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Forecast: Commercial Construction Spending Growth to Reach Decade High in 2019

Steady Beat of Commercial Construction Driving Bullish Growth Projections
August 10, 2018
Construction financing is readily available for major projects like the 1,055-room Omni Boston Hotel at the Seaport, which will be the fourth largest hotel in Massachusetts when it opens in early 2021.

Spending on hotel, office, distribution and other commercial and public buildings will likely expand for an unprecedented ninth consecutive year in 2019, according to a consensus forecast by the country's top industry economists.

The panel of experts from construction industry analytics company Dodge Data & Analytics, trade organization Associated Builders & Contractors and others surveyed by the professional organization American Institute of Architects this week raised its prediction for nonresidential construction spending in 2018 to increase 4.7 percent, up from the 4 percent increase it forecast in January.

The panel also slightly raised its spending forecast for 2019 to 4 percent at midyear from 3.9 percent in January.

"If these projections materialize, by the end of next year, the industry will have seen nine years of consecutive growth," said American Institute of Architects Chief Economist Kermit Baker. "Much of the optimism in the outlook is coming from the over performing commercial sector."

The panel's consensus is that spending on commercial buildings will increase 6.7 percent this year, up sharply from 4.4 percent projected at the beginning of the year, and 3.4 percent in 2019, up from 2.9 percent in the January forecast.

Total spending by the end of next year on nonresidential buildings, which include public safety, health care, education and religious facilities, is expected to be 5 percent greater than the last market peak in 2008, Baker said.

The bullish forecast is significant because as recently as a year ago, the same economists warned that a construction industry downturn could be on the horizon due to a shortage of construction workers, rising interest rates and construction costs and concerns that the economy was slowing. U.S. nonresidential spending increased just 2.2 percent last year, barely outpacing rising inflation in building costs.

One key sign that construction won't be slowing any time soon is architect workloads, which continue to increase. Architecture firms saw healthy growth in billings and new project activity last year, and both indicators remain strong through the first half of 2018.

Billings by design firms are an indicator of hard construction spending a year to 18 months in the future. Architects designing all types of buildings and housing are reporting average project backlogs of more than six months, the longest since 2010.

"It is unusual to see business conditions improve this late in a business cycle," Baker said, adding that healthy corporate profit growth and deregulation has spurred the confidence of the private sector.

Financing is readily available for trophy commercial projects like construction of the Omni Boston Hotel at the Seaport in Boston, which has been in the planning stages for four years.

Chicago real estate brokerage Jones Lang LaSalle (JLL) this week announced $330 million in financing for the hotel, which is expected to be the fourth largest in Massachusetts when it opens in less than three years.

"Lodging supply growth in the Seaport District has been minimal," said JLL Managing Director Kevin Davis, part of the team that closed the deal. "Opportunities to finance a project of this caliber are rare."

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