Regional Industry Growth Steady in 2014, But Uncertainties Linger
Despite a series of recent reports that the U.S. economy finally seems to be on firm ground and trending upward, the 2014 outlook for the construction sector remains mixed and riddled with questions.
An early December report from the U.S. Labor Dept. showed that the nation's gross domestic product rose 3.6% in the third quarter, unemployment dropped to 7%—the lowest point in five years—and the country created 203,000 jobs in November. The growth in GDP was well above the 2.8% increase that had been anticipated by analysts.
Other pluses for the national economy include a booming stock market, solid growth in auto and new home sales, and continuing good news for low interest rates and the health of banks and mortgage providers.
But the impact that these promising developments will have on the construction sector is uncertain, say industry insiders like Steve Sandherr, CEO of the Associated General Contractors of America. All are positive signs in the face of ongoing deficit spending, faltering consumer confidence and political gridlock in the nation's capital.
"We're optimistic about construction for next year," Sandherr told an industry group at a December outlook event in Denver. "But Washington is dysfunctional, and there's not a lot of optimism that anything comprehensive is going to get done [in the political arena]."
He said the construction industry has been forced "to play defense" on several regulatory issues, and there are big questions about the fate of the immigration bill and tax reform in Congress. "We'd like to see more balance in the tax code," he said. "But we're not holding our breath."
"The national economic news is mostly positive for now," says McGraw Hill Construction (MHC) Dodge economist Cliff Brewis. "But that hasn't translated into consistent growth for the construction industry."
Brewis says that financially driven recessions like the most recent one usually "result in huge losses of wealth, and the recovery process is longer. We are well into the recovery, but it will be slow and sluggish for some parts of the country."
Brewis says McGraw Hill Construction Dodge, which presented its annual industry outlook in October, anticipates 2.7% overall GDP growth for the U.S. in 2014 but cautions "that may be on the conservative side. We are targeting sequestration at 100% next year, but recent signs indicate it may not be that deep." Brewis says MHC estimated that federal government dysfunction cost a half a point in GDP growth in 2013.
Private-Sector Push
Brewis points out that the strength of the recovery will continue to depend largely upon the private sector, as government funding for projects remains uncertain. "The government is not helping much this time," he says. "And if the private sector senses problems, it will not invest. Any uncertainty makes it more cautious, and that's why we're seeing these starts and stops. That's typical of private-sector recoveries, and it will continue."
Ken Simonson, chief economist at AGC of America, agrees. The decline in government spending will continue for the foreseeable future, he says, and that will help keep industry growth "at a not-very-steady rate" next year. Simonson also predicts that the retail building market will take a hit next year as consumers buy more goods online, reducing the need for brick-and-mortar retail outlets. He sees a similar trend for office construction, as employers continue to shrink the amount of office space allotted per person. The demand for more mobility and flexibility in office configurations will continue, Simonson adds. That likely means more of a market for office renovations and additions rather than new construction.
Both Brewis and Simonson, along many other industry economists such as Anirban Basu with the Associated Builders and Contractors, say that the key to a more consistent recovery, both for construction and the country as a whole, will be employment growth.
ABC reported that construction gained 17,000 jobs in November, with 7,700 of those on the nonresidential side. "Despite the increase in November, labor force participation is still down compared to before the government shutdown," Basu says. ABC reported the national construction unemployment rate was at 8.6% in November on a non-seasonally adjusted basis, down from 9% in October and 12.2% a year ago.
But industry job growth has not been consistent across market sectors or in all sections of the U.S. "The middle of the country—from Texas north through the Dakotas—has done remarkably well, as have many metro areas on the coasts," Brewis says. "But there are still some areas, such as the Southeast, where things are slow. We will need at least 160,000 new jobs per month across all sectors or the economy will soften again."
Work Force Shortage
"Although many indicators are positive, locally and nationally, I still sense a fragility around this recovery, and any significant, unforeseen factors could easily halt the progress in its tracks," says Brandon Berumen, president and CEO of LEI Cos., Denver, and the 2014 chair of the ABC Rocky Mountain Chapter.
Complicating that fragility is a growing anxiety across the industry that its skilled work force is not keeping up with a renewed demand for services.
"The Front Range market should improve in 2014, as we have seen several projects being dusted off and brought back to life as well as a renewed sense of confidence in new development," Berumen adds. "But metro Denver has seen a significant change in the available work force since March [of 2013], and one of the most difficult challenges for 2014 will be finding craft labor as well as construction professionals to staff these projects. Contractors will strain to balance the need for additional resources with the financial reality that many of these projects were awarded when labor and staff were available at notably lower costs."
Michael Gifford, president of AGC of Colorado, says that many of his member firms are also concerned about staffing for the coming growth in projects. Gifford cites the economic strength of downtown Denver, continued development of the Regional Transportation District's FasTracks program and improving economic conditions in the mountain and resort communities as evidence of stronger growth anticipated for Colorado building contractors in 2014.
"Additionally, I am seeing an increase in the single-family residential remodeling sector," says Mike Wisneski, 2013 president of AIA Colorado. "I believe this is a good sign of increased consumer confidence and a reasonably optimistic forecast for 2014."
