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Nonresidential Construction Continues to Lag

Aerial view of Downtown Manhattan, New York
Although residential construction has been on the rise this year, nonresidential construction has been declining and may end the year flat at best. Forecasters say if the federal debt ceiling crisis can be overcome and public policy prioritizes infrastructure spending, 2014 could see a slow comeback. Wikimedia Commons/David Jones

A strong recovery in the residential market has grabbed the headlines, but the nonresidential sector, dragged down by uncertainty, is actually in decline.

September 24, 2013—A look at construction spending thus far in 2013 reveals a pronounced divide, strong private spending on housing construction offsetting a flat nonresidential sector, which has been marked by declines in publicly funded construction projects in many segments.

Overall, construction put in place for the first seven months of 2013 is up 5.6 percent from the same period in 2012, according to figures from the U.S Census Bureau that have not been seasonally adjusted. Total residential construction is up 20 percent and total nonresidential construction—which includes offices, health care facilities, transportation facilities, highways, and water and wastewater facilities, among others—is down 1.6 percent from 2012. Private construction, which includes both residential and nonresidential projects, rose 11 percent during the same period, with housing accounting for nearly half of the spending. Meanwhile, total public construction is down 5.3 percent, according to the census data.

Bernard Markstein, Ph.D., the U.S. chief economist for Reed Construction Data, of Norcross, Georgia, says that a combination of the government sequester and a slowdown in consumer spending—likely sparked by a 2-percent increase in the Social Security tax—created more weakness in the construction sector than many projected.

“I was concerned about those, but they took a heavier toll on nonresidential construction,” Markstein says. “I think a lot of it was greater uncertainty about where we were headed and reluctance of companies to invest.”

FMI, a consulting firm in Raleigh, North Carolina, has recently dialed back its forecasts for growth in the nonresidential sector in 2013, according to Randy Giggard, the manager of the firm’s Market Information Group.

“We think 2013 in nonresidential building is going to be totally flat,” Giggard says. “We think it will get a little bit stronger as we get to the end of the year, but over the last couple of months, we’ve seen the backlog slowing down. Some of it is sequestration and public spending. But some of it is uncertainty, with Federal Reserve policy and the upcoming budget battle and global unrest.”

Economic experts are cautiously observing contentious political debates over a continuing resolution to keep the government operating beyond September 30, as well as discussions on raising the national debt ceiling. A possible government shutdown on October 1 is increasingly part of the rhetoric.

“If that occurs, that’s just endemic of the whole situation with this uncertainty,” Markstein says. “There is always going to be uncertainty in business decisions. There is always something you are concerned about that you don’t know about. But we are creating additional uncertainty that is unnecessary in the government process. Now we’re at the point where we just really don’t know if the government can function at all.”

Although Giggard doesn’t foresee a potential government shutdown having profound direct effects on the construction industry, more uncertainty is not helpful.

“I think the continued talk of it does increase the uncertainly, the uneasiness,” Giggard says. “Just continually hammering the public with bad news and how the government doesn’t behave well is not a good thing and continues to hurt the psyche.”

Assuming a shutdown can be averted, even at the last minute, Markstein projects that the overall construction rebound will continue, with improvement in nonresidential sectors next year. He expects that heavy construction will finish the year down by 3.7 percent, but that this sector will grow approximately 5.5 percent in 2014. “It’s not a great recovery, but we’ve stopped cutting there,” Markstein says. “I wring my hands on that because we have such a need for investment in infrastructure and we’re just not doing it. The longer you put it off, the more damage occurs. Yes, you can get along; you can patch here and there. But eventually bad things happen. “

FMI is also projecting slow, steady growth in 2014 and continuing through 2017. And at this point, slow, steady growth is the best kind for the construction industry, Giggard says; faster growth might create employment problems. “We drove about 2 million workers out of the industry and aren’t prepared to handle a big near-term recovery,” Giggard explains. “We’ve already got a number of shortages coming up in the [markets] that are hotter.”

Also portending strength in the sector moving into 2014 is the Architecture Billings Index compiled by the American Institute of Architects (AIA). The index has remained in positive territory for 11 of the past 12 months. This indicates increased demand for design services and is seen as a leading indicator of construction activity.

“This upturn signals an impending turnaround in nonresidential construction activity, but a key component to maintaining this momentum is the ability of businesses to obtain financing for real estate projects, and for a resolution to the federal government budget and debt ceiling impasse,” said Kermit Baker, Ph.D., Hon. AIA, the chief economist for the AIA, in a press release announcing the numbers.

“In my view, the good news is that both sides of the aisle want to spend money and Americans have short memories,” Giggard says. “As the economy continues to improve—even as it improves at a slow rate—we are going to reach a point before too long where the government is going to want to spend money and the American public is going to put the Great Recession out of their minds and go ahead and do it.”



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