Continued construction gains through 2020

Continued construction gains through 2020

Friday, March 15, 2019 from Floor Covering Weekly

Spending on nonresidential buildings nationally is projected to grow by 4.4 percent this year, paced by healthy gains in the industrial and institutional building sectors, according to the American Institute of Architects’ recently released Consensus Construction Forecast. For 2020, growth is projected to slow to 2.4 percent, with essentially no increase in spending on commercial facilities, but gains in the 3 percent range in the industrial and institutional categories. Bolstering this outlook are business indicators coming from U.S. architecture firms. They are reporting healthy design billings and continue to see new project activity coming into their firms, pushing current project backlogs to their highest levels since the last recession.

While the construction industry remains generally optimistic, there is growing concern that a broader economic downturn may be materializing over the next 12 to 24 months. Sources of this concern include a softening investment environment, an international slowdown and weakness in the housing and auto sectors, which are considered leading indicators of the economy.

Business investment often reflects what corporate leaders feel about the growth potential for their companies. Business investment nationally in new plant and equipment saw healthy growth in 2017 and through the first half of 2018, but slowed significantly beginning in the third quarter of last year. Given the recent trends in business confidence scores, investment is unlikely to accelerate anytime soon. Business confidence fell sharply through 2018, with the fourth quarter showing the lowest levels in six years.

Additionally, the economies of many of our trading partners have not been performing as well as our own, which suggests that our export volumes will be declining in the future. Recent forecasts from the International Monetary Fund suggest that world economic growth will be slowing in the coming years. Domestically, it appears that housing starts have peaked for this cycle, having declined steadily from their first quarter 2018 levels.

However, these cracks in our economic foundation largely have not been reflected in construction activity. The American Institute of Architects’ Consensus Construction Forecast Panel, consisting of the nation’s leading construction forecasters, is projecting growth continuing through at least 2020. However, even within these projections, commercial building activity — offices, retail facilities and hotels — saw spending growth of around 7 percent last year, but the growth is expected to slow to 3.5 percent this year, and eke out a 0.6 percent increase next year. What will keep the industry afloat, in the panel’s opinion, is the performance of the institutional construction sector, which is heavily dominated by education and healthcare facilities.

While demographic trends are generally favorable to the education construction outlook, fiscal developments are the real growth engine. Rising house values have finally given local governments a boost in property tax revenue to undertake new projects and renovate older buildings. Additionally, the rising stock market in recent years had built up endowments for private schools and colleges to expand their facilities. Healthcare building spending is benefitting from extremely favorable underlying demographics, but in recent years growth has been tempered by uncertain implementation and modifications to the federal Affordable Care Act.

The nonresidential building construction outlook can best be described as solid, but tempered by growing uncertainty over how broader economic trends will play out. The fact that architecture firms had a strong 2018 bodes well for healthy growth continuing in construction activity through this year. And considering that new projects continue to flow into architecture firms at a healthy pace, 2020 is increasingly looking like another year of growth.

Kermit Baker is the senior research fellow for the Joint Center of Housing Studies at Harvard University. He may be reached via e-mail at [email protected]