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2014 Construction Forecast: Private Nonresidential Building Activity Poised for a Rebound in 2014

Growth in construction spending in 2013 continued to outpace the U.S. economy. Estimated total put-in-place construction spending—actual numbers, not seasonally adjusted—grew at a healthy 4.8% in 2013, increasing to about $900 billion. This rate was slower than the previous year’s increase of 9.2%, however.

The residential market saw the biggest gains, as a robust market for apartments and single-family houses outweighed downturns in private nonresidential and public projects. Residential construction spending achieved a level of about $287 billion–a 17.5% increase–in 2013, while nonresidential construction spending declined 1.5% after posting a 6.4% increase in 2012.

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Looking more closely at the nonresidential construction market, private sector spending declined 0.4%, while public sector spending declined 2.7%. Nonetheless, in the private sector, markets such as lodging (+28.7%), office (+9.6%), commercial (+8.8%) and manufacturing (+6.1%) posted healthy gains. The public sector fared relatively poorly, with significant contraction in the office (-25%), commercial (-23.2%) and education (-8.4%) markets.

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Current Construction Indicators
Following consistently increasing demand for design services throughout most of 2013, in December 2013, the AIA’s Architecture Billings Index (ABI) posted its first consecutive months of contraction since May and June of 2012. As a leading economic indicator of construction activity, the ABI reflects the approximate 9- to 12-month lead time between architecture billings and construction spending.

AIA reported the December ABI score was 48.5, down from a mark of 49.8 in November. This score reflects a decrease in design services (any score above 50 indicates an increase in billings).

The new projects inquiry index was 59.2, however, up from the reading of 57.8 the previous month, and reflecting optimism.

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The electrical industry, meanwhile, expressed optimism about current economic conditions throughout 2013, though the Electroindustry Business Conditions Index (EBCI) for current conditions in North America slipped below 50 in January 2014, possibly due to weather conditions impacting demand. A score above 50 in the EBCI, which is produced by the National Electrical Manufacturers Association (NEMA), is typically associated with expansion.

The index declined for the third straight month in January, falling to 40.6 from 52.8 in December. In sharp contrast, however, confidence in future business conditions accelerated in January, rising from 83.3 to 90.6.

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AIA Consensus Forecast Predicts Growth
Healthy fundamentals in the commercial property market, combined with the international economy returning to more traditional growth levels, are factoring into a projected increase in growth for the design and construction industry, according to Kermit Baker, PhD, Hon. AIA, chief economist for the American Institute of Architects (AIA).

The AIA’s semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters, is projecting that overall nonresidential construction spending will see a 5.8% increase in 2014. Led by the hotel and retail project categories, the commercial sector looks to see the biggest gains in spending, with demand for institutional projects increasing at a more modest level.

“Since the overall economy is stabilizing, there should be a significant improvement in the outlook for the construction industry that has been recovering at a slow and steady pace the last two years,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “At a more granular level, the surging housing market, growing commercial property values, and declining office and retail vacancies are all contributing to what is expected to amount to a much greater spending on nonresidential building projects.”

The improvement trend is expected to strengthen in 2015, with the AIA Consensus Construction Forecast projecting an 8% increase in nonresidential construction spending.

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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 Economy.com, FMI, Reed’s Construction Data and Associated Builders and Contractors.

“Residential construction ended on a strong note in 2013 and should remain positive for at least the next several months,” said Ken Simonson, chief economist for Associated General Contractors of America. “Meanwhile, private nonresidential spending appears to be poised for a rebound, but the short-term outlook for public construction is still negative.”

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