New Starts Come in Below Forecast

NORCROSS, GA—Construction starts nationwide came in below expectations during the second quarter, CMD said Thursday. Holding the momentum in check was the sluggish US economy as Q2 began, with both residential and non-residential building underperforming the locally-based construction data provider's forecast.

As a result, CMD has downgraded its projection for growth in construction this year, to 7.1% from the 9% that was forecast in its previous report. However, the report says, “starts growth should pick up from the second half of the year and into 2016 in line with the broader economy.”

In the residential sector, says CMD, single-family housing starts grew 9% over a year earlier, marking the fifth quarter of consecutive growth. Although multifamily starts were “less buoyant,” CMD sees reason to believe that “the underlying trend is stronger than is currently appearing.”

The firm points a growing trend in cities toward multi-purpose buildings, “whereby some residential units are included in an office block or retail center, so some of these residential buildings may be classified under other segments.” In addition, Census Bureau data on multifamily starts picked up as Q2 went along, meaning that “we may see a similar trend” reflected in CMD data in the months to come.

The outlook for non-residential starts is more uncertain, CMD says, on account of “the lukewarm pace of business investment growth.“ Accordingly, commercial office, education and healthcare real estate all underperformed relative to expectations.

Within the non-residential sector, “the continued decline in the construction of private offices has been particularly disappointing,” according to the report. “Office vacancy rates are currently near six-year lows, meaning that there should be plenty of scope for new construction in order to raise capacity. We expect that as business investment picks up in the second half of the year, construction of new office space will gain momentum quickly, so 2016 growth should be particularly robust.”

By contrast, industrial construction surged ahead on the recent on-shoring trend for manufacturing activity. Q2 saw a number of industry-driven mega-projects launch in Q2, such as a $2-billion Tesla Motors battery plant in Nevada and a $1-bilion methanol plan in Louisiana.

Another area of growth in new construction last quarter was civil engineering, which grew 7.7% over the year prior. CMD says spending on infrastructure projects from local and state governments is making up for tightened federal budgets in this area.

The sluggish economy at the start of Q2 also led CMD to lower its GDP forecast for the year, from 2.7% to 2.3%. However, the firm is predicting that stronger activity in the year's second half and beyond, and thus has raised ts GDP forecast for next year to 2.8%, up from 2.7% in its previous report.

“Last quarter saw the wider US economy post somewhat disappointing results, and the construction industry followed suit,” says Alex Carrick, CMD's chief economist. “However, the transitory nature of many of the economy's ailments and positive signs from the labor market should translate into more robust growth in the construction market over the long term.”