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2013 Nonresidential Construction Forecast: Steady Improvement

Despite a national recovery from the recession in 2009, construction activity in the United States continued to spiral downward in following years. Total construction spending declined to under $800 billion in 2011 from its peak of more than $1 trillion in 2008.

In 2012, the market turned a corner and achieved a level of growth that outpaced the U.S. economy. Estimated construction spending—actual numbers, not seasonally adjusted—increased to $850.2 billion in 2012 from $778.2 billion in 2011, a 9.2% increase. The residential market saw a significant increase in spending of 15.4%, while nonresidential saw an increase of 6.4%.

Despite declines in public nonresidential construction spending in key markets such as office (-14.5%) and commercial (-14.6%) construction, the nonresidential construction market expanded due to major gains in private lodging (+27%), education (+21.7%), manufacturing (+17.2%), office (+15.8%) and commercial (+10.3%) spending, in addition to transportation and power.

“After seeing construction activity seesaw for much of last year, there is a much stronger sense that we have entered a recovery phase, and the industry is positioned to see continued economic improvement as we move through year and into 2014,” says AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “The resurgent housing market has led to a ripple effect where there is a need for more retail establishments and office buildings across the country.”

Now the nonresidential construction industry appears poised for a solid, steady increase in activity in 2013. The American Institute of Architects’ (AIA) semiannual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters, projects a 5% increase in spending for nonresidential projects in 2013. The level of optimism is stronger than about six months ago; in July 2012, the group was projecting an increase of 4.4%. The biggest winners are expected to be hotel (+12.6%), retail (+9.6%) and office buildings (+11.4%).

The improvement trend is expected to strengthen in 2014, with the AIA Consensus Construction Forecast projecting a 7.2% increase in nonresidential construction spending.

Market Segment Consensus Growth Forecast Forecast % Change
2013 2014
Nonresidential Total +5.0% +7.2%
Commercial/Industrial +8.6% +10.7%
Hotels 15.7% 12.6%
Retail 7.8% 9.6%
Office buildings 7.3% 11.4%
Industrial facilities 5.0% 6.4%
Institutional 1.2% 4.7%
Healthcare facilities 4.4% 4.8%
Religious 2.6% 4.9%
Education 1.1% 4.5%
Amusement/Recreation 1.8% 5.5%
Public safety -1.7% 0.8%

Source: AIA Consensus Construction Forecast, calculated as an average of all forecasts provided by the panelists that submit forecasts for each of the above building categories: McGraw-Hill Construction, IHS-Global Insight, Moody’s, FMI, Reed’s Construction Data and Associated Builders and Contractors.

The architectural community (which lost 40% of its revenues between 2008 and 2011 and shed nearly a third of its workforce) is currently expressing a level of optimism that supports the first considerably sunny construction forecast in years. The AIA’s Architecture Billings Index, a leading economic indicator of construction activity based on monthly “work on the boards” surveys to AIA member-owned firms, closed 2012 with a score of 52, reflecting an increase in demand for design services (any score above 50 indicates an increase in billings), and with an approximate 9- to 12-month lag between architecture billings and construction spending. The new projects inquiry index was 59.4.

“While it’s not an across-the-board recovery, we are hearing a much more positive outlook in terms of demand for design services,” says Baker. “Moving in 2013, we are expecting this trend to continue and conditions improve at a slow and steady rate.”

A recent survey conducted by Associated General Contractors of America found contractors similarly optimistic about business in 2013, with 31% of firms planning to (modestly) add staff while only 9% are planning to make layoffs.

“While the outlook for the construction industry appears to be heading in the right direction for 2013, many firms are still grappling with significant economic headwinds,” says Stephen E. Sandherr, CEO of AGCA. “With luck and a lot of work, the hard-hit construction industry should be larger, healthier, more technologically savvy and more profitable by the end of 2013 than it is today.”

The electrical industry is also showing signs of optimism. The Electroindustry Business Confidence Index (EBCI) for current North American conditions, produced by the National Electrical Manufacturers Association (NEMA), gauges business confidence based on monthly surveys of senior managers at NEMA member companies.

The EBCI for current North American conditions extended its late-year rally in December, climbing for a fourth month in a row to 63.9. The index reached its highest mark since March, while more respondents than not reported an improved business environment for a second consecutive month. The EBCI for future North American conditions, meanwhile, also gained ground, jumping more than 11 points to 72.2, its highest reading since April.

Besides Hurricane Sandy, which impacted the economy and delayed construction projects in affected areas, the “fiscal cliff” budget negotiations disrupted the real estate and construction markets in late 2012. The term “fiscal cliff” refers to a severe impact on the economy—potentially a mild recession—that would have resulted from automatic budget-reducing spending cuts (including significant construction project spending) and tax increases going into effect. The uncertainty of the budget negotiations resulted in construction layoffs and delays in capital spending. A rough bipartisan deal addressed some issues but left the heavy lifting for the next Congress, which is now in session. The next effective deadline of the automatic spending cuts is March 1, 2013.

“We can’t truly think the design and construction industry is completely out of the woods until the continued uncertainty over Federal budget and debt issues is resolved,” says Baker. “This has caused enough anxiety in the real estate marketplace that has resulted in numerous delays and even cancellations of active construction projects. More than one-quarter of architecture firms are reporting that this tenuous situation is a tremendous concern to clients and may lead to more delays or project terminations.”

As a worst-case scenario and given the toxic political climate in Washington, DC, we may face the prospect of periodic “fiscal cliff” deadlines throughout the year, creating escalating uncertainty that could undermine recovery in the construction market and the economy as a whole.

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