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US Builders Optimistic Amid Early Signs of Construction Slowdown

Apt/Condo Construction Rebounds Sharply in January; Office, Hotel and Warehouse Construction Declines 15%
March 5, 2018
Pasternack Properties broke ground on the 1.1 million-square-foot Warehouse 1 in the TEN Distribution Center industrial park in Phoenix, the first of six buildings planned for the $300 million, 3.6 million-square-foot industrial park.


The value of new multifamily development starts jumped nearly 40% while nonresidential construction turned flat or declined in January as U.S. construction entered 2018 in a state of "decelerating expansion," according to recent data from Dodge Data & Analytics.

Total U.S. construction starts declined a modest 2% to a seasonally adjusted $725.9 billion in January following a 13% increase the prior month, largely due to an 18% pullback in public works, electric utility and gas plant construction.

The value of multifamily housing starts spiked 39% in January, with 11 projects valued at $100 million or more breaking ground as apartment and condominium construction showed fresh legs after three straight months of declines to close 2017. As a group, the commercial construction categories excluding multifamily - office, industrial, retail and hospitality projects - fell 15% in January. The value of new office construction starts declined 31% after a sharp 44% increase in December. Hotel construction dropped 13% in January after a modest 4% gain in December.

"January’s level of activity is consistent with the picture of a decelerating expansion," said Robert Murray, chief economist for Dodge Data & Analytics. "Some dampening may come from higher material prices and tight labor markets, yet while interest rates are rising, the increases are expected to stay moderate this year."

The supply wave has not crested in the U.S. multifamily sector, with CoStar’s forecast calling for delivery of approximately 500,000 units over the next two years, with much of the new development concentrated in large urban projects near CBD office buildings and retail. While office construction starts closed out 2017 below their historical average for the 10th consecutive year, office deliveries are expected to reach a cyclical high this year, with CoStar forecasting that the new supply will cause the U.S. office vacancy rate to begin ticking up as completed construction finally begins to outpace demand.

Over 225 million square feet of industrial properties delivered in 2017, the highest recorded in over 10 years, and of January 2018, over 230 million square of industrial space had broken ground in the last year, much of speculative development. The level of retail construction remained well below historical average, with just over 60 million square feet under construction as of December compared with last cycle’s peak of nearly 170 million square feet.

Despite slowing conditions in almost all sectors besides multifamily, optimism abounds in the construction and design industries. The "optimism quotient" in Wells Fargo's 2017 Construction Industry Forecast released this week was 133, a 10-point increase over last year and the highest reading for the index since the late 1990s.

Total nonresidential construction, including commercial, institutional and public works projects, remained flat, edging up 1% in January to $240.8 billion despite a 149% jump in entertainment-related projects, including the groundbreaking for the $1.3 billion domed stadium in Las Vegas that will be the new home for the Oakland Raiders, slated for occupancy prior to the 2020 NFL season.

Murray noted economic growth from this year's tax cuts may benefit commercial building and manufacturing construction starts, while the institutional portion of nonresidential building should stay close to last year’s historically elevated levels.

Construction of educational facilities, the largest nonresidential building category by dollar amount, slipped 1% while health-care facilities retreated 10% in January, despite the start of several large hospital projects such as the $254 million Hubbard Center for Children Medical Center in Omaha NE; and the $120 million replacement for the Memorial Hospital complex in York, PA.

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