Looking Towards the Horizon: Where Tomorrow’s Construction Dollars are Heading Ken Simonson, Chief Economist AGC of America Kermit Baker, Chief Economist The American Institute of Architects American Bar Association Forum on the Construction Industry 2012 Fall Meeting
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Looking Towards the Horizon: Where Tomorrows Construction Dollars are Heading Ken Simonson, Chief Economist AGC of America Kermit Baker, Chief Economist.
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Looking Towards the Horizon: Where Tomorrow’s Construction Dollars are Heading
Ken Simonson, Chief Economist
AGC of America
Kermit Baker, Chief Economist
The American Institute of Architects
American Bar AssociationForum on the Construction Industry
2012 Fall Meeting
Construction Recovery Has Taken an Unusually Long Time to Unfold
• Access to credit still a big problem for construction industry;
• Weak job growth, uncertain economic and political climate have made businesses nervous about capital expansions;
• Energy costs – and other construction commodity prices – are unusually volatile given relatively weak economy;
• European problems threaten financial system and limit U.S. exports;
However, Signs of Optimism Are Beginning to Emerge
• Corporate profits past two years at pre-recessionary levels, giving companies potential for capital investment;
• Manufacturing sector of the economy surprisingly strong; beginning to bring some production back to U.S. soil;
• Construction market fundamentals (office vacancy rates, retail rents, hotel revenue per available room) are generally improving;
• Housing market finally seems to be recovering;
Housing Market Issues
1. Housing recovery finally seems to be getting underway, but the magnitude of the upturn is still somewhat disappointing.
2. Falling house prices, a large inventory of distressed homes, and low mobility holding back stronger recovery.
3. Outlook is for continued gains over coming years, but still several years away from reaching long-term trend.
4
Almost Four Years Into Presumed Housing Recovery, Market Conditions Finally Beginning to Turn Up
Sources: U.S. Department of Commerce; National Association of Realtors
80
100
120
140
160
2009-Q1
Q2 Q3 Q4 2010-Q1
Q2 Q3 Q4 2011-Q1
Q2 Q3 Q4 2012-Q1
Q2 Q3(p)
New home sales
Existing home sales
Housing starts
Index: 1st quarter 2009 = 100
House Prices are Trending Up, But Haven't Shown Much Recovery Since Their Steep Decline…
Commercial Property Values Fell Further Than House Prices, But a Recovery Appears to be Underway
20052005
20062006
20072007
20082008
20092009
20102010
20112011
2012110
120
130
140
150
160
170
180
190CoreLogic HPI (Single Family)
Moody’s/RCA Core Commercial Index
14
Index Value (Dec. 2000=100)
Notes: Data are normalized to 100 in December, 2000.Source: CoreLogic National House Price Index (HPI), Single family combined, monthly data through July 2012; Moody’s/RCA Commercial Property Price Index–Core Commercial from Moody’s Investors Service and Real Capital Analytics (RCA) measures price changes in the retail, industrial and office market segments, through July 2012.
Month
Architecture Billings Saw a Steep Decline During This Past Recession, But Have Begun to Recover in Recent Months
Source: AIA Architecture Billings Index
Billings scores since 1995; index: 50 = no change from previous month
Jan-08Jan-09
Jan-10Jan-11
Jan-1230
35
40
45
50
55
Recent Downturn Has Pulled Down Commercial/Industrial Building Construction Sector
Source: AIA Architecture Billings Index
Billings scores since 2007; index: 50 = no change from previous month
25
30
35
40
45
50
55
60
J an'08
Apr Jul Oct Jan'09
Apr Jul Oct Jan'10
Apr Jul Oct Jan'11
Apr Jul Oct Jan'12
Apr Jul
Residential
Commercial/ Industrial
Institutional
Difficulty With Financing Rated as Most Serious Problem in Client’s Decision to Proceed on Project
Source: The American Institute of Architects, September 2012.
