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Nonresidential construction spending grew 2.5 percent in July and a robust 8.6 percent year over year, according to the U.S. Census Bureau. “[This] encouraging report provides further evidence that a vigorous nonresidential construction recovery is finally at hand,” said Anirban Basu, chief economist of Associated Builders and Contractors (ABC).

In its Construction Outlook Second Quarter Report, FMI remains cautiously optimistic: “Multifamily is still a fast-growing market, but the rate of growth is slowing...nonresidential construction is on the verge of breaking out of its long slumber. Health care and education markets have both slowed due to political circumstances. Those issues could be resolved next year, and the pent-up demand will come rushing into the market. Infrastructure is another example. If someone can come up with the political will or new ideas for funding and operating, this area could take off.” FMI’s overall prediction is to expect total construction put-in-place to grow 7 percent this year and for the next few years.

Nonres Construction Spending

Here are the numbers and predictions by construction category.

  • Office-related construction is up 20 percent from a year ago. FMI predicts 4 percent growth in 2014 and continued improvement during the next five years.
  • Health care-related construction grew 1.6 percent in July, but is down 6 percent from the same time last year. FMI says political uncertainty continues to affect construction of new health care facilities but expects $40.8 billion in new construction, based on a trend of fewer large health care facilities and more outpatient care closer to patients and updating extant facilities.
  • Manufacturing-related spending grew 4.7 percent in July and is up 23.9 percent on an annual basis. FMI points to signs of sustainable growth, predicting a 6 percent increase in 2014 and 8 percent in 2015--with global economic factors like energy and transportation costs, political unrest and the need for trained workers in high-tech tipping the balance for locating or relocating to the United States.
  • Education-related construction grew 0.5 percent in July, but is down 1.2 percent on a year-over-year basis. FMI predicts that education will expand only 1 percent for 2014, with potential growth in additions and renovations and year-round schools.
  • Lodging construction is up 2.7 percent on a monthly basis and is up 16 percent from last year. FMI predicts growth of 14 percent in 2014, slowing to 11 percent in 2015.
  • Water supply-related construction expanded 2 percent compared to June, but is 2.8 percent lower than at the same time last year. Due to lack of funding, FMI expects an overall decrease of 1 percent in 2014, with just 2 percent growth in 2015.
  • Amusement and recreation-related construction grew 0.2 percent in July and is up 12 percent from the same time last year. FMI predicts the category will remain flat, but notes new stadiums are bringing in additional development that includes mixed-use venues and revitalization around the stadiums.
  • Public safety-related construction gained 3.3 percent on a monthly basis and is up 9.6 percent on a year-over-year basis. FMI predicts a 1 percent decrease in 2014, noting that while federal incarceration rates are increasing, state and local incarceration rates are down.
  • Power construction spending gained 7.2 percent in July and is 25.7 percent higher than the same time one year ago.
  • Commercial construction spending fell 2.8 percent in July, but is up 6.9 percent compared to a year ago. FMI predicts 6 percent growth in 2014, with pricing being a challenge even while owners want perks such as green building components. FMI advises contractors to work leaner and use new building methods like prefabrication and modular. FMI also poses an interesting question in its Construction Outlook: Just how much has online shopping hurt the retail industry? It has changed the way retailers view traditional storefronts. Despite growing 4 percent since 2005, e-commerce is still a very small percentage of total retail sales. Contractors need to be aware of how much e-commerce in education, religion, amusement, travel, recreation and health care can and will change their businesses. On the plus side, there will be an increased need for data centers and warehouses. FMI recommends contractors that persist in going to the same market where they have always worked to deploy some new tactics, such as being the low-price provider or the most efficient contractor.
  • Communication construction fell 1.2 percent for the month and is down 11.3 percent on an annual basis. FMI expects a 5 percent increase in 2014, with communication remaining steady in the coming years due to increasing demand for small cell networks and improved service in areas where cell towers are prohibited.
  • Religious spending fell 5.1 percent for the month and is down 1.3 percent from the same time last year. FMI predicts a 1 percent decline with any growth occurring in renovation as new congregations move into vacant retail space or abandoned churches.
  • Sewage and waste disposal-related construction fell 1.4 percent for the month, but has grown 3.1 percent on a 12-month basis. FMI predicts no growth for 2014 because many municipalities depend on the tax base for funding. FMI points out that environmentally friendly approaches using new technologies and planning offer greener solutions that attract business and people. Unfortunately, one of the primary drivers of water and wastewater projects appears to be court-ordered consent decrees issued under the Clean Water Act.
  • Conservation and development-related construction fell 7.1 percent in July, but is up 24.8 percent on a yearly basis. FMI predicts 5 percent growth for 2014 as industrial markets flourish behind the strength of the natural resources sector and the low cost of energy drives the onshoring phenomenon in other industrial sectors.
  • FMI notes that power industry construction declined from 5 percent to 3 percent and predicts slower growth through 2018. Expiration of tax credits may cause a short burst of wind power construction projects, then lose momentum due to financing concerns. Updating facilities to use more natural gas may drive new construction, but at the same time, many owners will hold of making that decision.

Transportation and Highway Spending

Construction spending in the transportation category grew 0.4 percent on a monthly basis and has expanded 2.2 percent on an annual basis. Highway and street-related construction expanded 6.9 percent in July and is up 2.7 percent from the same time last year. FMI notes that President Obama needs support for a four-year $302 billion surface transportation reauthorization bill, which if passed, would achieve certainty in highway funding in addition to funds proposed in 2016 budget. FMI forecasts a 2 percent increase, with possibly more from P3 funding from private investors. However, any private funding will not begin to approach the amount of infrastructure the country needs.

Moody’s Investor Services North American Building Materials Report notes that states with improved budgets are taking an active role in addressing infrastructure needs.Virginia raised its gas tax for additional funding of $800 million per year. Florida’s Department of Transportation approved a $10.2 billion budget for FY 2014/2015 in addition to the state’s public-private partnerships. Federally funded Transportation Infrastructure Finance & Innovation Act (TIFIA) projects are beginning to drive additional aggregates shipments. TIFIA funding is estimated to support $30 billion to $50 billion in new construction, stimulating private capital investment for projects of national or regional significance in key growth areas through the United States.

Construction Materials Prices

ABC’s Basu notes that construction materials prices were unchanged in August, but are 1.7 percent higher than this time last year, according to a Sept. 16 producer price index (PPI) release by the U.S. Department of Labor. Softwood lumber, plumbing fixtures, concrete products, iron and steel, fabricated structural metal, nonferrous wire and cable, prepared asphalt, tar roofing and siding all rose slightly. Natural gas, crude petroleum and crude energy materials prices experienced declines.

Moody’s Investor Services predicts operating income growth of more than 7 percent for the remainder of 2014 and into at least mid-2015. Building materials companies, with high fixed cost structures, are positioned to benefit from the operating leverage they receive with increasing volumes, according to Moody’s. This growth is coming from the continued residential construction recovery, coupled with improving nonresidential construction activity and a stabilizing public construction market.

Construction Employment

The U.S. construction industry added 20,000 jobs in August, according to the Sept. 5 Bureau of Labor Statistics report; 5,500 of them were nonresidential construction (2,300 of which were specialty contractors). "While the national construction unemployment rate inched up to 7.7 percent, construction is a segment in which many executives complain about a lack of available skilled workers and rising unemployment must be interpreted more broadly," said Basu. "The industry has a high demand for job seekers and increasing demand for construction workers implies that many of these job seekers will find employment. Moreover, the industry's unemployment rate has fallen 1.4 percent from where it stood one year ago."

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