Signs of building recovery come with notes of caution
If you were to confuse August with March, you might be looking at the nonresidential construction indicators released last month. August came roaring in with a forecast from the American Institute of Architects that was remarkably optimistic but ended meekly with a report from consultant FMI that was decidedly less so.
AIA went so far as to double its projections on how much spending on nonresidential construction projects would increase this year. It now says spending will rise 4.4% up from its projection of a 2.1% increase in its January Consensus Forecast.
A sharp spike in demand for industrial facilities this year, along with sustained demand for hotels and retail properties prompted AIA to change its forecast. In its semiannual Consensus Construction Forecast, AIA further projects a 6.2% increase in nonresidential spending in 2013.
“With companies looking to bring back manufacturing jobs from overseas, there has been a sharp rise in demand for industrial facilities, which is leading to an upward revision in projections for future construction spending,” AIA Chief Economist Kermit Baker says. “Continued budget shortfalls at the state and local level, along with a depressed municipal bond market are holding the institutional market back from seeing similar upticks in spending.”
Spending in the industrial sector will rise 12.9% this year and another 8.1% in 2013, according to AIA. Other substantial increases will come in: lodging (9.5% in 2012, 18.2% in 2013); retail (6.2%, 9%); office buildings (4.7%, 8.7%); health care (4%, 7.5%); and even religious buildings will rebound from negative territory this year to positive growth in 2013 (-5%, 3%).
AIA’s optimistic forecast contains a cautionary note as well.
“Federal tax and spending changes – the so-called fiscal cliff – that may come into play in early 2013 could upset the economic applecart and prove detrimental to recovery possibilities,” Baker says. “We will likely have a better sense after the presidential election what will happen with regards to the Bush-era tax cuts, Social Security payroll tax, extended unemployment and deficit reduction plans that will have a ripple effect that will extend to the construction industry.”
FMI’s Third Quarter Nonresidential Construction Index Report, released three weeks after the AIA forecast, sounds even more cautious about a recovery. The consultant bases its index on a survey of nonresidential construction company executives who are asked to vote up or down on a number of business parameters such as construction activity, overall economy, construction material costs and labor costs.
This year’s third quarter index plunged five points, taking it back to where it was in the second quarter of 2010. Confidence in the economy took the biggest hit from panelists, dropping 24.7 points from last quarter.
“‘Beware of the upturn’ is the sentiment expressed by a number of panelists,” FMI states. “They raise concerns that too many contractors have been taking on too much low-bid work just to keep their backlogs full. The result is businesses are becoming unable to finance ongoing losses.”
In spite of this tactic by contractors, or perhaps because of it in some cases, the report contains at least one positive sign.
“Temporary gains in the economy have been enough to boost sales and release some projects that have been on hold for a long time,” FMI states. “The result is panelists report their backlogs have improved somewhat. This is the first time backlogs have shown improvement since the second quarter of 2011.”
FMI also notes that executives are more optimistic about their own markets than the larger economic picture. Of course, any recovery can be measured truly on how close it hits to home.