Percent of firms rating as “very serious”
66%
53%
25%25%
6%
21%
0%
20%
40%
60%
80%
Financing Weakeconomy
Upcomingelections
Const./ energycosts
Need forfacility?
Internationalunease
Some Construction Sectors Recovering This Year; Overall Recovery Strengthens in 2013
Source: AIA Consensus Construction Forecast Panel, June, 2012
billions $ of construction spending
$278.1
$86.6
$37.2
$154.3
4.4%5.7%
12.9%
0.7%
6.2%
10.2%8.1%
3.0%
0%
5%
10%
15%
20%
25%
30%
$0
$50
$100
$150
$200
$250
$300
Total Nonres. Comm. Industrial Institutional
201120122013
annual % change
Population Growth Last Decade Was Dominated by College Age Population and Pre-Retirees
Source: US Census Bureau. 2000 and 2010 Decennial Censuses.
Population Growth, 2000 to 2010 (Millions)
1.0 0.9
-2.8
1.2
3.44.0
19.0
-5
0
5
10
15
20
Under 5 5 to 17 18 to 24 25 to 44 45-64 65 to 84 85+
Age
Population growth 2000 to 2010 = 26.6 million
This Coming Decade, School Populations, Young Workers, and Active Retirees Dominate Growth
Sources: US Census Bureau. 2000 and 2010 Decennial Censuses, and Projections of the Population by Selected Age Groups and Sex for the US: 2010 to 2050, Low Net International Migration Series, December, 2009.
Population Growth (Millions)
1.0 0.9
-2.8
1.21.5
4.1
-0.2
5.8
2.9
0.8
3.4 4.0
19.0
13.6
-5
0
5
10
15
20
Under 5 5 to 17 18 to 24 25 to 44 45-64 65 to 84 85+
2000-2010 estimates (26.6 million)
2010-2020 projections (28.6 million)
Age
Summing Up
1. Homebuilding finally recovering from historic lows – working through large inventory of distressed properties, and beginning to see prices edge up – but still well below long-term potential.
2. Nonresidential construction downturn has been most severe of several generations, and is currently running at half of its 3-decade average.
3. Nonresidential construction recovery appears to be on the horizon, but continues to be uneven and uncertain; commercial sectors expected to turn up before institutional.
4. Over the coming decade, growth heavily concentrated in seniors’ and young workers’ age ranges; construction activity focused on emerging demand of these populations.
• GDP, personal income, jobs: growing, but slowly• Office, retail up due to remodeling, not starts• Power, mfg., warehouse/distribution, lodging will grow• ‘Shale gale,’ Panama Canal expansion driving new activity• Apartments should boom; single-family still a mystery• Federal, state, local construction cuts will continue• Unemployment dropping but only because workers leave• Materials costs not extreme but will outpace CPI
23Source: AGC
One (or many) bright spot(s): the shale ‘gale’
Haynesville
Fayetteville
New Albany
Floyd-NealWoodford
Barnett-Woodford
Eagle Ford
Barnett
Lewis
Cody
Niobrara
Mulky
Bakken
Antrim
Baxter-Mancos
MowryGammon
Mancos
Pierre
Natural gas productionTrillion cubic feet (TCF)
862 TCF shale
2,543TCF total
67% increase in shale production 2007-10
Source: EIA Annual Energy Outlook, 2008 to 2011
Marcellus/Devonian/Utica
Shale’s direct and indirect impacts on construction
• Onsite: Each well requires access road, site prep, pad, storage pond, support structures, pipes
• Nearby: Products, water require trucking, rail, pipeline, processing
• Local spending by drilling firms, workers, royalty holders• Orders for fracking sand, drills, compressors, pumps,
Source: Census Bureau construction spending, housing starts reports 34
Housing outlook
• SF: improvement so far but distressed and ‘shadow’ inventory will depress prices, limit new construction
• MF: Upturn should last throughout 2012 and 2013- Vacancy rate is now at 10-year low; rents are up- Rental demand should rise as more people get jobs- But condo market continues to have large overhang- And government-subsidized market likely to worsen
• The big mystery: Have preferences changed to favor renting, close-in locations (=> more MF, less SF)?
