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Construction seen as a steady market for rest of 2017

Feb 17, 2017 | 03:19 PM | Nat Rudarakanchana

Tags  steel, construction, construction outlook 2017, construction 2017, Anirban Basu, Aldo Mazzaferro, Macquarie, Sage Policy Group economics

The American Institute of Architects forecasts 6-percent growth in overall U.S. non-residential building spending, after a "successful" 2016.

The U.S. construction sector is poised to continue a trend of healthy growth, even as sector spending hasn’t quite reached pre-recession peaks, according to economists and forward-looking data.

The latest Architectural Billings Index (ABI), a leading indicator of U.S. construction spending, clocked in at 55.9 in December, a big jump over November’s 50.6, the American Institute of Architects (AIA) said Jan. 18.

Any reading above 50 indicates that U.S. architects are submitting more bills than the previous month, and the indicator typically foreshadows construction spending to come in the nine to 12 months ahead.

December’s ABI reading is the highest score since July 2007, according to AIA data. November’s ABI results also showed remarkable strength in new project inquiries, indicating that architects took calls from many customers curious about designing new buildings.

Still, coming months will show whether the trend has legs into 2017, accoridng to AIA chief economist Kermit Baker, who urged caution.

“December is an atypical month for interpreting trends, so the coming months will tell us a lot more about conditions that the industry is likely to see in 2017,” he said in a Jan. 18 statement.

Still, he noted that the “sharp upturn” in building design activity is “certainly encouraging.”

The AIA forecasts 6-percent growth in overall U.S. non-residential building spending, after a “successful” 2016, where spending rose almost 8 percent, the institute said Jan. 31.

Commercial construction—especially retail, office and hotel buildings—will continue to lead the pack among subsectors, while industrial construction is projected to remain flat, the forecast said. In 2018, spending on educational structures could lead the charge, the institute said.

The overall expectation is that construction spending will “outperform the broader economy” in 2017 and 2018, Baker wrote in a Jan. 25 commentary.

Part of the strength in commercial construction in 2017 could be driven by global investors who continue to pour money into commercial and multi-family U.S. real estate, at nearly unprecedented rates, according to economist Anirban Basu, chairman and chief executive officer of Baltimore-based Sage Policy Group Inc.

In 2015 foreign investment in such U.S. real estate exploded and hit $71.7 billion, up 153.4 percent relative to 2014, according to a presentation Basu gave Jan. 31, at the Tampa Steel Conference 2017 in Tampa, Fla.

That’s some $30 billion more than the prior peak of 2007, when sales to offshore investors hit $40.7 billion, Basu said, citing data from Jones Lang LaSalle Inc., among others.

“With the weak global economy, where else do we expect the global investors to invest?” Basu asked rhetorically, citing economic malaise and uncertainty in Europe, the United Kingdom post-Brexit, and in emerging economies like Brazil and Russia. “A lot of that (investment) capital comes to America. Where else is it going to go, looking for safety and yield?”

Partly because investors see stocks as overvalued and the bond market as similarly problematic, they need a suitable space to park their money and gain return, Basu said, speaking before an audience of steel importers, trade lawyers and port officials.

Money invested in commodities like oil and natural gas before 2015 rotated into U.S. real estate after energy prices collapsed in late 2014, continued Basu, who is also chief economist for the Washington-based Associated Builders and Contractors trade association, a nationwide group with nearly 21,000 chapter members involved in construction.

Construction gains in 2015, where spending on lodging—primarily hotels—and offices outperformed many non-residential sectors, don’t necessarily reflect real demand for buildings, according to Basu, who noted that the U.S. economy grew at a tepid 2 percent or so in 2015 overall.

These multi-year construction trends are key to watch for steel, because construction consumes 42 percent of domestic steel shipments, Basu said, citing data from the American Iron & Steel Institute. That data showed that construction is the largest U.S. single end-market for steel, a fact that has held true for decades, he noted.

Investors who continue to invest in U.S. real estate show no sign of slowing down, either, he said, citing more recent data.

