Riding the Roller Coaster: Experts Offer Conservative but Optimistic Outlook

Though experts predict the construction market may still have a ways to go before it reaches a full rebound, they were positive about the present outlook during a recent webinar provided by Reed Construction Data. Titled “Riding the Roller Coaster: Ups and Downs of Construction Spending, Materials and Labor,” the webinar included outlooks from Kermit Baker, chief economist for the American Institute of Architects (AIA), Ken Simonson, chief economist for Associated General Contractors of America (AGC) and Bernard Markstein, chief economist for Reed.

“We’re still seeing many markets across the country that are still digging out from this dramatic downturn that we saw in housing market conditions,” said Baker.

He continued, “We’ve seen a lot of progress on the housing front but we’ve still got a long way to go … Housing prices plummeted from their high in early 2006 to what we thought was the trough in 2009 but they’ve really been bouncing around that since then.”

House prices are up again by 10 percent, according to Baker, but “[that’s] only a small increase compared to what we lost during the downturn.”

Baker pointed to three major cities leading the way for house pricing rebounds: Phoenix with a 21-percent increase, San Jose with a 16-percent increase and Las Vegas with a 15-percent increase. “Two of the top three [Las Vegas and Phoenix] were among the hardest hit areas in the country,” he said.

While consumer demand has become less of a concern for the housing market, Baker said the housing industry has new issues to contend with. “Increasingly the issues are supply and the labor force,” he said. “[The data] suggests that many have moved on to other industries. Immigrants also have typically staffed much of the construction market and immigration is down.”

The data regarding housing starts also is positive.

“Last year we had 780,000 housing starts nationally, up 28 percent over 2011. For 2013, the consensus is just over a million housing starts,” said Baker. “Even the lowest projection for this year is a 10-percent increase in housing starts and for 2014 all forecasters are predicting strong gains … If we realize these consensus numbers it will take us to 1.4 million housing starts by the end of next year.”

The remodeling market also continues to be on the upswing. “Spending by consumers on improvements on their homes increased by about 10 percent last year,” said Baker.

On the nonresidential construction side, Baker said the main issues affecting his outlook “are the market fundamentals—things like rent and vacancy rates. They’re generally healthy and moving in the right direction”

“The AIA’s Architectural Billing Index (ABI) is healthier than it’s been in years,” he said.

However, Baker was conservative in his predictions, noting that the overall economy will play a role in the recovery.

“Until the broader economy gets better, [until] we see better job numbers … the construction outlook is likely to remain relatively muted by historical standards and there are still a lot of challenges for this industry as we move toward the recovery,” he said.

Property values also are a key positive factor.

“We’ve seen a downturn in activity in construction activity levels in the nonresidential building sector, almost as dramatic as it was for residential, but we’ve also seen a downturn in property values for commercial properties,” said Baker. “The commercial property downturn began about a year later than residential but the declines were every bit as dramatic as they were for homes. A big difference for this market is that while housing prices hit bottom or near bottom in 2009, and we’re just now starting to see some improvement in 2012, commercial property values hit bottom and immediately began to turn around and they’ve gained a good share—40 percent—of what they lost and are already trending upward at a healthy pace.”

Additionally, the commercial market didn’t have the excess inventory to work off that the residential market did when the downturn struck. “Without so much excess inventory to work off the recovery should come faster than it should in the residential sector,” said Baker.

With regards to the ABI, Baker pointed out that it “has been bouncing around the 50 line but now we’ve seen eight straight months of gains.” “The fourth quarter of 2012 was the best quarter we’ve seen since the downturn began and the first quarter came in even stronger so things seem to be moving in the right direction and they’ve been moving in the right direction for almost three quarters now,” he said.

Simonson followed Baker, noting that he “see[s] somewhat of a mixed picture but clearly a positive picture for housing overall.”

“Single-family [housing] could flatten out by the end of the year,” he said. “There are a lot of markets where prices may start getting away from what people can afford to pay particularly with the tighter restrictions on who’s eligible for a mortgage.”

Simonson noted, however, that there are some less positive factors playing a role in the recovery as well, including a continued slowdown in government spending.

The [2009] stimulus legislation was adding a lot to federal spending and those [projects] wound up in 2011 by and large, and the same summer the president and the leadership in congress agreed to very tight caps on discretionary spending,” he said.

While he said sequestration has “been a slope and not a cliff,” Simonson said it has also meant a cut in federal construction spending.

“With this slope federal discretionary spending is expected to continue to decline for many more years,” he said, and many local governments are having to follow suit.

Likewise, retail building is down, due to the growing trend of consumers purchasing items online that they would have purchased locally in the past.

“I do think the data center market will remain strong but data centers and warehouses don’t add up to anything like what we’ve seen in the retail market in the last decade,” he said.

Still, Simonson remains somewhat positive, though, for 2013. “By the end of the year I think we’ll see growth in the nonresidential and private spending and in residential spending,” he said.