After a sluggish year with just 1 percent growth, backhoes and bulldozers should be busier in 2017 with 5 percent growth in construction starts, for a total volume of $713 billion. That is the prediction from industry leader Dodge Data & Analytics, presented at the group’s annual conference held recently at National Harbor in Oxon Hill, Maryland.
“The U.S. construction industry witnessed signs of deceleration in 2016, following several years of steady growth, raising concern that we are at the start of another cyclical decline,” said Robert Murray, Dodge’s chief economist. Slow 2016 was preceded by post-recession annual growth rates of 10 to 12 percent from 2010 to 2015. About a dozen billion-dollar-plus project starts drove 11 percent growth in 2015.
As 2016 draws to a close, however, a new pattern seems to be emerging: one of slow but steady growth. “We are entering a more mature phase of expansion,” Murray said. “Construction spending can be expected to see moderate gains through 2017 and beyond.”
Murray pointed out a number of factors that support this prediction, including the following: moderate job growth, healthy market fundamentals in commercial real estate, infrastructure and public works funding through state and local bond measures, stabilized energy prices, continued low interest rates, low inflation, and a new presidential administration. The construction industry is benefiting from the year-old Fixing America’s Surface Transportation (FAST) Act, and could further benefit from passage of the Water Resources Development Act by the end of the year.
Leading the projected advancement are the residential, commercial, and institutional building sectors. On the opposite end of the spectrum, the energy sector—including power plants, liquefied natural gas transport facilities, and the like—is highly volatile, with a major decline predicted for 2017, pulling down the entire industry’s growth rate. The Dodge outlook makes the following sector-specific predictions:
- Single-family housing will rise 12 percent in dollars, corresponding to a 9 percent increase in units to 795,000 housing starts in 2017. Housing demand is being driven by better access to home mortgage loans, continued employment growth, low mortgage interest rates, and millennials aging into the 30-to-35 age bracket.
- Multifamily housing, on the other hand, is leveling off; 2017 growth will be flat in dollars and down 2 percent in units to 435,000. This sector appears to have peaked in 2015, punctuated by exceptional activity in New York City. The outlook is better for secondary and tertiary markets.
- Commercial building will increase 6 percent, following the estimated 12 percent gain in 2016. Office, retail, and warehouse construction are on the rise, while hotel construction is expected to level off after a strong 2016.
- Institutional building will advance 10 percent, resuming its expansion after pausing in 2015 and 2016. K–12 school construction is supported by the recent passage of major school construction bond measures. The outlook is sunny for amusement facilities including sports arenas, casinos, and convention centers, as well as transportation terminals.
- Manufacturing plant construction will increase 6 percent following steep declines in 2015 and 2016, highlighted by the pullback in large petrochemical plant project starts.
- Public works construction also will register a 6 percent improvement, regaining upward momentum after slipping 3 percent in 2016.
- Electric utilities and gas plants will fall another 29 percent after the 26 percent decline in 2016 and a 2015 spike from new LNG facilities. Power plant construction, which was supported in 2016 by the extension of investment tax credits, will ease back as new generating capacity comes on line.
Across the border in Canada, the outlook is a bit chillier. Canada has been “flirting with recession,” said Dodge senior economist Richard Branch, due to weak oil and commodity prices, uneven employment growth, and a slowdown in residential construction. These factors have weakened the Canadian dollar, but that is not a bad thing, noted Branch. Canada’s weak currency has strengthened its exports, which also have been bolstered by resilient consumer spending, low interest rates, strong consumer demand in the United States, and stimulus spending focused on infrastructure.
The Canadian dollar has effectively become a petro dollar, Branch asserted, moving with the price of oil. Market dominance by this single commodity has a major effect on some provinces, notably Alberta, while leaving Ontario, Quebec, and other provinces relatively untouched. Alberta, for example, has experienced negative economic growth both in 2015 and 2016. Despite these negative factors, overall Canadian construction activity—as measured by the Canadian dollar value of new permits—is expected to grow by 6 percent in 2017 with a total value of C$87 billion, after dropping by 3 percent in 2016.
The Canadian residential market differs markedly from that of the United States. Single-family-home permits in Canada are expected to hit a multiyear low in 2017 after having declined since 2004. Last year’s permitting level was the lowest since 1995. Developers are buying up large land parcels for multifamily development, favoring millennials, immigrants, and those seeking lower housing costs. Demand outstrips supply of single-family housing in popular destinations such as Vancouver, where housing prices climbed by 20 percent in 2016, and the provincial government slapped a 15 percent land transfer tax on foreign buyers of residential property. The new tax already has had a cooling effect on the local market. Single-family housing is expected to perform better in secondary and tertiary markets such as Winnipeg and Quebec City, Branch noted.
Canada’s multifamily market, on the other hand, has seen strong permitting activity over the last few years. Permitting peaked in 2015, fell in 2016 as provincial governments enacted regulations to tamp down prices, and is expected to grow by 4 percent to a total of 128,000 new permits in 2017.
Permits for new commercial construction in Canada have fallen steadily since 2013, with only meager growth projected for 2017—a total value of C$17.1 billion. The office market is particularly weak, with permitting value expected to hit a seven-year low in 2017. Office vacancy rates, now at 12.6 percent nationwide, are projected to decline even further.
The surprise winner in the Canadian commercial building sector is retail, which is projected to grow in 2017, even with the continued popularity of online sales. Canada’s retail market took a huge hit in 2013 when the retailer Target exited the Canadian market, shuttering 133 stores. But now the outlook is bright for brick-and-mortar retail outlets both domestic, such as the Ottawa-based Giant Tiger discount chain, and U.S.-based such as Nordstrom and Costco.
The educational and institutional sectors also show positive signs, said Branch, with 10 percent growth expected for each sector in 2017. An aging population, with the over-60 age cohort slated to be the nation’s largest demographic by 2030, is fueling even more robust growth in health care facility construction, which is expected to jump by 15 percent next year.
So where is the smart money going? That question was not on the conference agenda. But asked how he would invest $100 million in U.S. real estate, Dodge’s Murray answered: “Not hotels.” Secondary and tertiary markets look good to him—as they do to many other economic prognosticators.