HARDI/ITR Construction Forecast, Q3 2014 (Part 1)

Economic Overview

HARDI and ITR Economics upgraded their outlook for U.S. industrial production growth by 0.8 percent to 2.4 percent for 2015. After a slowdown in the first half of 2014 the second half is showing positive trends in new and unfilled orders and capacity utilization rates.

The Prime Rate has remained flat as expected, but declines in long-term interest rates are benefiting the economy. Despite year over year decline of corporate profits in the first half of the 2014, says ITR, the stock market has mostly shaken off the impact to stock prices,

In the housing market, housing starts are expected to increase over the next two years. ITR revised its forecast from 1.022 million to 1.09 million for 2015 and from 1.153 million to 1.192 million for 2016. Existing homes, however, made gains in pricing that have left affordable homes below $200,000 scarce and are pushing first-time buyers out of the market. This trend is expected to continue as home prices continue to rise along with mild increases in mortgage rates and tightening credit.

Nonresidential construction is picking up across most sectors. Growth through August 2014 was 9.6% higher than last year but the pace of growth is expected to slow as the year winds down. Office construction was up 19.8 percent in August bolstered by construction of data centers.

Northeast Region

Housing construction in the Northeast dropped off in the middle of 2014 with the housing permit authorizations down 9.4 percent year over year. Slowdowns were pronounced in Massachusetts and New York State and Vermont slipped to a negative growth rate of -0.3 percent. Home appreciation trends were inconsistent across the region with gains New York State, Vermont, Massachusetts and Maine and declines in the remainder of the region. The forecast for growth in housing construction in the region is 2.8 percent for 2014, accelerating to 16.7 percent in 2015, and 14.3 percent in 2016.

Commercial construction projects are beginning to surface as the general economy strengthens. In the Northeast, New York state, New Hampshire and Massachusetts saw percent of spending increase by double digits in August on a year over year basis with New York spending up 43.9 percent. In general for the region, spending is expected to decrease through mid-2015 before expanding in 2016. The construction growth forecast is unchanged at 9.6 percent for 2014, 1.6 percent for 2015 and 9.6 percent for 2016.

Mid-Atlantic Region

Housing permits fell in August by 7.8 percent in the Mid-Atlantic and have been in an overall trend of deceleration throughout 2014. The entire region is experiencing a slower growth rate. Housing permits authorizations are expected to improve mid-2015. Rising home prices has moved buyers to rent and inflated rental prices. ITR forecasts 3.9 percent growth in the housing construction for 2014, 12.7 percent in 2015, and 7.8 percent in 2016.

Commercial construction in August was 8.8 percent below year ago level but is rebounding. Annual construction activity is expected to improve as we move into the new year and expand by mid-2015. Metro areas are showing increased activity but other regions are lagging below year ago levels. ITR’s forecast remains unchanged at -5.8 percent growth in commercial construction for 2014, 6 percent in 2015, and a jump to 14.1 percent in 2016.

Southeastern Region

Housing in the Southeast continued to slow through August but have picked up momentum in the last three months. Nashville’s real estate market has boomed and was ranked as the 12th US city for overall real estate prospects last year. Nashville has led the region with an average 42.2 percent annual growth since 2012 with 26.2 percent growth in the last 12 months. Growth continues in all states in the Southeast region except for Virginia which has seen housing permits growth slip to -7.0 percent. Home price growth is slowing across the region except for North Carolina which is accelerating. The Miami area has seen property values grow in both single and multifamily markets due to a surge of international buyers. ITR raised its forecast for the Southeast to 2.8 percent for 2014, 7.7 percent in 2015, and 9.1 percent growth in 2016.

Commercial construction in the Southeast is recovering nicely and was down only 4.8 percent y/y at the end of third quarter. Spending in the last quarter totaled $3.1 billion for the strongest quarter in 18 months but still annual spending is still just 42 percent of the pre-recession peak level. Office building demand is expected to pick up as the vacancy rate drops below 15 percent. Georgia and Virginia slowed in commercial construction activity in the last quarter, but improvement was seen in the rest of the region. ITR revised its forecast upward to -2.9 percent for 2014, 4.7 percent in 2015 and 10.4 percent in 2016.