December 1, 2014

AEC economists: 2015 will be strong

Three national economists see a strong year ahead for construction.

Alex Carrick of the construction data firm CMD, Kermit Baker of the AIA and Ken Simonson of the AGC made predictions during a recent webcast hosted by CMD.

Carrick said gross domestic product for 2014 was up 2.3 percent over 2013, and he expects it will be up 3 percent or more in 2015 thanks to the strength of energy, high-tech and manufacturing.

“Everything changed as of May. That was a real turning point for the economy overall,” Carrick said, referring to the month when total employment reached pre-recession levels. At that point, he said, companies stopped looking in the rear-view mirror and began to focus on the future.

More good news, Carrick said, is the U.S. trade deficit has decreased by a third thanks to more domestic energy production.

Baker said the architectural billings index is much better, and that's a predictor of construction activity nine to 12 months out. He said new design contracts are growing faster than billings, which indicates architects are building up backlogs.

Baker said three-quarters of surveyed architects say they are working on projects that were delayed during the recession, and they predict one in five of the stalled projects will get built.

Simonson said total construction spending peaked in 2006, leveled out in 2011 after a big drop, and has been moving up slightly since then.

He credited three trends: the “shale gale,” Panama Canal expansion and housing — especially multifamily.

He said the extraction of oil from shale deposits mainly affects parts of the Midwest, East and Texas. That boom means more roads, site prep and pad construction, storage ponds, support structures and pipes.

Even with falling oil prices, he said shale gale areas still are rich in natural gas deposits.

The Panama Canal expansion is causing ports to prepare for larger ships that will arrive by 2016.

Simonson named three trends that are holding down construction: less government spending on schools and infrastructure; consumers switching to online shopping; and less office space per employee.

But Carrick said more Internet sales should increase demand for warehouses and truck drivers.

Here is Simonson's list of the best industries for construction in 2015: multifamily, manufacturing, oil and gas, pipelines, warehousing, lodging, rail and data centers.

Baker said for next year he sees nonresidential construction up 8.1 percent, commercial up 11.2 percent, industrial up 9.2 percent and institutional up 5.8 percent.

“It's looking a lot better and 2015 is shaping up to be a healthy year,” Baker said.

Where are workers?

Carrick said jobless claims have been below 300,000 for the past four months, and employment in the architecture and engineering fields is almost back to its peak. He said that's a good indicator of future construction demand.

Even though the construction unemployment rate has dropped to 6.5 percent from 9 percent a year ago, Carrick said total employment is still a concern for the industry.

Construction workers left their field during the recession and many didn't return. That helped create a shortfall of 1.5 million jobs in the construction industry, he said.

Baker said construction employment in 2012 was off 19.1 percent from its peak in 2007, and some positions saw larger drops, such as drywallers (down 35.7 percent) and supervisors and managers (down 31 percent).

Women working in the industry dropped from 3.5 percent to 3.1 percent over that same period, he said.

Simonson referred to a recent AGC member survey about the hardest positions to fill. Here are the results: 66 percent had difficulty finding carpenters, 64 percent roofers, 59 percent equipment operators, 54 percent plumbers, 52 percent electricians, 48 percent project managers/superintendents, and 32 percent estimators.

Simonson said for some jobs we are close to an absolute shortage of labor, such as workers who build liquefied natural gas terminals. He said few LNG terminals have been built in recent years and the people who built them have retired.

Baker said the industry still fails to attract younger workers while the existing workforce continues to age.

Simonson said higher wages would help.

What's hot, what's not

Carrick said construction starts will improve in a cyclical fashion in the years ahead. He said multifamily starts are near 400,000, which is about where they should be, but single-family starts are only half what they were before the recession.

Simonson said single-family housing will be limited by tight credit, demographic shifts, student loans and more people choosing to live in cities.

Baker said house prices have regained about 60 percent of their losses since the recession, but they wouldn't regain that peak anytime soon because the market was overheated.

Baker said prices of existing Seattle single-family houses are above their long-term average. San Francisco has the highest prices and Detroit the lowest. He said housing starts will increase sharply in 2015 and 2016, but stay below historical levels.

There is pent-up demand for nonresidential construction, according to Carrick.

Baker said $501 billion was spent during the peak of the construction boom on nonresidential construction. That number for 2014 is projected to be $377 billion.

Nonresidential spending is up nearly 5 percent so far this year, according to Baker. The commercial/industrial sector is strong, while the institutional sector has declined but appears to be bottoming out, he said.

Baker said the architectural billings index for the institutional sector has seen “very healthy scores” over the past few months.

Carrick said office vacancy rates remain high in most major cities, with only five having rates less than 10 percent. Two of those cities are Portland and San Francisco. The national average is 15.2 percent, according to Baker.

Carrick said government finances are improving, but agencies are still trying to cut spending.

He said declining gas prices helped boost retail sales by 4 percent this year. New cars were especially in demand, with sales up nearly 20 percent.

“Americans are starting to relent with the belt-tightening,” Carrick said. “We're starting to relax and enjoy ourselves a bit more.”

In other sectors, Carrick said K-12 education projects will be delayed due to demographics, but health care projects will pick up for the same reason. He said the number of people age 65 and older will double over the next 20 years, and by 2055 there could be 500,000 centenarians living in the U.S.

Carrick said he would like to see more spending on bridges and roads. He said the government needs to find additional ways to fund those projects other than the 18.4-cent federal gas tax.

Simonson said Congress can't find funding for transportation projects, so he sees highway construction spending dropping in 2015 and 2016.