[This article was written by Construction Practice attorney Garret Murai and appeared in The Wendel Report: Construction and Infrastructure Update, January 2017.]
As we start off 2017 (I, for one, am glad 2016 is behind us), it’s time to think about what the new year might bring.
Wendel Rosen recently conducted an informal market sentiment study at a recent real estate industry event in Oakland. The survey was specific to the economic conditions in and around Oakland. To view the results of this survey, which include a comparison to results gathered for the same questions in 2010, please click here.
While our survey was based on a limited data set, the overarching sentiment was an optimistic outlook for the near future. For a national view of the construction market, we looked to the experts at Dodge Data & Analytics, who have made the following predictions for the coming year.
According to their 2017 Dodge Construction Outlook, they predict that U.S. construction starts will increase modestly in 2017, up 5% to $713 billion, after rather anemic growth in 2016 following several years of steady growth.
According to Robert Murray, chief economist for Dodge Data & Analytics, while the first half of 2016 lagged behind construction activity in 2015, that shortfall grew smaller as the year progressed, easing concern that the construction industry might be in the early stage of a cyclical decline. Rather, according to Murray, it appears that the construction industry has now entered a more mature phase of expansion, one characterized by slower rates of growth than during the 2012-2015 period and that construction spending can be expected to see moderate gains through 2017 and beyond:
On balance there are a number of positive factors which suggest the construction expansions room to proceed. The U.S. economy in 2017 is anticipated to see moderate job growth, market fundamentals for commercial real estate should remain generally healthy, and more funding support is coming from state and local bond measures. Although the global economy in 2017 will remain sluggish, energy prices appear to have stabilized, interest rate hikes will be gradual and few, and a new U.S. President will have been elected.
Of note, Dodge Data & Analytics’ 2017 Dodge Construction Outlook came out before the Presidential elections, when many believed that Hillary Clinton would be a shoo-in for the Presidency. While there are many uncertainties surrounding how the nation and economy will do under President-elect Donald Trump, Trump has promised to spend $1 trillion on infrastructure in the next 10 years, and the stock market seems to be betting on it.
By industry segment, single family construction spending is expected to increase the most significantly, while multifamily housing, which had seen significant gains over the past years, is expected to continue its relatively flat trajectory started last year. Spending on electrical utility and gas plants is expected to continue to fall. Here are a few additional highlights from the report:
- Single Family Housing: Single family housing is expected to rise 12% in 2017, corresponding to a 9% increase in units to 795,000. Access to home mortgage loans is improving, and some of the caution exercised by potential homebuyers will ease with continued employment growth and low mortgage rates. Older members of the Millennial generation are now moving into the 30 to 35 year-old age bracket, which should begin to lift demand for single family housing.
- Multifamily Housing: Multifamily housing is expected to be flat in 2017 and down 2% in units to 435,000. Multifamily housing appears to have peaked in 2015, lifted in particular by an exceptional amount of activity in the New York, NY metropolitan area, which is now settling back. Continued growth for multifamily housing in other metropolitan areas, along with still generally healthy market fundamentals, will enable the retreat at the national level to stay gradual.
- Commercial Buildings: Commercial buildings are expected to increase 6% in 2017 on top of the 12% gain estimated for 2016. Office construction is showing improvement from very low levels, lifted by the start of several signature office towers and broad development efforts in downtown markets. Store construction should show some improvement from a very subdued 2016, and warehouses will register further growth. Hotel construction, while still healthy, will begin to retreat after a strong 2016.
- Institutional Buildings: Institutional building is expected to advance 10% in 2017, resuming its expansion after pausing in 2015 and 2016. The educational facilities category is seeing an increasing amount of K-12 school construction, supported by the passage of recent school construction bond measures. More growth is expected for the amusement category (convention centers, sports arenas, casinos) and transportation terminals.
- Manufacturing Plants: Manufacturing plant construction will increase 6%, beginning to recover after steep declines in 2015 and 2016 that reflected the pullback for large petrochemical plant starts.
- Public Works: Public works construction is expected to improve 6% in 2017, regaining upward momentum after slipping 3% in 2016. Highways and bridges will derive support from the new federal transportation bill, while environmental works should benefit from the expected passage of the Water Resources Development Act. Natural gas and oil pipeline projects are expected to stay close to the volume seen in 2016.
- Electrical Utilities and Gas Plants: Electric utilities and gas plants are expected to fall another 29% in 2017 after the 26% decline in 2016. The lift that had been present in 2015 from new liquefied natural gas export terminals continues to dissipate. 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.
All in all, we think these predictions spell ample opportunity for many segments of the construction industry. We will be watching closely to see how that plays out throughout the Bay Area.