Modest growth is the consensus forecast for the U.S. construction industry in 2013 based on reports from national associations representing building contractors, home builders, road and transportation builders, and others. Growth in total construction spending is expected to increase 6 percent to 8 percent with changes in individual market sectors ranging from minus 1 percent to greater than 20 percent.
All predictions for the U.S. economy – and by extension, the market for civil Engineering services – are conditioned on resolution of pending tax increases and spending cuts currently scheduled to take effect in early 2013.
Assuming efforts to cushion the full extent of the fiscal cliff are successful, keeping the U.S. economy from sliding back into recession, then there are several positive factors to benefit construction, including low interest rates and improving market fundamentals for several project types.
Nonresidential Building Construction
Spending on sectors within the broad nonresidential building Construction category is forecast to increase from 3 percent to 10 percent in 2013, ABC reported. Thanks to a handful of segments experiencing more rapid economic recovery, much of the construction expansion in 2013 will be in categories heavily associated with private financing.
Due largely to constrained capital budgets at state- and local-government levels, as well as ongoing turmoil in Washington, D.C., publicly funded construction spending is expected to be flat, and perhaps worse. It is forecast that spending on commercial construction, office-related construction, and power facilities will increase approximately 10 percent in 2013; lodging will increase about 8 percent.
More modest growth of 3 to 5 percent is expected for the educational, health care, and manufacturing industries. Construction Backlog Indicator (CBI) – which is measured in months and reflects the amount of construction work under contract but not yet completed – increased to 8 months in the third quarter of 2012, a 3.5-percent increase compared with the previous quarter. The CBI indicates acceleration in nonresidential construction spending by mid-2013. What the CBI data tell us is certain industries and geographies will be associated with more robust construction- spending recovery, including segments related to energy generation, health care, and infrastructure.
CBI dynamics also seem to suggest the latter half of 2013 may be associated with more rapid growth in construction spending than the first half of the year. However, the infrastructure category, which is the most susceptible to spending cuts related to the fiscal cliff, is the only category that did not experience rising backlog during the third quarter. Construction Outlook provided a slightly different forecast for nonresidential construction. According to the report, commercial building will increase 12 percent, greater than the 5-percent gain estimated for 2012.
Warehouses and hotels will benefit from lower vacancy rates, while store construction will feature more upgrades to existing space and a lift derived from gains for single-family housing. The increase for office construction will be modest, as new privately financed projects continue to be scrutinized carefully by lenders. 2013's level of commercial building in current dollars will still be more than 40 percent below the 2007 peak.
Residential
As interest rates remain historically low, unemployment slowly declines, and the economy improves, the residential construction sector continues to gain strength. The U.S. Department of Commerce reported in December building permits in November 2012 were at a seasonally adjusted annual rate of 899,000, up 3.6 percent from the revised October rate and up 26.8 percent from November 2011. Housing starts in November 2012 were at a seasonally adjusted annual rate of 861,000, down 3 percent from the revised October estimate, but up 21.6 percent from November 2011.
Construction Outlook predicts that spending for single-family housing will grow 24 percent, corresponding to a 21-percent increase in units to 615,000, and multifamily housing will rise 16 percent in dollars and 14 percent in units. The positives for single-family housing have become more numerous, including an easing in the pace of foreclosures, stabilizing home prices, and record low mortgage rates. Multifamily housing construction is exhibiting slower growth than during 2011 and 2012, but improved market fundamentals will help to justify new construction. Builders across the country are reporting some of the best sales conditions they've seen in more than five years, with more serious buyers coming forward and a shrinking number of vacant and foreclosed properties on the market. One thing that is still holding back potential home sales is the difficulty that many families are encountering in getting qualified for a mortgage due to today's overly stringent lending standards.
While there is still much room for improvement, the consistent upward trend in builder confidence over the past year is indicative of the gradual recovery that has been taking place in housing markets nationwide and that we expect to continue in 2013. Public-works construction, including transportation and water infrastructure, will continue to be impacted by tight federal, state, and local budgets. Public works construction will decrease 1 percent in 2013 as federal spending cuts.
Port improvements in anticipation of completion of the Panama Canal expansion project in 2015 are expected to increase U.S. ports and waterway construction nearly 25 percent to $2.65 billion. ARTBA anticipates increased market activity in California, Florida, Kentucky, Maryland, Massachusetts, Mississippi, New Jersey, New Hampshire, New York, Texas, Virginia, and Washington. The ARTBA forecast indicates increased airport runway and terminal construction in 28 states, with sector growth overall of 4.5 percent, reaching $12.5 billion. Market-driving states include Alaska, Arizona, California, Florida, Illinois, New York, Ohio, Tennessee, and Texas. Steady revenue streams from water and wastewater utilities can leverage private investment. Many municipalities are recognizing an opportunity to have their systems managed by private firms. The funding that becomes available is significant. Based on the demand for pipe, water-sector construction is particularly strong from Virginia south into Florida, despite the housing recession. A combination of population growth and drought is driving large water pipeline projects in cities such as San Antonio and Austin, Texas. The cities are tapping remote aquifers – some 30 or 40 miles away – to manage water demand in urban areas. Major reconstruction following Hurricane Sandy also could be a public works market factor for the East Coast during 2013, In early December, the Obama Administration requested $60.4 billion in emergency supplemental funds for Hurricane Sandy recovery efforts. The American Council of Engineering Companies reported that, if approved, $21.5 billion of that total would be designated for Federal Emergency Management Agency disaster relief and $15 billion for Community Development Block Grants. Another $12 billion would be earmarked for the Department of Transportation, largely for restoration of damaged transit systems, and $5.3 billion would go to the U.S. Army Corps of Engineers civil-works program. The request also included $13 billion for mitigation projects for communities to reduce the risk of damage from future disasters.
The White House and Congress will be able to successfully navigate the nation past its fiscal cliff. If that happens, the latter half of 2013 could be surprisinglygood for nonresidential activity given the large volume of construction projects that were put on hold in 2012.