2016 Construction Industry Overview

Overall, the construction industry has experienced far from rapid growth in 2016. With oil prices low, major capital projects from firms involved in the energy and power industry saw low demand, correlating to a lackluster year within the greater engineering and construction sector. Total construction spending growth from a year ago, including residential and nonresidential, has lagged, hitting the lowest level of year over year growth since 2012. Specifically, business fixed investment growth, which includes investment in property, plant and equipment, has reflected the pessimism of today’s construction environment, remaining very soft over the past year. A major trend impacting the residential, particularly single-family, construction industry has been demand. Millennials, with their urban attraction and debt-aversion, have much preferred renting to home owning.

It’s hard to not mention President Trump’s $1 trillion infrastructure spending plan when discussing public construction. Uncertainty surrounding magnitude and time table make this hard to predict, given that it took Congress over 10 years to pass its current long-term funding plan, which amounted to 1/3 the size of the proposed plan and half the time horizon. One part of Trump’s infrastructure plan that has really excited the construction industry is collaboration. The promotion of public-private partnerships might give the construction industry the boost it needs to return to its pre-recessionary glory. Regardless of the exact magnitude or timeline, policy makers on both sides of the aisle agree that significant investment into the crumbling infrastructure of the US is desperately needed, and quickly. The $124 billion municipal construction industry has experienced lackluster performance in the past 5 years, with only 0.3% of annual growth. Funding for many public projects has stalled amongst economic concerns, and growth in the industry is projected to remain modest for the next 5 years.

10 comments to 2016 Construction Industry Overview

  • Alexander

    It will be interesting to see how Millennials will change the CRE industry. They clearly prefer apartments, but that does not necessarily mean the construction industry will slow down. Multifamily apartment construction is very capital intensive compared to single family residential. So while residential spending may decrease, multifamily spending will probably increase as Millennials reach adulthood.

    • You can easily check the data, the same series breaks down single family vs 5-unit and above residential construction, public construction and business construction.

  • cohend17

    It is true that demand for multifamily assets is still rising. Rent growth has doubled inflation growth over the last year and vacancy, generally, continues to drop. However, demographically speaking, young millennials are the main driver of demand. It is important to note that many millennials are also reaching the 30 year mark (or more). This means that more will be finding job security and starting families, causing them to move into houses. Additionally, the aging boomer generation will most likely seek to downsize to a more affordable home or move to a retirement community, probably not urban multifamily. I would not look for one asset class to wildly outperform the other, rather, it seems like there could be a way for steady growth in both areas.

  • kwindle3717

    I think your comment about construction in the oil and energy sector is interesting, especially in light of President Trump’s recent executive order pushing construction of the Dakota Access and Keystone XL pipelines. The current low oil prices are not stimulating construction of new infrastructure, and extraction infrastructure built during the oil price boom is becoming too expensive to use. While this project will promote the construction of new pipelines, it’s possible that it also causes further depression of the oil industry and construction companies associated with it by increasing the supply of oil and thus decreasing prices even more. It will be interesting to see the effects of this project (if it even ends up happening).

  • ghimirer17

    I agree with Katie’s comments on the effect of the Dakota Access and Keystone XL pipelines contributing to lower oil prices (if it happens), and what it could mean for the construction industry? Specifically, since you mention Trump’s infrastructure spending plan and the potential of collaboration between private and public, I wonder if these two projects could get in the way of the success of the plan in terms of construction projects for items other than pipelines. In addition, I found your point about millennials demanding rent vs. home ownership to be compelling as it was not something that I had thought about previously, but it makes a lot of sense. I wonder what effect this could have on the family housing market vs. apartment complexes? Either way it will be interesting to see the effect on the construction industry over all.

  • lancer17

    I find the energy industry comment relative to Trump’s infrastructure plans fascinating. While the infrastructure projects for DAPL and Keystone XL will bring large construction projects, hostility towards Mexico (and the collapse in the Peso) would largely restrict natural gas and power infrastructure development in the Southwest. Mexico has recently undergone many political reforms, one of which includes the deregulation of the energy markets. The United States would be the largest supplier of primary energy sources in the near-term to the Mexican Market. If these plans can’t be carried out due to the administration’s hostility, then are these infrastructure projects cancelling each other out? Clearly the construction industry would benefit from the oil pipelines, but border-crossing gas pipeline projects could be brought to a halt.

  • Demographics! Urbanization! The US is no longer building new cities and new interstate highways. Population is growing slowly, and families are smaller [in part because we’ve a big share of the population with empty nests, or only one member still alive]. And housing and roads and malls last a long time. Is there a future in construction? Yes, lots of infrastructure needs fixing, residences too. Bridges that will fall down, dams that will collapse, and potholes that slow traffic and increase driving costs by, er, accelerating depreciation of motor vehicles…

  • santanagarcesk17

    President Trump’s infrastructure plan reminds me of the TVA, where President Roosevelt saw opportunities for employment and modernization through construction. Similarly, most of China’s development and growth has come from increased investment in infrastructure. Although we have reached full employment, this election has highlighted an anger at a lack of mobility and job growth that’s usually seen in the cities. An overhaul of infrastructure could bring a lot of good to the United States and give a boost to economic indicators giving Americans a clearer sense of recovery.

  • Yes, but how many of those who support Trump are willing and able to take construction jobs? Without unions to see that pensions and the like are part of the package, they won’t be particularly attractive, and they certainly won’t be feasible for the many older workers and those with bad knees (that is, those severely overweight). Many of the “horizontal” construction jobs do also require prior human capital. If the estimated (by whom? reliability?) 11 million illegal immigrants raise their hand and volunteer to be deported, then maybe wages would rise a lot, but…would that be offset by inflation threats and higher interest rates? Or will Trump try to pack the Fed?

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