What’s Ahead for Construction in 2019

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Following years of healthy growth, construction in the U.S. may level off in 2019 as the economic expansion matures and interest rates rise.

U.S. construction starts are expected to total some $808 billion next year, just above the $807 forecast for 2018, according to Dodge Data & Analytics. That follows annual increases of 11% to 14% from 2012 to 2015; 7% increases in both 2016 and 2017; and an estimated 3% increase this year.

“There are, of course, mounting headwinds affecting construction, namely rising interest rates and higher material costs, but for now these have been balanced by the stronger growth for the U.S. economy, some easing of bank lending standards, still healthy market fundamentals for commercial real estate, and greater state financing for school construction and enhanced federal funding for public works,” says Robert Murray, Dodge’s Chief Economist and VP of Economic Affair.

The Federal Reserve has raised rates eight times since 2015 while minutes from its November meeting indicate another quarter-point interest-rate hike is likely in December, and three additional increases could be on the table in 2019.

Meanwhile, the cost of construction materials has risen 7.4% over the past year. Other concerns related to trade tensions, however, may be lessened after the U.S. agreed at the G-20 Summit in Buenos Aires to temporarily suspend plans to raise tariffs on some $200 billion of Chinese goods.

Despite the slowing growth and other negatives, Murray believes fundamentals remain sound and doesn’t expect a repeat of the problems of 2008 and 2009.

“Any erosion in market fundamentals for commercial real estate will stay modest,” he says, adding “the greater funding from state and local bond measures passed in recent years will still be present and it’s likely that federal spending for construction programs will increase once all the federal appropriations bills for fiscal 2019 are finalized.”

Specifically, Dodge expects commercial building in 2019 will decline 3% after 2% gains in 2017 and 2018; institutional construction will climb 3% following a 1% increase in 2018 and 18% surge in 2017; and manufacturing plant construction will advance 2% on the back of an estimated 18% increase this year.

“While 2018 market fundamentals for offices and warehouses are healthy, next year vacancy rates are expected to rise as the economy slows, slightly dampening construction. Hotel construction will ease back from recent strength, and store construction will experience further weakness,” Dodge said in the 2019 construction industry outlook.

Separately, Moody’s predicts growth in U.S. construction spending will slow to about 3%-5% in 2019 from 4%-6% this year, with gains in commercial activity expected thanks to government programs such the Fixing America’s Surface Transportation (FAST) Act and other transportation measures.

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