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Construction industry now, 2013 and beyond: 3 economists look into their crystal balls

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Modern Money

The architecture, engineering and construction industry is in better shape than it was a year ago, and the upward trend could continue, three economists said during a webcast by Reed Construction Data. However, the “fiscal cliff,” troubled state economies, tight lending standards and the Obama administration’s regulatory agenda are headwinds that could alter the trend, they said.

Kermit Baker

Housing starts improve in 2012

Housing starts are up 35% since 2011, with private residential construction leading the way, said Kermit Baker, chief economist at the American Institute of Architects. Private residential spending soared a seasonally adjusted 20.9% between 2011 and 2012. However, “lower house prices, a large inventory of distressed homes and weak household-formation numbers have held back stronger recovery,” Baker said. “We’re a long way from long-term potential.”

Ken Simonson

Multifamily spending is the star in this sector. Spending increased 49% in a year, and this trend could continue, said Ken Simonson, chief economist at the Associated General Contractors of America. More households have started to form, he said, but “this isn’t translating into owner-occupied space because of credit, student debt” and more people choosing to live in cities rather than suburbs.

Panama Canal expansion and shale boom will lead heavy sector into 2013

The oil shale boom has fueled construction as each drilling site requires preparation, an access road, a pad, a storage pond, support structures and pipe installation, Simonson said. Spending on private nonresidential work in the power sector increased 19% in September compared with September 2011, according to the U.S. Census Bureau.

Expansion of the Panama Canal has increased work at ports on the East and West coasts as they dredge to accommodate larger ships, boost storage capacity and enhance rail access, Simonson said. This helped private, federal, state and local spending in the transportation sector rise 11% in September compared with September 2011, according to the Census Bureau.

However, spending on highways and roads; educational facilities; sewage, water and waste disposal; and communication projects decreased, as did spending on lodging, religious and conservation work.

Construction outlook for 2013 and beyond

Bernie Markstein

“Commercial construction turned around this year and is expected to continue to improve,” said Bernie Markstein, chief economist at Reed Construction Data. This is a sentiment shared by the others.

Baker noted that the Architectural Billings Index has started to recover, albeit unevenly, and he is optimistic that recovery will continue. Simonson expects total construction spending for 2013 to 2017 to increase 6% to 10% per year and anticipates “gradual improvement in private nonresidential construction, led by power and energy related to shale and oil activity; manufacturing plants; some in warehouse and distribution as more online retail occurs.” Markstein concurred: “Despite considerable challenges, the outlook for heavy engineering construction is fairly positive.”

Simonson also foresees improvement in the hospitality and higher-education segments. However, in retail and office space, money will be spent on remodeling, rather than new construction, he said.

Threats to outlook

“The biggest threat to the current outlook is the fiscal cliff,” Simonson said. Markstein and Baker agreed. However, each thinks the threat can be avoided, although “the risk that it does take effect is growing,” Simonson said.

The American Institute of Architects estimated that if the country does go over the cliff, a $2 billion reduction in federal construction spending will result because of sequestration, as well as a loss of as many as 66,500 jobs in the architecture, engineering and construction industry. In addition, a sudden increase in taxes that would accompany sequestration would “chill home and private nonresidential construction spending,” Simonson said. Also, the possibility of losing a mortgage-interest deduction could negatively affect home prices, Baker said.

Troubled state and local economies, and an aversion to spending by Congress, don’t bode well for public construction, Simonson and Baker noted.

Building-material costs, which Simonson sees rising between 3% and 8%, could be adversely affected by trade issues, energy policy and regulation, Baker said.

Then there’s the Environmental Protection Agency, which has deferred a plethora of rules regarding greenhouse-gas emissions, stormwater regulation and more that could have severe consequences to the industry.