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Has construction gone into neutral while waiting for a green light, or is the industry about to reverse direction? That question has gained urgency as the broader economy experiences increasing turmoil while doubts spread regarding the sustainability of recent construction growth.

Construction spending figures from the U.S. Census Bureau illustrate the ambiguous evidence. For 2015 as a whole, value put in place—spending on projects that were already under way or broke ground during the year—topped 2014 totals by a healthy 10.5 percent. The upturn was well distributed among major segments, with private residential spending up 12.6 percent, private nonresidential spending up 12 percent and public construction up 5.6 percent.

However, recent numbers are much less impressive. Private nonresidential spending has fluctuated in a narrow range since May 2015; the December 2015 total was the lowest since April 2015 at a seasonally adjusted annual rate. (Seasonal adjustment is a statistical technique for removing the influence of recurring patterns such as holiday- or weather-related variations. Annual rate means the monthly total has been multiplied by 12 to allow easy comparison to full-year totals.) Similarly, the December 2015 total for public construction was virtually the same as in May 2015, and was nearly 3 percent below the peak reached in August 2015. Private multifamily construction shrank 8 percent from its all-time high in September 2015 to December 2015. Only new single-family construction has continued to expand consistently, rising for the ninth consecutive month in December 2015.


The most notable downturn occurred in manufacturing construction. Spending skyrocketed 44 percent for 2015 as a whole. But after setting records in each of the first five months of the year, spending plunged 13 percent from May to December. The growth was propelled by huge petrochemical and fertilizer projects, natural gas liquefaction and export facilities and assembly and parts plants for cars, trucks, aircraft and other transportation equipment.

Many of those projects will continue to build out in 2016, but there has been a dearth of new plant announcements in the last several months. Meanwhile, many categories of manufacturers are struggling with weak foreign demand or stronger import competition as the dollar appreciates against trading partners’ currencies. And domestic demand for oilfield, mining, agricultural and other equipment has shriveled, further dimming the outlook for manufacturing construction.

Warehouse construction is another niche with doubtful prospects. Spending on “general commercial” warehouses, as distinguished from self-storage units, more than doubled from December 2012 to December 2014 but has been nearly flat since then. It appears that the massive building program undertaken by Amazon and other Internet retailers has largely been completed, and there will not be as many new warehouses in the near future. (One exception may be in Colorado, where marijuana growers have reportedly snapped up all available space.)


The retail sector continues to struggle. In January 2016, Walmart announced it would close 154 U.S. stores; Macy’s and several other chains also shut stores or closed completely. Nevertheless, the sector offers some opportunities for demolition and recycling as new tenants take over and remodel space abandoned by earlier occupants. More so than in the past, retailers—notably grocery stores—are locating on the first or second floor of multistory apartment, office and hotel buildings rather than in standalone structures.

One of the fastest-growing categories for the past several years was lodging. Hotel and motel construction increased 31 percent in 2015. But this segment also flattened out in second half of the year. There are still reportedly large numbers of projects and rooms that are expected to break ground or be renovated in the next 12 months. But the key metric for many hotel investors, called revenue per available room or RevPAR, has recently turned negative compared to the same week a year ago after steady 5 to 10 percent yearly growth. That suggests many markets may have reached saturation.

On a more positive note, private office construction climbed 26 percent in 2015 to the highest level since 2008. Numerous skyscrapers and corporate office complexes are under way or will soon break ground in a variety of locations, including Seattle, San Francisco, Silicon Valley, Los Angeles, suburban Dallas, New York and Boston. Many companies are replacing or adapting older buildings in city centers, generating considerable demand for demolition and recycling. Suburban office parks, formerly the heart of new office construction, are generally languishing with high vacancy rates, but some of these are being repurposed to add hotels, shopping and entertaining, and sometimes housing.


Private hospital construction turned positive in 2015 after years of decline. Hospitals now face competition from independent urgent-care centers, outpatient surgical facilities and primary-care clinics in retail locations. Uncertainty over the implications of the Affordable Care Act for hospital utilization and reimbursement rates also may have held down construction spending. Compared to a few years ago, hospitals admit fewer patients overnight and discharge them earlier, to their own homes and separate rehabilitation facilities. Thus, new hospitals are likely to have fewer patient recovery rooms and relatively more space devoted to treatment and diagnostic facilities.

The outlook appears at least moderately favorable for the three categories that account for nearly two-thirds of public construction: highway and street, educational, and other transportation (transit, airports, ports and passenger rail facilities) sectors. Highways, transit and Amtrak received a boost in December 2015 when President Obama signed the first long-term (five-year) federal-aid funding bill in more than a decade.

The legislation not only provides much-needed continuity for the programs but modestly increases federal money for all three types of transportation construction. In addition, in the past few years more than a dozen states have passed fuel-tax increases or other measures to fund their highway construction programs.

Several major airports are undergoing modernization and expansion, among them Dallas-Fort Worth, Los Angeles, Salt Lake City and Tampa, plus plans for projects at O’Hare and LaGuardia. All of these will entail demolition recycling. However, ongoing Congressional refusal to raise or replace the gas tax as the mainstay of federal funding means further increases in highway and transit dollars are likely to be small at best.


Both public and private spending on higher education construction reached record levels in 2015, aided more by capital campaigns than any restoration of public funding. But college and university enrollment has been falling for three years in a row, as the pool of high school graduates shrinks and an improved job market leads both high school seniors and older workers to seek employment instead of more schooling. Some colleges are closing their doors or curbing investment in facilities as a consequence.

Enrollments also have been slipping or level in prekindergarten through high school in many parts of the country as the birth rate and immigration both have declined. Furthermore, more children are enrolling in urban traditional and charter public schools that may have spare capacity or may be in converted buildings. These locations generate demand for renovation and temporary construction to a greater extent than the past model of “more children equals more housing in new suburbs equals new schools.”

The most promising sector for construction in 2016 appears to be residential. Multifamily construction (almost entirely rental units, with very few condos or co-ops outside of Florida and New York) has increased at double-digit year-over-year rates since September 2011, although growth has decelerated in 2015.

Rental growth and occupancy rates still seem to be holding up enough to spur more construction in 2016. Single-family homebuilding and new and existing home sales have been trending upward, albeit irregularly. Existing home sales and—probably to a lesser extent—new multi- and single-family construction generate demand for residential remodeling and additions.

Putting all the pieces back together, it is likely that 2016 will be another positive year for all three construction segments. Residential construction spending should record spending growth of 8 to 10 percent. Private nonresidential spending will do nearly as well overall, with strength in office, electric power, pipeline and hospital construction offsetting weakness in manufacturing, retail, warehouse and lodging segments. Public construction will grow moderately. These numbers augur well for both construction and demolition recycling. However, if U.S. economic growth stalls, all categories of construction may cool rapidly as well.

Ken Simonson is chief economist of the Associated General Contractors of America, Arlington, Virginia.