How Long Can This Growth Cycle Continue?: The 2018 Building - - PowerPoint PPT Presentation

How Long Can This Growth Cycle Continue?: The 2018 Building Construction Outlook

Kermit Baker, Hon. AIA Chief Economist The American Institute

• f Architects

January 29, 2018

Institutional Categories Account for Over Half the Spending on Nonresidential Buildings

Office, 12.3% Retail/Other Comm., 15.1% Lodging, 4.9% Manufacturing, 13.3% Education, 21.8% Health Care, 10.1% Religious, 1.2% Public Safety, 2.5% Amuse./Rec., 4.5% Transportation, 9.4% Commun., 5.0%

Share of U.S. nonresidential building construction spending, 2007-2016

Source: Construction Spending Put-in-Place, U.S. Department of Commerce

2007-2016 average = $410.7 billion

Commercial/Industrial = $187.0B (45.5%)

Institutional = $223.7B (54.5%)

2017 Y-T-D Results Show Overall Growth for Nonres. Spending Moderating; Institutional Still Sluggish

2017 2016 % change Total Nonres. Bldg. Construction $444.1 $433.2 2.5% Commercial/Industrial 229.5 224.9 2.0%

Lodging 26.1 24.6 6.4% Office 63.2 61.4 3.0% Commercial (retail and other) 79.8 69.9 14.2% Manufacturing 60.3 69.1 -12.7%

Institutional 214.7 208.3 3.1%

Health care 36.7 35.5 3.4% Education 85.3 82.9 2.9% Religious 3.0 3.2 -8.1% Public safety 7.5 7.3 2.6% Amusement and recreation 21.6 20.6 4.6% Transportation 39.9 38.9 2.7% Communication 20.7 19.8 4.4%

Source: U.S. Census Bureau, Value of Construction Put in Place, January, 2018

Billions of $, NSA, Jan-Nov 2017 totals

Topics

• Administration policy initiatives and the construction
• utlook: tax reform and infrastructure investment;
• Emerging housing affordability concerns;
• Labor availability challenges facing the construction
• utlook;
• The Architecture Billings Index and construction forecasts

for 2018-2019.

Tax Reform: Potential Implications for Real Estate/Construction & Housing

Real Estate/Nonresidential Construction – Quite positive

• Favorable business conditions encourage investment, including

structures;

• Expensing of capital expenditures;
• Reduce maximum pass-through rate for business owners (passing

through corporate profits to personal income) to 25%;

Housing – Modestly negative

• Reduced value of mortgage interest/local property tax deduction with

higher standard deduction;

• Potentially higher interest rates if federal debt levels increase;

Trump Admin. Proposed Infrastructure Program

• Key program elements

– $200B federal investment over decade $800B state, local, private matching

• Opportunities

– Support could be politically broad-based; envisioned to be revenue neutral; – Stimulus to economy, construction sector; – Roll back of regulatory hurdles to accelerate implementation;

• Challenges

– Project financing likely reliant on private user fees, likely excluding many needy infrastructure categories; – Stimulus programs typically not implemented so late in a business cycle; – Likely to exacerbate existing construction labor shortages;

Housing Starts Have Been Trending Up, With Single- Family Growth Outpacing Multifamily

Source: U.S. Census Bureau.

National housing starts (000s, SAAR)

200 400 600 800 1,000 1,200 1,400 Single-family Multifamily

130 140 150 160 170 180 190 200 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

• 26%

+44%

Notes: Monthly data through November, 2017. Peak (trough) occurred in February of 2007 (2012). Source: S&P CoreLogic Case-Shiller U.S. National Home Price SA Index.

Discounting Inflation Effects, House Prices Have Exceeded Values at Prior Peak

Nominal Index Value (January=100)

House Price-to-Income Ratios Exceed Historical Averages in Most Large Metro Areas

Notes: Index compares the median price of homes to the median level of household income in a given area.. Source: Zillow Price-to-Income Ratio, calculated as part of Zillow’s quarterly Affordability Indices; current data for Q3-2017.

