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Starts, planned projects grew last month, MHC says; office, hospital markets look shaky
New construction starts in September jumped 13% from August at a seasonally adjusted annual rate, McGraw Hill Construction (MHC) reported yesterday. “Nonresidential building bounced back after losing momentum in August, and the nonbuilding construction sector was lifted by the start of several large power plants, which ran counter to the sharply downward trend for electric utilities that’s been present during 2013. For the first nine months of 2013, total construction starts on an unadjusted basis were reported…up 2% from the same period a year ago. If electric utilities are excluded from the year-to-date statistics, total construction starts in the first nine months of 2013 would be up 11%....The 2% gain for total construction starts on an unadjusted basis during the January-September period of 2013 reflected a mixed pattern by the three main construction sectors. Nonresidential building matched the amount reported during last year’s first nine months, due to this behavior by segment – commercial building, up 9%; manufacturing building, up 1%; and institutional building, down 5%. Nonbuilding construction year-to-date fell 20%, as a 63% plunge for electric utilities far outweighed a slight 2% gain for public works. Residential building advanced 26% year-to-date, with single family housing up 29% and multifamily housing up 17%.” According to MHC vice president of economic affairs Robert Murray, “While the extent of September’s gain overstates the current health of construction, the latest month did provide positive news for nonresidential building which continued the up-and-down pattern that’s occurred during 2013. The September gain for nonresidential building reflected the manufacturing plant category posting a strong increase, commercial building staying close to its recently improved pace, and several institutional structure types rising from previously weak levels. After the downward trend that’s been underway from 2009 through the first half of 2013, the institutional building sector may now be starting to stabilize.”
The Dodge Momentum Index advanced 2.9% in September, MHC reported on October 7. The index “is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. After a brief pause in June 2013, the Momentum Index resumed its upward trend in the most recent three months. Since the end of 2012, the Momentum Index has risen an impressive 31%, and in September it reached its highest level since the first quarter of 2009. This acceleration suggests that, as of September, owners and developers viewed the environment for construction as improving. Once again, the two main components of the Momentum Index diverged in September. The demand for new commercial buildings rose dramatically over the month, boosted by recovering market fundamentals such as rents and occupancy rates. The commercial component of the Momentum Index jumped 8.5% in September thanks to increased plans for new office development….The institutional segment of the Momentum Index retreated 2.5% in September, as a gain for healthcare projects was offset by a larger decline in plans for amusement and education buildings.”
Despite the positive news from MHC, shrinking demand for office space per employee appears likely to hold down office construction. “According to a recent CoreNet Global survey of corporate real estate executives, more than three-quarters of respondents project that the average will drop from the 2010 average of about 225 square feet to 150 square feet or less by 2018,” CoStar Group reported on October 8. “…More than 53% predicted average office space usage will [fall] to 100 square feet or less by 2018.” The Wall Street Journal reported on October 2, “The office-vacancy rate in the third quarter nudged down to 16.9% from 17% three months earlier and a post-recession peak of 17.6% in 2010, according to real-estate research firm Reis Inc….San Francisco led the country with rent growth of 7.7% over the past 12 months, followed by the San Jose, Calif., area – including Silicon Valley – with 5.3% growth. Those cities were trailed by New York, Houston and Dallas. Meanwhile, Sunbelt cities such as Las Vegas and Tucson, Ariz., continued to see rents fall over the year, as did Baltimore, Chattanooga, Tenn., and Charleston, S.C.”
Hospital construction also appears unlikely to rebound soon. Hospitals “are starting to cut thousands of jobs amid falling insurance payments and inpatient visits,” USA Today reported on Sunday. Among the reasons: “Medicare, Medicaid and private insurance companies are cutting hospital reimbursements….The National Institutes of Health reduced funding to hospitals by 5% as part of sequestration…The number of inpatient hospital days fell 4% from 2007 to 2011.”
UPS announced on October 8 that it “plans to invest approximately $50 million to build an additional nine liquefied natural gas (LNG) fueling stations, bringing the total number of stations to 13. Four were announced in April, and all should be operational by the end of 2014….The expansion will include fueling stations in Florida, Illinois, Indiana, Mississippi, Missouri, Ohio, Pennsylvania and Texas. Construction is already under way at LNG fueling facilities in Tennessee and Texas.”
The Data DIGest is a weekly summary of economic news; items most relevant to construction are in italics. All rights reserved. Sign up at www.agc.org/datadigest.
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