Where is the construction industry going in 2013? Up? Down? Flat? Based on the input from my network of construction professionals, 2013 should be slightly better than 2012, but still nowhere near the booming mid-2000’s.
The U.S. economy shrunk in the fourth quarter of 2012 in a surprise negative 0.1% GDP – the first contraction since Q2 2009. Most economists blamed the contraction on the reduction in government/military spending, the impact from Hurricane Sandy and/or the fiscal cliff drama. However, many experts pointed to a decline in inventory buildups as the prime cause of the contraction. Against a backdrop of strong consumer spending and steady sales and fixed investments by businesses, a decline in inventory generally reflects an underlying strength in the economy. My gut instinct tells me that inventory dropped due to the unplanned, temporary demand for goods created by Hurricane Sandy where millions of people had to replace their damaged possessions and houses.
With more economic uncertainty, inflationary pressures and costlier calamities, the Millennial Generation (those born between 1980 and 2000) have been pushed towards either living with their parents or renting an apartment versus owning a home or condo. Paired with tighter mortgage restrictions, this phenomenon partially explains the recent boom in the new construction of multi-unit rental buildings and the influx of professional investments in single-family-home rentals. The demand from ex-owners of foreclosed properties (who need to rent a home) has also helped fuel the apartment boom.
Construction and Real Estate economic figures, such as the AIA Index, have been improving for several months. When more construction projects are being designed, it’s assumed that actual construction projects will occur in the near future. Granted some of these projects are a “budgeting exercise” and may never see the light of day. That said, 50% of something is better than 90% of nothing. The increase in actual construction filters into an increase in construction jobs which then feeds back into the rest of economy as construction employees purchase goods and services.
Based on discussions that I’ve had with general and concrete contractors, the construction economy in 2013 should be the same or slightly better than 2012. However, this positive feeling is reinforced by the buildup in the backlog of construction companies. Also, as humans, we tend to compare our current sentiments to recent history. The recent history in construction was Depression, so most anything is better. Mindful Contractors are less optimistic (but mostly less certain) about the outlook in 4Q 2013 and onward. Due to the Great Recession, the construction crystal ball has been broken, repaired with duct tape, but is constantly leaking fluids. The thought is that the Millennial Generation will eventually want to own a home, but the real question is when? I think that once the Millennials get decent-paying jobs and create families, then the apartment rental market will lose its luster. Home-ownership will have a revival but home-rental could play a larger role in the United States during the foreseeable future.
– Neel Khosa, Vice President
References:
1. AIA Index (1/23/2013 report)
2. Business Insider (1/30/2013 article)
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