Pause Button
Despite those factors and the potential impact of several large new projects in Colorado—Colorado State University's new football stadium, with construction costs likely to be more than $200 million; the Gaylord Hotel and Resort near Denver International Airport, at nearly $800 million, with an estimated 10,000 construction jobs; and large, ongoing work such as the South Terminal Redevelopment at DIA, RTD's Eagle P3 rail and mixed-use developments in downtown Denver, especially in the Central Platte Valley—McGraw Hill Construction Dodge forecasts only a moderate 1.1% growth in construction starts for the state in 2014. "The Colorado market will hit the pause button next year. And that shouldn't alarm anyone," says Brewis. "It's not an indicator that anything is wrong. It's just that Colorado has experienced very strong growth for the past couple of years (12% in 2013 and 29% in 2012), and it can't be sustained at that level. We still see Colorado, and in fact, the entire Mountain West, as in very good shape compared to the rest of the country." The regional industry should be back to where it was in 2007 "very soon," he adds.
Brewis sees strength in Utah and Colorado multifamily construction, which he says will continue as a "nice little business"; hotels and hospitality work, with room-occupancy rates holding up well; smaller retail and office work; and some growth in the resort areas. Retail projects will be more renovation than ground-up construction, but "as single-family housing spreads, retail will grow with it," he says.
Consolidation in the health care arena and a saturation of regional hospital beds will change the short-term nature of construction in that sector, but longer term, "health care construction will do remarkably well," Brewis adds.
The education sector, as with other institutional work, will remain slow. "But education work is close to bottoming out," Brewis says. Higher-education projects, many of them funded without using public dollars, will lead the eventual recovery in the educational sector, but likely not in 2014.
The state's construction market is "getting better," says Rich Thorn, president and CEO of AGC of Utah. "Glimpses of optimism seem to be evident in conversations with our members. Some sectors seem better than others, but overall, we believe we are heading in the right direction."
McGraw Hill forecasts a nearly 12% bump next year for Utah and the Intermountain area. "And that's not to say the area is that much stronger than Colorado and Wyoming," Brewis says. "It's just that they are nearly a year ahead of Colorado in the recovery cycle. Colorado will see stronger growth in 2015."
He says that the Denver and Salt Lake City metro areas have similar strengths. Both are investing heavily in improved commuter rail and highway programs, both have healthy multifamily and hospitality markets and potential for growth in their resort and tourism arenas. And both will see some growth in their alternative-energy markets. "But," he cautions, "they are also subject to the same swings." Regional population growth and in-migration must be managed properly, he adds.
Northern Growth
Meanwhile, Idaho and Montana are anticipating a year of solid growth as well.
"Private investment, particularly in energy-related projects, appears to be increasing at a modest rate in Montana, with most of our member companies reporting higher revenues in 2013 and somewhat brighter prospects for 2014," says Cary Hegreberg, executive director of the Montana Contractors' Association, the AGC chapter in the state. "Highway contractors are on edge, as federal funding remains precarious and there is little appetite in our Legislature to appropriate state funds for highways."
Hegreberg adds that competition from employers in the oil-and-gas industry in neighboring states such as North Dakota is "posing a perplexing dilemma for Montana contractors. They finally see an increase in workload but can't find a work force," he adds.
Several large commercial building projects are nearing completion in Idaho, with others continuing into next year, says Wayne Hammon, executive director, Idaho AGC.
"Estimates are bolstered by recent reports that vacancy rates for all classifications of commercial space (office, industrial and manufacturing) have returned to prerecession levels and that rental rates have climbed significantly over the last half of 2013," Hammon says.
He says that three large interstate projects are planned in the Boise area along with the replacement of "a significant bridge" in McCall.
"The state and a number of local highway districts are advancing repair and maintenance projects in other regions of the state originally scheduled for later in the 2014 construction session," Hammon says.
However, in general, highway and public works projects are not expected to see a big increase across the region next year. Wyoming voters passed an increase in the state's gas tax, which should boost heavy-highway construction prospects there, but highway funding remains clouded by the stalemate in Washington and the increased fuel efficiency of many newer-model cars and trucks, which cuts revenues from fuel taxes. And Congress is not likely to raise the gas tax anytime soon, Brewis says.
Highway construction in Colorado should improve in 2014, although long-term rebuilding work for flood-damaged highways in the northeastern part of the state and along the Front Range foothills will take months or years to design and could complicate the funding formulas.
"Although Colorado's economic recovery is sporadic and not geographically consistent, overall we do expect 2014 to be an improvement compared to 2013 for heavy, highway and utility construction," says Tony Milo, executive director at the Colorado Contractors Association. "An increase in CDOT work, thanks to the RAMP [Responsible Acceleration of Maintenance and Partnerships] program, plus federal aid funding due to the 2013 flood, will boost the state's highway construction activity."
Simonson and others say the Mountain States region will also continue to benefit from "the shale gale," the rush to capture shale-oil resources, an improving single-family residential market and the "double-edged sword" of in-migration and population growth.
"People like it here," says Simonson. "The growth is coming to you. More people and businesses want to move here. And you will need to get your infrastructure ready for that."
