2018 Construction Outlook: Mature Expansion, Deceleration in Some Sectors, Continued Growth in Others

by Wendel, Rosen, Black & Dean LLP
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U.S. construction starts are expected to increase 3 percent to $765 billion in 2018 according to Dodge Data & Analytics in its 2018 Dodge Construction Outlook. But we may be approaching the end of a construction boom, at least in certain industry segments.

The construction industry as a whole is in a “mature stage of expansion,” indicates Robert Murray, Chief Economist for Dodge Data & Analytics. “After rising 11% to 13% per year from 2012 through 2015, total construction starts advanced a more subdued 5% in 2015. An important question entering 2017 was whether the construction industry had the potential for further expansion,” explained Murray.

Several project types, including multifamily housing and hotels, have pulled back from their 2016 levels, but the current year has seen continued growth by single family housing, office buildings, and warehouses. In addition, the institutional segment of nonresidential building has been quite strong, led especially by transportation terminal projects in combination with gains for schools and healthcare facilities. As for public works, the specifics of a $1 trillion infrastructure program by the Trump Administration have yet to materialize, so activity continues to hover around basically the plateau for construction starts reached a couple of years ago.

While construction starts are expected to slow from the 4 percent gain in 2017, explained Murray, key indicators suggest that the industry will see continued, albeit modest, growth in 2018:

The U.S. economy next year is anticipated to see moderate job growth. Long term interest rates may see some upward movement but not substantially. While market fundamentals for commercial real estate won’t be quite as strong as this year, funding support for construction will continue to come from state and local bond measures. Two areas of uncertainty relate to whether tax reform and a federal infrastructure program get passed, with their potential to lift investment. Overall, the year 2018 is likely to show some construction project types register gains while other project types settle back, with the end result being a 3% increase for total construction starts. By major sector, gains are predicted for residential building, up 4%; and nonresidential building, up 2%; while nonbuilding construction stabilizes after two years of decline.

As to specific industry segments, the report predicts deceleration in certain segments and continued growth in others for 2018:

  • Single Family: Single family housing will rise 9 percent in dollars, corresponding to a 7 percent increase in units to 850,000 (Dodge basis). Continued employment growth has eased some of the caution shown by potential homebuyers, while older Millennials in their 30s are helping to lift demand for single family housing. A modest boost will also come from rebuilding efforts in Texas and Florida after Hurricanes Harvey and Irma.
  • Multifamily: Multifamily housing will retreat 8 percent in dollars and 11 percent in units to 425,000 (Dodge basis). This project type appears to have peaked in 2016, helped by widespread growth across major metropolitan markets. That strength has begun to wane in 2017, given slight deterioration in market fundamentals (rent growth, occupancies) and a more cautious bank lending stance.
  • Commercial: Commercial building will increase 2 percent, following a 3 percent gain in 2017, and continuing to decelerate after the sharp 21 percent hike back in 2016. Office construction should see further growth in 2018, helped by broad development efforts in downtown markets, and warehouse construction is supported by greater demand arising from e-commerce. However, store construction will remain weak, and hotel construction will continue to pull back from its 2016 peak.
  • Institutional: Institutional building will advance 3 percent, maintaining its upward track after this past year’s 14 percent jump. Educational facilities should see more substantial growth next year, lifted by the passage of recent school construction bond measures. The robust volume of transportation terminal projects in 2017 may not be repeated in 2018, but activity should stay at a high level.
  • Manufacturing: Manufacturing plant construction will recede 1 percent in dollar terms, after surging 27 percent this past year due to the start of several massive petrochemical projects. Next year should still see moderate growth for manufacturing plants in square footage terms.
  • Public Works: Public works construction will improve 3 percent, slightly more than the 1 percent growth in 2017. Highways and bridges should be helped as federal funding rises to the levels called for by the FAST Act, while the environmental categories will partly reflect reconstruction efforts related to Hurricanes Harvey and Irma. Additional benefit may come from the infrastructure program proposed by the Trump Administration, should it achieve passage in some form.
  • Utilities: Electric utilities and gas plants will drop 13 percent, falling for the third year in a row after the exceptional growth reported in 2015. Power plant construction starts will ease back as new generating capacity comes on line.

Photo credit: Sean Creamer, Crystal Castles, Attribution 4.0 International (CC BY 4.0)

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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