Forecast 2013: Construction Market Outlook

Construction Forecast 2013

A sluggish economy is often directly reflected in the health of the construction industry, both in the commercial and residential sectors. It is only when confident in future success and prosperity that businesses and individuals choose to create lasting roots by breaking ground for new buildings. Since the economic downturn in 2008, the housing and construction markets have been filled with hesitation, uncertainty, and an overall sense of stasis. The next year, however, is looking as if it just might be a better year for all involved, pending the resolution of the fiscal cliff and the perpetuation of consumer confidence.

By The Numbers

In a release from the Associated Press (AP) in mid-November, U.S. home sales were continuing to climb, both for previously occupied homes and for new construction. One driving factor is that apartment rent is on the rise, prompting more families and individuals to consider purchasing sooner rather than later. Another factor is the continuing record low mortgage rates being offered. According the AP report, the average rate on a 30-year fixed mortgage has not risen above four percent for the entire year.

Confidence has risen so much that the National Association of Home Builders & Wells Fargo, in their latest builder sentiment index released on November 19, revealed that the index is at 46, up five points since October. According to the AP report, that is the highest reading since just before the housing bubble burst when it peaked in the low 70s in 2005 and 2006, and it is a trend first seen on the upward tilt in October of 2011, when the index stood at just 17. Sales of new homes hit an adjusted rate of 389,000 in September, the highest level seen in more than two years, and a 21.7 percent increase over last year.

The number of houses available for sale has dropped considerably as well. At the end of October, there were only 2.14 million homes on the market, a figure the AP reports as the lowest number in over a decade.

With all this positive data in hand, Barclays Capital economist Michael Gapen comments that the report is encouraging. “Our view is that housing is in a recovery phase,” he added.

The recent release of The McGraw-Hill Construction Report indicates that “total U.S. construction starts for 2013 will rise 6% to $483.7 billion, slightly higher than the 5% increase” that was estimated for the 2012 calendar year. This heightened climate of construction, along with the fact that lower interest rates will stretch the dollars available to home owners, will help to bolster sales at industrial and construction distributors across the nation, as projects will overall require more materials, and more expensive materials, than ever before.

Robert Murray, McGraw-Hill Construction’s Vice President of Economic Affairs, says there are “several positive factors to benefit construction” in the coming years. He cites low interest rates and improving market fundamentals as among the factors that will help bolster the construction market in 2013.

Going Green

As in other sectors as well, “green” initiatives in the housing market continue to trend upwards, even while they are often more costly than traditional materials and processes. According to the latest McGraw-Hill Construction Study, more than half of all builders are predicting more than sixty percent of their work to be green by 2015. This is up from only 28 percent of builders in 2012. This data implies that building green has become a norm, rather than just a niche.

The top reason for builders to look at green construction in 2008 was “doing the right thing.” Today, in 2012 and looking ahead to 2013 and beyond, firms report that market demand and client demand are the top reasons they build with green in mind. The fact that green is now a demand rather than a bonus calls attention to a distinct transition and shift in the industry. Geraud Davis, president and CEO of United Technologies Climate Controls & Security, also confirms this trend, saying that they “now see more pull than push for green buildings.” An interesting point to note is that builders not currently working in the green building industry still feel that the primary driver motivating future green building is the desire to do the right thing, and not market demand.

Slow, But Steady, Recovery

The McGraw Hill Construction Report presents much to be encouraged by in the year ahead. Some key predictions include:

  • 24% increase in dollars and a 21% increase in units for single family housing
  • 16% increase in dollars and a 14% increase in units for multi-family housing
  • 12% increase in commercial building, slightly faster than the 5% gain estimated for 2012
  • 13% drop in institutional building, with a focus on higher education and healthcare

These numbers here and the ones presented earlier in the article paint a brief picture of what is ahead for the construction industry, but they also tell a story about the economic conditions in recent years and how those conditions have changed the face of not only construction, but the idea of the American Dream. The fact that more Americans will be buying and building homes in the next year, at four times the rate of years since 2006, is an extremely telling statistic. The confidence levels in the economy as displayed by those figures tells the industry that consumers are ready to stick their neck out again and chase the recently-elusive For Sale signs that have permeated front yards across the country. Consumers willing to buy and build homes is indeed a good sign that the economy and the construction industry is returning to a level of normalcy that has not been experienced for over half a decade.