35Source: Author
• Private sector added jobs since 2010, construction only since 1/11• Unemployment fell but construction added few jobs in 2 years• Thus, workers are leaving for other sectors, school, retiring
September '10 September '11 September '120%
5%
10%
15%
20%
25%
17.2%
13.3% 11.9%9.2% 8.8% 7.6%
Construction Total
Unemployment rates(September 2010-September 2012)
Construction vs. overall (un)employment, 9/10-9/12
36Source: BLS employment, unemployment reports
2010 2011 2012-1%
0%
1%
2%
3%
4%
Construction vs. private employment, 9/10-9/12(seasonally adjusted, cumulative % change since 9/10)
Construction0.6%, 31,000
Private3.6%3,881,000
Source: BLS state and regional employment report
-14%
2%
2%
6%
0.3%
4%
-1%
-10%
7%
5%
-8%
12%
-7%
11%
-1%
2%
7%
2%
-0.2%
-7%
-0.2%
-5%
-6%
-5%
9%
-5%
6%
-8% -4%
3%
-3%
-4%
-2%
-5%
-7%
-3%
-7%
9%
-5%
1%
HI3%
-1%
VT-1%
CT-6%
RI8%
DE-5%
NJ-6%
MD-0.4%
DC15%
NH1%
-10% or worse -5.0% to -9.9% -0.1% to -4.9% 0% to 4.9%
MA-5%
State construction employment change (U.S.: 0.4%) 8/11 to 8/12 (seasonally adjusted): 20 + DC up, 30 down
38Source: Author, based on Bureau of Labor Statistics for Producer Price Indexes (PPIs) and Employment Cost Index (ECI); Federal Highway Administration for National Highway Construction Cost Index (NHCCI)
PPI for materials
PPI for offices
ECI
NHCCI
PPIs for inputs vs. bid prices, 1/11-9/12 (January 2011=100)
39Source: Author, based on BLS reports (PPI), Federal Highway Administration reports (NHCCI)
J F M A M J J A S O N D100
105
110
2011 2012
PPI for inputs to commercial structures
J F M A M J J A S O N D100
105
110
2011 2012
PPI for new offices
J F M A M J J A S O N D100
105
110
2011 2012
PPI for inputs for other nonres (highway, heavy)
J F M A M J J A S O N D100
105
110
2011 2012
Natl. Highway Construction Cost Index (NHCCI)
Producer price indexes for key inputs, 1/11-9/12 (January 2011=100)
40Source: Author, based on BLS producer price index reports
J F M A M J J A S O N D85
100
115
130
2011 2012
Steel mill products
J F M A M J J A S O N D85
100
115
130
2011 2012
Copper & brass mill shapes
J F M A M J J A S O N D85
100
115
130
2011 2012
Gypsum products
J F M A M J J A S O N D85
100
115
130
2011 2012
Lumber & plywood
Producer price indexes for key inputs, 1/11-9/12 (January 2011=100)
41Source: Author, based on BLS producer price index reports
J F M A M J J A S O N D85
100
115
130
2011 2012
No. 2 diesel fuel
J F M A M J J A S O N D85
100
115
130
2011 2012
Concrete products
J F M A M J J A S O N D85
100
115
130
2011 2012
Asphalt paving mixtures & blocks
J F M A M J J A S O N D85
100
115
130
2011 2012
Prepared asphalt & tar roofing & siding materials
Outlook for materials
• Industry depends on specific materials that:– are in demand worldwide– have erratic supply growth– are heavy, bulky or hard to transport
• Construction requires physical delivery• Thus, industry is subject to price spurts,
transport bottlenecks, fuel price swings• Expect 2-4% Dec-Dec PPI increase but volatility