Nation-wide, monthly multi-family groundbreakings have
pretty much recovered to their pre-recession volume (400,000 units annualized).
It’s the single-family market that continues to hold back.
Single-family starts are only about half of what might be
expected (600,000 units annualized versus 1.2 million), based on their history.
Prospective buyers remain wary. The precipitous drop in home prices, extending
through several years after the sub-prime mortgage mess came to light, combined
with myriad wrenching foreclosures, have left scars that are taking a long time
to heal.
Single-family housing starts have been so far below their
normal level for so long, finding an outlet for the pent-up demand is becoming
critical.
Strangely enough, it may be an increase in interest rates
that will release the steam. It’s happened before. Buyers take low rates for
granted and feel no urgency to act. Once they see yields starting to move
higher, they are compelled to enter the market quickly, before the next round
of hikes.
The Federal Reserve is expected to wind up its bond-buying
program by this October and to begin applying the screws to interest rates by
the summer of 2015 at the latest.
A marked improvement in housing starts has dramatic
implications for the whole economy. The front-line effects are on building
material sales.
A pick-up in retail expenditures ‒ for
furniture, carpeting, drapes, appliances, etc. ‒ follows in short order.
Reed’s latest residential starts projections, when graphed,
show a consistent trend upwards that will raise their dollar volume to about
$300 billion by the forecast-period’s end in 2018.
The actual dollar volume of commercial construction starts
so far this year has been uninspiring, -14.5%. The biggest sub-category,
retail, is -8.1%. Hotel and motel work is also notably weak, -48.8%.
Both are set for cyclical turnarounds. The U.S. initial
jobless claims figure for the latest week, ending July 19, was among the lowest
ever, only 284,000. Employment growth is on a tear, averaging over 200,000-plus
jobs per month through June. July’s figure, when released, is also likely to be
impressive.
More and better jobs, plus higher incomes, all translate to
greater spending on essentials and such extras as entertainment (restaurant
meals, travel, etc.) and self-improvement (more stylish clothes, cosmetics,
etc.).
Tower construction will be driven higher by gains in
office-based employment and a decline in the “cap” rate (i.e., the annual net
income from a leasable property expressed as a percent of its asset value.)
The higher asset valuations that are reducing the cap rate
are gradually causing a pendulum swing from a “buy” decision to a “build”
choice among owners contemplating new investments on alternate or additional
facilities.
Industrial construction is another category of starts with
improving prospects. Whether in terms of input costs (e.g., natural gas in
plastics), transportation costs or heating/cooling costs, American
manufacturers are gaining a competitive advantage versus many foreign
enterprises from the shale-gas and tight-oil development-surges underway in
North Dakota, Texas and several other locations around the country.
U.S. firms are also bringing home some of the jobs (and
related investments) they previously outsourced to other countries. Growing
labor movements in the likes of China, Bangladesh and Thailand are lowering the
weekly number-of-hours-worked, inspiring greater work-place safety regulations
and raising pay-scales overseas.
Institutional and infrastructure construction spending will
kick into a higher gear as well. Year-over-year population growth of 0.7% may
not sound that buoyant, but it lifts the national census count by 2.2 million
individuals annually. This has ripple effects on the need for physical structures
– schools, hospitals, fire halls, police stations, roads and highways.
For a long time, finding the money needed to proceed with
such projects has been the issue. Government coffers were constrained by many
of the same factors (weak business activity and a credit crunch) that were
placing a choke-hold on family finances.
As the economy regains its strength, the public purse is
putting on weight again, largely through self-correcting measures. Washington
may continue to display the dysfunctional tendencies that hamper the capital
spending programs it funds, but states and municipalities will benefit from
faster flowing streams of sales, income and property taxes. Besides, fewer
people on the unemployment roster will free up cash to be spent in areas other
than social services.
Finally, there are the capital expansions taking place in
America’s booming energy sector. This will add icing to the
construction-spending cake.
U.S. total construction starts will once again scale $600
billion by 2016. They dropped to $400 billion from 2009 to 2011 inclusive. By
2018, $700 billion appears achievable.
For Canada, an improving U.S. construction scene will send
some of its froth over the border.
There is evidence that material costs are increasing faster
south of the border than to the north. In the previous Economy at a Glance, the
average year-over-year material cost increase for the 20 largest U.S. cities
was +3.8%. For Canada’s 10 largest urban centers, the comparable figure was
+1.7%.
Canadian contractors and owners should prepare themselves
for a jolt, especially with respect to goods they import, given that the
“loonie” (93 cents U.S.) is currently residing below the value of the
greenback.
There are lots of risks to the foregoing. The Middle East is
a powder keg. President Putin may take his Ukraine and other expansionist
ambitions one step too far. China’s “shadow” banking system may lead that
nation down a credit-crisis rabbit hole. Mother Nature may demonstrate once
again, somewhere on the globe, how nasty she can be when cranky.
But there’s always something to be worried about. There’s an
old saying in the economics profession: the present is always a terrible time
to have to make a forecast.
That’s probably true now in about as equal measure as it has
ever been.
Download a PDF copy of
this article, A U.S. Construction Starts Forecast: Approaching $700 Billion by
2018 by going here…
Source: Reed
Construction Data
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