CoStar Insights

Pair of U.S. Construction Outlooks Reflect Continued Strong Pipeline for Commercial Developers

by Randyl Drummer | Jun 27, 2017
Industry reports released over the past few days, including a new index launched by the U.S. Chamber of Commerce and materials supplier USG Corp., reveal the strong expected performance by the U.S. commercial construction industry, along with optimism among contractors that pipelines will continue to add new projects through next year. 

An overwhelming majority of respondents, 96%, surveyed for the new USG + U.S. Chamber of Commerce Commercial Construction Index (CCI) is confident that revenues will increase or remain stable this year. The CCI, a quarterly index designed to gauge the outlook and sentiments specifically for the commercial construction industry, sprang from a partnership between the Chamber, USG and Dodge Data & Analytics, "was born out of a need to understand the issues that affect commercial construction," said Jennifer Scanlon, USG president and chief executive officer. 

About 40% of contractors surveyed for the CCI expect an increase in revenue this year with 3% expecting a decrease. The index measures such specific indicators as construction work backlogs, new business pipelines, revenue projections, workforce issues and access to construction financing. 

A number of mixed-use megaprojects are moving toward vertical construction in urban metros across the U.S., including the planned $1.6 billion expansion of Penn Station in Manhattan; The Eleventh, a $1.25 billion project on a full block at Manhattan's High Line; and the $1 billion redevelopment of Chicago's Union Station, just to name a few. 

In a separate report, the Associated Builders and Contractors (ABC) Construction Backlog Indicator (CBI) released June 21, reported that construction backlogs increased to nine months during the first quarter, up 8.1% from the fourth quarter of 2016 and up 4% on an n annual basis. 

"For the first time in the series’ history, every category, firm size, industry and region registered quarterly growth in the CBI," said ABC Chief Economist Anirban Basu commenting on the report intended to serve as a leading construction spending indicator. "Among the big winners were firms in the western U.S. and those with annual revenues between $30 million and $50 million. This was a terrific report." 

Basu cautioned that some contractors registered concern for conditions in 2019 and 2020, citing the already lengthy duration of the economic recovery; evidence of saturation in some CRE markets; cuts in public spending; and tightening monetary conditions. 

The first quarter CBI report, however, "strongly suggests that rumors of the business cycle’s demise are exaggerated, at least thus far," Basu said. 

Meanwhile, current numbers show commercial construction moving ahead at a slow but steady pace. Dodge Data & Analytics reported separately last Wednesday that value of new construction starts ticked up 1% from April to May at a seasonally adjusted annual rate. Public works construction bounced back 30% from its subdued April amount, helped by the May start of four large pipeline projects totaling a combined $3 billion, enabling the nonbuilding construction sector to register a 23% gain in May, offsetting modest 4% declines for both nonresidential building and housing. 

Nonresidential building grew 5% year to date, with institutional building up 17%, commercial building down 5% and manufacturing building down 9%. 

Somewhat surprisingly, given deamnd for housing, residential building was flat, with single-family housing up 8% while multifamily housing decreased 17%, according to Dodge. 

Yet another leading indicator of future construction spending, the Architecture Billings Index (ABI) produced by the American Institute of Architects, posted a solid 53 in May, up from 50.9 the previous month. The AIA's new projects inquiry index was 62.4, up from 60.2 the previous month, while the new design contracts index increased from 53.2 to 54.8. 

"The fact that the data surrounding both new project inquiries and design contracts have remained positive every month this year while reaching their highest scores for the year is a good indication that both the architecture and construction sectors will remain healthy for the foreseeable future," said Kermit Baker, chief economist with the AIA. "This growth hasn’t been an overnight escalation but rather a steady, stable increase." 

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