Ratio of single-family existing house prices to household income for U.S. and top 15 U.S. metro areas

2 4 6 8 10 Historic Average (1985-2016) Current

Younger Households Disproportionally Buying Homes In More Affordable Markets

Note: Data includes largest 50 metro areas ranked by population. Source: JCHS tabulations of US Census Bureau, 2016 American Community Survey (ACS).

Homeownership Rate Among Households Under Age 35 in 2016

Average for top 50 metros = 31.3%

The Construction Labor Force Shrank by 1.8 Million Workers Since Peak

6.9 8.3 6.2 6.8 0.8 0.8 1.0 0.5 7.7 9.1 7.3 7.3 2 4 6 8 10

2002 2007 2012 2016

Employed Unemployed

Number of Persons in the Construction Labor Force (Millions)

Notes: Data include workers age 16 and over housed in non-group quarters. The construction labor force includes workers with construction management and trade occupations in the construction industry. Source: JCHS tabulations of US Census Bureau, American Community Survey.

Construction Labor Force Attracts Few Women, Relies Heavily on Younger and Foreign Workers

3.2 41.6 20.9 16.4 3.1 40.7 26.3 21.3 2.8 33.2 25.7 20.8 3.1 33.2 29.1 24.1 5 10 15 20 25 30 35 40 45 Women Under Age 35 Foreign-Born Hispanic Foreign-Born 2002 2007 2012 2016

Share of construction labor force (Percent)

Notes: The construction labor force includes workers with construction management and trades occupations in the construction industry. Data include workers housed in non-group quarters that are either employed or unemployed but available for and seeking work. Source: JCHS tabulations of US Census Bureau, American Community Surveys.

More So Than for Many Other Occupations, Immigrants are Key Source of Construction Labor

Immigrant share of labor force by occupation, 2014

17.2% 27.2% 46.5% 22.7% 19.3% 13.6% 11.2% 0% 10% 20% 30% 40% 50% Total labor force Construction Agriculture Services Transportation Sales Office/admin.

Note: Construction occupation figures include extraction; figures based on 2014 American Community Survey. Source: Pew Research Center, Occupations of Unauthorized Immigrant Workers, November, 2016.

The AIA’s Architecture Billings Index

• Established in the ,mid-1990’s, the ABI is a monthly

measure of revenue trends as U.S. architecture firms.

• Computed as a diffusion index centered around 50; any

score above 50 indicates that design activity is increasing nationally; any score below 50 indicates a decline.

• Analysis demonstrates that design activity is highly

correlated with construction activity, with a 9-12 month lead.

• Sub-indexes for major regions (4); major building

categories (3).

45 50 55 60

Architecture Billings Were Surprisingly Strong in 2017

Source: AIA Architecture Billings Index

diffusion index: 50 = no change from previous month, seasonally adjusted

2017 Results Stronger Than Prior Two Years

51.6 52.6 51.2 51.4 52.2 53.6

40 45 50 55 60 Billings Design contracts

2015 2016 2017 National ABI scores

Source: The American Institute of Architects ABI survey.

Recent ABI Strength Largely Missing the Institutional Construction Sector

Source: AIA Architecture Billings Index

Billings scores since 2013; index: 50 = no change from previous month

4 5 5 0 5 5 6 0

Jan '1 3 Apr Jul Oct Jan '1 4 Apr Jul Oct Jan '1 5 Apr Jul Oct Jan '1 6 Apr Jul Oct Jan '1 7 Apr Jul Oct

Residential Commercial/ Industrial Institutional

Commercial Gains Expected to Ease by 2019, Offset by Upturn in Industrial, Institutional Categories

Source: AIA Consensus Construction Forecast Panel, December, 2017 billions $ of construction spending on nonresidential buildings $419 $186 $66 $167 4.0% 4.4% 2.8% 3.8% 3.9% 2.9% 5.2% 4.3%

• 10%

0% 10% 20% 30%

• $200

$0 $200 $400 $600 Total Nonres. Comm. Industrial Instit.

2017 spending level 2018 % change 2019 % change

annual % change