2013 Industry outlook

January 2013 » Exclusive
U.S. construction industry forecasts cite potential for modest growth.
Bob Drake

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.

Disclaimer: As this article is written in mid-December, 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 that efforts to cushion the full extent of the fiscal cliff are successful next year, 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," said Robert Murray, McGraw-Hill Construction's vice president of Economic Affairs. "The modest gains experienced during the past two years have in effect produced an extended bottom for construction starts, in which the process of recovery is being stretched out."

Associated Builders and Contractors (ABC) Chief Economist Anirban Basu predicted that nonresidential construction spending will expand 5.2 percent in 2013. "The U.S. economy is presently expanding at a 2 percent rate," Basu said. "Even in the absence of a dive off the federal precipice, the nation will struggle to achieve 2 percent growth next year as certain tax rates rise and as federal spending growth slows and perhaps turns sharply negative."

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 next year will be in categories heavily associated with private financing," Basu said. "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 next year, and perhaps worse."

Basu 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.

ABC's 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. According to Basu, the CBI indicates an acceleration in nonresidential construction spending by mid-2013.

"What the CBI data tells 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," said Basu. "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, Basu said that 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.

McGraw-Hill Construction's 2013 Dodge 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. Next year's level of commercial building in current dollars will still be more than 40 percent below the 2007 peak.
  • Institutional building will level off, following the steep 13 percent drop estimated for 2012. For educational facilities, K-12 construction will slip further while college and university construction should stabilize. Health care facilities are expected to make a modest rebound after this year's downturn.
  • The manufacturing building category will grow 8 percent, showing improvement after its 2012 decline.
  • Electric utility construction will drop 31 percent, after reaching a record high in current dollars during 2012, which was boosted by the start of two large nuclear power plants. Projects of similar magnitude are not expected for 2013. The expiration of federal loan guarantees for renewable energy projects should also dampen construction in 2013.

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 that 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 3.0 percent from the revised October estimate but up 21.6 percent from November 2011.

McGraw-Hill Construction's 2013 Dodge Construction Outlook predicts that spending for single-family housing will grow 24 percent, corresponding to a 21-percent increase in units to 615,000 (McGraw-Hill Construction basis) and multifamily housing will rise 16 percent in dollars and 14 percent in units. According to McGraw-Hill, 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, McGraw-Hill reported.

The National Association of Home Builders (NAHB) reported in mid-December that the NAHB/Wells Fargo Housing Market Index (HMI) attained its highest level – 47 – since April of 2006. The HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months and also asks builders to rate traffic of prospective buyers. Any number greater than 50 indicates that more builders view sales conditions as good than poor.

"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," said NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla. "However, 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," noted NAHB Chief Economist David Crowe.

Public works
Public works construction, including transportation and water infrastructure, will continue to be impacted by tight federal, state, and local budgets. According to McGraw-Hill, public works construction will decrease 1 percent in 2013 as federal spending cuts in particular restrain environmental projects. However, the new two-year federal transportation bill – MAP-21 – is expected to help limit the impact of spending cuts on highways and bridges.

According to Alison Premo Black, Ph.D., chief economist for the American Road and Transportation Builders Association (ARTBA), the U.S. transportation construction infrastructure market is expected to show modest growth in 2013, increasing 3 percent from $126.5 billion to $130.3 billion. Growth is expected in highway and street pavements, private work for driveways and parking lots, airport terminal and runway work, railroads, and port and waterway construction. ARTBA predicts that the bridge market, which has shown substantial growth during the last 10 years, will remain flat in 2013.

However, at least two developments related to MAP-21 could lead to additional market activity in the short term and strengthen the market in 2013 and 2014, Black said. First, the law's restructuring of the federal highway program offers state transportation departments more flexibility in their use of federal funds. This could lead to slightly increased investment in highway, bridge, and pavement work above the forecast in some states. Second, MAP-21's expanded federal Transportation Infrastructure Finance & Innovation Act (TIFIA) loan program should also increase construction activity in some states.

ARTBA expects the bridge and tunnel construction market to remain flat in 2013 at about $28.2 billion. Its forecast shows projects in eight states – California, Florida, Illinois, New Jersey, New York, Pennsylvania, Texas, and Washington – will continue to account for about half of the U.S. market activity in this sector. With a number of major bridge projects on the horizon, however, the bridge and tunnel sector should rebound smartly in 2014, ARTBA predicted.

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.

Uncertainty caused by the 33-month-long delay in passage of MAP-21 will result in a decline in construction in the subway and light rail markets, ARTBA said. Construction activity is projected to be down by 8 percent overall. However, based on recent contract awards, California, Florida, Georgia, Hawaii, Illinois, Kansas, Massachusetts, New York, Oregon, Pennsylvania, Texas, and Washington will be moving forward on key transit projects.

Projects in the water sector – potable water, wastewater, and stormwater – are being driven by the need to replace aging, underground infrastructure and by environmental regulations and U.S. Environmental Protection Agency consent decrees, said Tony Radoszewski, executive director of the Plastics Pipe Institute (PPI). Cuts in public funding are challenging municipalities' efforts to address these issues.
However, potential funding from Private Activity Bonds (PABs) and revenue streams from new stormwater fees may drive greater private-sector investment. The Sustainable Water Infrastructure Coalition (SWIC), comprising trade associations for pipe manufacturers (including PPI) and other associated industries, is trying to encourage both the U.S. Senate and House of Representatives to approve PABs. "It's proven to be effective. In the conditions where you don't want to increase any spending, we're asking for a small amount to gain a huge amount. The return on the dollars is significant," Radoszewski said.

Additionally, as stormwater management gains focus, more municipalities are instituting fees on residents' water or sewer bills to pay for improvements. "It generates a funding source to upgrade the storm sewer systems," Radoszewski said. "There's a push for not only the traditional pipe system for stormwater management, [but] also non-pipe systems using swales and other types of green infrastructure designs."

Steady revenue streams from water and wastewater utilities can leverage private investment. "A lot of municipalities are recognizing an opportunity to have their systems managed by private firms," Radoszewski said. "The funding that becomes available is significant."

Radoszewski noted that, based on the demand for pipe, water-sector construction is particularly strong from Virginia south into Florida, despite the housing recession. And 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, he said.

Major reconstruction following Hurricane Sandy also could be a public works market factor for the East Coast during 2013, according to ARTBA's Black. In early December, the Obama Administration requested $60.4 billion in emergency supplemental funds for Hurricane Sandy recovery efforts. If approved, the American Council of Engineering Companies reported that $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.

"With the elections now behind us, the hope is the White House and Congress will be able to successfully navigate the nation past its fiscal cliff," said ABC's Basu. "If that happens, the latter half of 2013 could be surprisingly good for nonresidential activity given the large volume of construction projects that were put on hold during the course of 2012."

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