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Dodge Outlook Report: Housing leads industry to moderate 2014 growth

Source: McGraw Hill Construction, New York

A mainstay in construction industry forecasting and business planning, the Dodge Construction Outlook predicts that total U.S. construction starts for 2014 will rise 9 percent, to $555.3 billion—higher than the 5 percent increase to $508 billion estimated for 2013. The projection was made at McGraw Hill Construction’s 75th annual Outlook Executive Conference in Washington, D.C.

“We see 2014 as another year of measured expansion,” says McGraw Hill Construction Vice President of Economic Affairs Robert Murray. “Against the backdrop of elevated uncertainty and federal spending cutbacks, the construction industry should still benefit from several positive factors going into 2014. Job growth, while sluggish, is still taking place. Interest rates remain very low by historical standards, and in the near term the Federal Reserve is likely to take the necessary steps to keep them low. The bank lending environment is showing improvement in terms of both lending standards and volume of loans. And, the improving fiscal posture of states and localities will help to offset some of the negative impact from decreased federal funding.”

Based on specific construction market sector research of 2013 activity and 2014 prospects, the Dodge Construction Outlook finds:

  • Single family housing will grow 26 percent in dollars, corresponding to a 24 percent increase in unit starts, to 785,000 (McGraw Hill Construction basis). The positives for single family housing are numerous—the pace of foreclosures has eased, home prices are rising, and mortgage rates remain near recent lows. However, the demand for housing will continue to be restrained by careful bank lending practices.
  • Multifamily housing will rise 11 percent in dollars and 9 percent in units. While growth continues, the percentage gains will be smaller than the previous four years, reflecting a maturing multifamily market. This structure type is still a favored investment target by the real estate finance community, which in the near term should lead to more high-rise residential buildings in major cities.
  • Commercial building will increase 17 percent, a slightly faster pace than the 15 percent gain estimated for 2013. Both warehouses and hotels will continue to lead the way, while stores and office buildings pick up the pace. The positives for commercial building are improving market fundamentals and more bank lending for commercial development. Next year’s activity in dollar terms will still be 28 percent below the 2007 peak.
  • Institutional building will edge up 2 percent, turning the corner after five years of decline. For the educational building category, colleges are revisiting capital expansion plans, and passage of recent construction bond measures in several states should help K-12 school projects. Healthcare construction is expected to remain flat, given continued emphasis on cost containment.
  • Public works construction will drop 5 percent, pulling back after a 3 percent gain in 2013 that was lifted by several large highway and bridge projects. More focus on deficit reduction will limit federal support for environmental public works, although the improved fiscal position of state and local governments will help cushion the extent of decline.
  • Electric utility construction will retreat 33 percent, continuing the 55 percent correction estimated for 2013 that followed the current dollar high reached in 2012. Capacity utilization is down sharply, limiting the near term need for new generating capacity. The need for transmission line work remains strong.

“The 2014 picture bears some similarity to what’s taking place during 2013, with single family housing providing much of the upward push; multifamily housing showing a slower yet still healthy rate of growth after four years of expansion, and commercial building gradually ascending from low levels,” notes Murray. “One change that’s expected for 2014 is that institutional building will no longer be pulling down nonresidential building and total construction.”

Copies of the 2014 Dodge Construction Outlook report, with additional details by building sector, can be ordered here. Additional reports are available from McGraw Hill Construction Research and Analytics, http://construction.com/market_research.