NOTE: This article is Part 1 of 2. See Part 2 with Dodge's predictions for institutional, manufacturing and public works construction here.
Lackluster growth in construction starts and spending this year has caused some industry experts to sound the alarm of an impending slowdown in the construction cycle. However, Dodge Data & Analytics Chief Economist Robert Murray attempted to quell those fears during the release of the much-anticipated 2017 Dodge Construction Outlook on Oct. 20 during the firm's Outlook 2017 Executive Conference held at Maryland's National Harbor.
Murray said during the event that he believes the industry is "moving into a more mature phase of expansion," rather than entering a period of decline. He noted that the current construction recovery only kicked into high gear in 2012, well after the overall economy started to rebound. "This is a very measured upturn," he said. "It's not a boom."
Murray predicted that the construction industry's period of growth will continue into 2018, then a cyclical slowdown will emerge in 2018 and 2019. Despite the inevitable downward trend in the cycle, Murray noted that the slow nature of the recovery means that the subsequent decline will also be gradual. "We don't have that boom and bust situation [that was] present in the past decade," he said. "When the slowdown ultimately comes, it's not going to be a repeat of what we experienced in 2009."
He pointed to three primary areas of change that the industry should keep an eye on in the coming year:
- Growing support for infrastructure spending: Both presidential candidates have called for a major boost in funding for infrastructure, as the issue has gained widespread attention across the U.S. Murray said he views the public works sector as "one of the supportive elements for keeping this expansion going a bit longer."
- Extreme volatility in the electric power and gas plant sector dragging down the overall picture: This segment of the construction industry has seen huge spikes and significant plummets in the past few years, with that trend expected to continue in 2017. Murray said the sector is so turbulent that he believes a clearer picture of the industry's growth emerges when electric power/gas plant construction is removed from the equation.
- Impact of rising interest rates will not be immediate but significant in a few years: The Federal Reserve is expected to raise short-term interest rates once this year at its December meeting and twice in 2017, according to Murray. Despite the impending rate hike, he noted that the increases are moderate and will not impact the construction industry immediately. Murray predicted that interest rates will create "more of a dampening element by 2018, which will lead to a slowdown in overall economic activity in 2018 or 2019."
Dodge tracks construction starts figures, which count the total value of a new project as soon as it kicks off, rather than spending figures, which are spread throughout the course of a project. Starts numbers typically lead spending figures. Last year, Dodge predicted 2016 construction starts would rise 6% to $712 billion. However, the firm has lowered its forecast for the year to a 1% gain and $676.4 billion in starts. Dodge's picture for 2017 is more positive, as it predicts a 5% increase in starts activity to $712.9 billion.
The annual Outlook report from Dodge is seen as a reliable bellwether of future activity in the residential, commercial, institutional, manufacturing, public works and electric utilities/gas plants construction sectors. Overall, Dodge expects the majority of the segments to perform well in 2017 and offers a positive forecast for construction performance next year.
2016: +7% starts; 730,000 units
2017: +9% starts; 795,000 units
Although single-family construction hasn't swelled to the levels that economists predicted last year, it continues to pick up steam as more millennials make the switch from renting to owning. Murray said the transition of the millennial generation into homeownership has been "a slower process than in previous generations," due largely to affordability concerns. However, now that the number of younger buyers is growing, the single-family sector "might be adding a helpful boost" toward the latter half of the current construction cycle, he said.
2016: -5% starts; 445,000 units
2017: -2% starts; 435,000 units
The multifamily sector dominated residential construction after the recession, but the hot market seems to be cooling now that more renters are venturing into homeownership. Murray pointed to rising rents and vacancy rates as two signs that this sector is "beginning to settle back." Despite the slowdown in multifamily, Murray doesn't expect a significant decline in the sector, as the massive millennial generation continues to create more new households, which typically start out as renters.
Store and shopping center predictions:
2016: -14% starts; 97 million square feet
2017: +5% starts; 102 million square feet
Some weakness in the retail sector has resulted in a "stalled recovery" for the store and shopping center sector, according to Murray. As major retailers like Macy's announce widespread store closures, related construction has suffered as a result. However, Murray predicted that strength in the grocery store segment as well as a rise in renovations across the retail industry will lead to a 5% bump in starts for store construction next year. "Average square feet for store projects continues to be low, but alteration values trend upward," he said. "The renovation side seems to be the place to be."
2016: +3% starts; 201 million square feet
2017: +2% starts; 206 million square feet
Although commercial warehouse construction has slowed after extreme growth between 2011 and 2014, low vacancy rates and the strong e-commerce industry continue to buoy the sector. Murray predicted that warehouse construction will grow another 2% next year, as it has "not yet reached its peak for the current business cycle" due to the fact that demand continues to outpace supply.
2016: +9% starts; 100 million square feet
2017: +10% starts; 110 million square feet
Office construction is projected to rise 9% in 2016 due largely to the start of two massive projects — the 3 Hudson Boulevard building in New York's Hudson Yards development and the One Vanderbilt tower in Manhattan. Murray advised industry insiders to keep an eye on office construction in suburban markets, which have largely been "left behind in this recovery." The office sector is expected to grow 10% in 2017. Murray predicts that corporate headquarters will drive a significant portion of that increase, as more firms look to consolidate their business into a central location.
2016: +10% starts; 71 million square feet
2017: -1% starts; 70 million square feet
Recent strength in the hotel sector is due to a variety of factors including the proliferation of legalized gambling in more states, as well as to a boost in convention center activity leading to accompanying hotel construction. But the market hasn't peaked yet, Murray said, as vacancy rates are up and supply could soon outpace demand. If the hotel sector declines in 2017 as Dodge predicts, it will break a six-year streak of consecutive gains in hotel construction starts.