation funding

Communication
  • Fifth-generation (5G) infrastructure and hardware are being deployed rapidly
  • 5G infrastructure requirements are estimated to exceed $200 billion
  • Bandwidth needs remain high, providers are working to bring new capacity online in efforts to keep up with the public demand

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

Manufacturing
  • International trade negotiations, new tariffs and oil price volatility continue to generate uncertainty
  • Increased investment tied to domestic oil and gas production, especially along the Gulf Coast
  • Leading indicators suggest a softening/declining trend in industrial production into 2020

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
  • Various technologies are being implemented to improve processes and the overall customer experience
  • Faced with opposition, pipeline activity is to remain active well into 2020
  • Trends toward electrification (e.g., electric cars) are increasing infrastructure requirements

Drivers: Population, industrial production, government spending

Highway and Street
  • Expanding state and local economies have led to increased funding sources
  • Overall growth is driven by a handful of the largest states (e.g., California’s SB1)
  • Upcoming 2020 federal funding rescission could pose major challenges
  • Fixing America’s Surface Transportation (FAST) Act is set to expire in 2020

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
  • Introduction of the Water Quality Protection and Jobs Creation Act of 2019 to support further spending
  • Significant $2.75 billion flood control effort in North Dakota represents the first P3 for the U.S. Army Corps of Engineers (USACE)

Drivers: Population, industrial production, government spending

Conservation and Development
  • USACE spending is being aided from various sources, including a recent 2019 disaster relief bill, the 2019 federal spending package and the 2018 Consolidated Appropriations Bill
  • Further, albeit mild, EPA cuts realized in proposed 2020 budget

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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