AGC Chief Economist Urges Caution as Construction Industry Slowly Improves

Slowly, but surely, but hardly where it needs to be yet.

That was the gist of Ken Simonson’s outlook on what’s ahead in 2014 and beyond for the commercial/multifamily building markets. Speaking during Thursday’s hour-long webinar sponsored by the Window and Door Manufacturers Association (WDMA), the chief economist for the Associated General Contractors of America (AGC) warned against jumping to the conclusion that things are okay again because construction spending numbers are at their highest levels in four years.

While acknowledging that private residential construction is up significantly, Simonson noted several factors such as the declines in overall government spending, investment in office space and retail that continue to leave the construction industry overall in a precarious position as the new year approaches.

“On the whole,” he says, “it keeps construction moving at an uneven, slowly-upward pace.”

The construction industry on the whole has improved since being devastated by the recession, although there is still work to do, Simonson says. Industry employment numbers are above their 2011 lows, but still well below (-1.9 million jobs) their April 2006 peak. More ominously, those numbers do not reflect the many construction industry workers who either retired or left the industry all together for other work during the recession.

Additionally, although construction spending has climbed 20 percent to a four-year high, it has only translated into a 7-percent employment rate increase, Simonson says, attributing the disparity in the numbers to the higher prices charged by contractors and higher labor costs, among other things.

Still, he lauded the uptick in construction in the private residential sector and parts of the commercial side that have keyed the industry’s relative resurgence.

Continued investments in natural gas and oil have helped fuel the spike and led to added construction projects, especially in areas such as North Dakota and Louisiana. Other similarly favorable developments leading to additional construction work include the ongoing expansion of the Panama Canal and the 18-percent increase in private residential construction.

Simonson forecasted continued particularly strong prospects in the multi-family housing sector, which has benefitted directly from the recession-related problems plaguing the single-family sector, such as excessive personal debt, poor credit and a growing customer preference to rent and avoid larger financial pitfalls.

Simonson says he expects multifamily housing to grow at a double-digit rate in 2014 and to continue increasing 6 to 10-percent annually through 2017.

“All these things don’t suggest that single-family housing is dead,” he says, “but it’s going to have a much slower climb and perhaps flatten out at a much lower level than previously.”

Things appear to be a lot more convoluted on the non-residential side, where only the numbers of manufacturing, transportation, lodging and parts of retail construction projects are expected to begin picking up. Non-residential construction had begun showing signs of life again as of 2012, only to then taper off earlier this year and eventual decline last month, Simonson says.

Commercial construction has been strong in port areas as local jurisdictions prepare for the increased shipping headed their way with the expansion of the Panama Canal. Quite simply, more crates coming their way mandate the need for more warehouses to store the incoming cargo.

Likewise, the rise in the natural gas and oil activity has led to more manufacturing construction for companies wishing to be closer to their companies and less vulnerable to the kind of shipping issues prevalent when located in distant lands.

But it’s hardly been all smooth sailing on the commercial side either.

Typically a large source of construction projects, public schools, as well as a number of college and universities continue to struggle with financing in the wake of receding budgets and lower enrollments nationwide.

“The funding challenges are extreme,” Simonson says.

Retail construction has also suffered as the advent of warehouse and online buying has trimmed the need for new shopping malls and the kind of stand-alone stores that used to be among the signature commercial projects, says Simonson.

Other areas on the commercial side still struggling include health care and office construction in areas other than Houston, Silicon Valley, San Francisco or Seattle.

Simonson says he sees more of the same in the upcoming years, along with labor shortages, demographic challenges and price increases in both labor and materials. That likely means more shaky times for the construction industry could still be ahead.

“You have to be careful in assuming that that everything is getting better,” Simonson says.

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