Construction will probably be the fastest growing market for U.S. steel in 2017, given recent data, one of the bright spots for domestic steel demand alongside automotive demand, according to Macquarie Capital (USA) Inc. senior analyst for steel, metals and mining Aldo Mazzaferro at a separate presentation, also given at the Tampa Steel Conference.

Mazzaferro predicts overall U.S. steel demand will be up 3 percent in 2017 vs. 2016, rising to 107.1 million tons, with 95.1 million tons of shipments from U.S. steel mills, according to his presentation.

There’s also “room for growth” in U.S. residential construction work in 2017, with work so far in 2016 remaining “slow and steady,” construction consultant Kathryn Thompson of Thompson Research Group said in a November 2016 forecast webinar.

Historically, the 56-year average for U.S. housing starts is 1.4 million starts per year, according to Thompson, who is chief executive officer of the Nashville-based research and consultancy, an advisor to major funds and investors.

In 2016, 1.17 million privately owned housing starts were recorded, according to preliminary U.S. Census Bureau data, released Jan. 19. That’s 4.9 percent above 2015’s total in housing starts, but still below the historical average, on Thompson’s estimates, indicating further room for growth in 2017.

Still, U.S. residential construction uses relatively little steel, industry experts note. Nonetheless, there is an effort under way, including at the Chicago-based American Institute of Steel Construction (AISC), which promotes structural steel, to push for higher steel intensity in single-family homes, AISC executives told AMM in a late October 2016 interview.

Steel beams are also used in residential projects taller than four storeys, the organization’s top two executives Roger Ferch and Charlie Carter told AMM in an interview in Chicago.

Wood is typically a major material for single-family homes, but increasingly millennials prefer to live in taller apartment complexes, often containing structural steel, construction market sources said.

Nonetheless, there’s a danger that the construction cycle will peak in coming years, industry observers warned in 2016, though they spoke before the Nov. 9 election of now-President Donald Trump.

Trump is the other major factor for 2017 and beyond, in terms of construction, sources noted.

Trump’s promise to spend $1 trillion in a major infrastructure package comes in the context of typical annual U.S. construction spending of $1.2 trillion currently, so such a measure could have a “dramatic impact,” the AIA noted in its 2017 forecast.

As Trump’s administration seeks to slash taxes and regulation for companies, that could unleash pent-up construction dollars, to be used on commercial and industrial construction, the AIA noted.

Trump’s touted wall on the U.S.-Mexico border could also consume as much as 2.5 million tons of rebar, although that is an estimated amount to be spread over four to five years, Chris Casey, executive director of the Independent Steel Alliance (ISA), has noted.

Nonetheless, significant downside for construction exists, based on Trump’s policy priorities, sources said.

A promised rollback of the U.S. Affordable Care Act—also known as Obamacare—could cause big uncertainty in the health care sector, slowing or even freezing new construction spending there, the AIA said.

Healthcare construction accounts for about 10 percent of national construction spending, so any political uncertainty could have major knock-on effects, according to the AIA.

Additionally, Trump’s vow to crack down on immigration will probably leave the construction industry short on labor, in a sector where there’s admittedly much immigrant labor, both legal and illegal, sources said.

Construction labor shortage has been a chronic concern for years, worsening significantly since millions of U.S. construction workers left the industry after the Great Recession of 2008 to 2009, never to return, Basu said.

Without immigrant labor, construction costs could rise “massively” on higher labor costs, assuming U.S. companies can find enough U.S. workers to do the job, he said.

“If you do seasonal construction work, you often depend on non-American workers. That’s just the way it is,” Basu said at the conference. “They come in on certain types of visas. Rumor has it that the president’s next executive orders will focus exactly on those types of visas,” Basu said on Jan. 31.

Basu, in his role as chief economist for the Associated Builders and Contractors, which represents thousands of non-union contractors, has heard constant complaints from construction firms about labor shortages.

“Even today, with the status quo, these construction firms will tell you: ‘We can’t find electricians. We can’t find carpenters. We can’t people to do drywall. We can’t find welders. We just cannot find these craftspeople.’”

“But to the extent that we can import them, even for a time, it’s very helpful,” Basu added, characterizing comments from construction industry veterans. “You take them (immigrant labor) away—construction costs are going to rise massively. Massively,” he said.


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