How Long Can This Growth Cycle Continue?: The 2018 Building - PowerPoint PPT Presentation

How Long Can This Growth Cycle Continue?: The 2018 Building Construction Outlook Kermit Baker, Hon. AIA Chief Economist The American Institute of Architects January 29, 2018

Institutional Categories Account for Over Half the Spending on Nonresidential Buildings Share of U.S. nonresidential building construction spending, 2007-2016 Office, 12.3% Commun., 5.0% Commercial/Industrial = Transportation, 9.4% $187.0B (45.5%) Amuse./Rec., 4.5% Retail/Other Comm., Public Safety, 2.5% 15.1% Religious, 1.2% Health Care, 10.1% Lodging, 4.9% Institutional = $223.7B (54.5%) Manufacturing, Education, 21.8% 13.3% 2007-2016 average = $410.7 billion Source: Construction Spending Put-in-Place, U.S. Department of Commerce

2017 Y-T-D Results Show Overall Growth for Nonres. Spending Moderating; Institutional Still Sluggish Billions of $, NSA, Jan-Nov 2017 totals 2017 2016 % change Total Nonres. Bldg. Construction $444.1 $433.2 2.5% Commercial/Industrial 229.5 224.9 2.0% Lodging 26.1 24.6 6.4% Office 63.2 61.4 3.0% Commercial (retail and other) 79.8 69.9 14.2% Manufacturing 60.3 69.1 -12.7% Institutional 214.7 208.3 3.1% Health care 36.7 35.5 3.4% Education 85.3 82.9 2.9% Religious 3.0 3.2 -8.1% Public safety 7.5 7.3 2.6% Amusement and recreation 21.6 20.6 4.6% Transportation 39.9 38.9 2.7% Communication 20.7 19.8 4.4% Source: U.S. Census Bureau, Value of Construction Put in Place, January, 2018

Topics • Administration policy initiatives and the construction outlook: tax reform and infrastructure investment; • Emerging housing affordability concerns; • Labor availability challenges facing the construction outlook; • The Architecture Billings Index and construction forecasts for 2018-2019.

Tax Reform: Potential Implications for Real Estate/Construction & Housing Real Estate/Nonresidential Construction – Quite positive • Favorable business conditions encourage investment, including structures; • Expensing of capital expenditures; • Reduce maximum pass-through rate for business owners (passing through corporate profits to personal income) to 25%; Housing – Modestly negative • Reduced value of mortgage interest/local property tax deduction with higher standard deduction; • Potentially higher interest rates if federal debt levels increase;

Trump Admin. Proposed Infrastructure Program • Key program elements – $200B federal investment over decade $800B state, local, private matching • Opportunities – Support could be politically broad-based; envisioned to be revenue neutral; – Stimulus to economy, construction sector; – Roll back of regulatory hurdles to accelerate implementation; • Challenges – Project financing likely reliant on private user fees, likely excluding many needy infrastructure categories; – Stimulus programs typically not implemented so late in a business cycle; – Likely to exacerbate existing construction labor shortages;

Housing Starts Have Been Trending Up, With Single- Family Growth Outpacing Multifamily National housing starts (000s, SAAR) 1,400 Single-family 1,200 Multifamily 1,000 800 600 400 200 0 Source: U.S. Census Bureau.

Discounting Inflation Effects, House Prices Have Exceeded Values at Prior Peak Nominal Index Value (January=100) 200 +44% 190 180 170 160 150 140 - 26 % 130 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Notes: Monthly data through November, 2017. Peak (trough) occurred in February of 2007 (2012). Source: S&P CoreLogic Case-Shiller U.S. National Home Price SA Index.

House Price-to-Income Ratios Exceed Historical Averages in Most Large Metro Areas Ratio of single-family existing house prices to household income for U.S. and top 15 U.S. metro areas 10 Historic Average (1985-2016) 8 Current 6 4 2 0 Notes: Index compares the median price of homes to the median level of household income in a given area.. Source: Zillow Price-to-Income Ratio, calculated as part of Zillow’s quarterly Affordability Indices; current data for Q3-2017.

Younger Households Disproportionally Buying Homes In More Affordable Markets Homeownership Rate Among Households Under Age 35 in 2016 Average for top 50 metros = 31.3% Note: Data includes largest 50 metro areas ranked by population. Source: JCHS tabulations of US Census Bureau, 2016 American Community Survey (ACS).

The Construction Labor Force Shrank by 1.8 Million Workers Since Peak Number of Persons in the Construction Labor Force (Millions) 10 9.1 0.8 7.7 8 7.3 7.3 0.8 0.5 1.0 6 8.3 4 6.9 6.8 6.2 2 0 2002 2007 2012 2016 Employed Unemployed Notes: Data include workers age 16 and over housed in non-group quarters. The construction labor force includes workers with construction management and trade occupations in the construction industry. Source: JCHS tabulations of US Census Bureau, American Community Survey.

Construction Labor Force Attracts Few Women, Relies Heavily on Younger and Foreign Workers Share of construction labor force (Percent) 45 41.6 40.7 2002 40 2007 33.2 33.2 35 2012 2016 29.1 30 26.3 25.7 24.1 25 21.3 20.9 20.8 20 16.4 15 10 3.2 3.1 5 3.1 2.8 0 Women Under Age 35 Foreign-Born Hispanic Foreign-Born Notes: The construction labor force includes workers with construction management and trades occupations in the construction industry. Data include workers housed in non-group quarters that are either employed or unemployed but available for and seeking work. Source: JCHS tabulations of US Census Bureau, American Community Surveys.

More So Than for Many Other Occupations, Immigrants are Key Source of Construction Labor Immigrant share of labor force by occupation, 2014 50% 46.5% 40% 30% 27.2% 22.7% 19.3% 20% 17.2% 13.6% 11.2% 10% 0% Total labor Construction Agriculture Services Transportation Sales Office/admin. force Note: Construction occupation figures include extraction; figures based on 2014 American Community Survey. Source: Pew Research Center, Occupations of Unauthorized Immigrant Workers, November, 2016.

The AIA’s Architecture Billings Index • Established in the ,mid-1990’s, the ABI is a monthly measure of revenue trends as U.S. architecture firms. • Computed as a diffusion index centered around 50; any score above 50 indicates that design activity is increasing nationally; any score below 50 indicates a decline. • Analysis demonstrates that design activity is highly correlated with construction activity, with a 9-12 month lead. • Sub-indexes for major regions (4); major building categories (3).

Architecture Billings Were Surprisingly Strong in 2017 diffusion index: 50 = no change from previous month, seasonally adjusted 60 55 50 45 Source: AIA Architecture Billings Index

2017 Results Stronger Than Prior Two Years National ABI scores 60 2015 2016 2017 55 53.6 52.6 52.2 51.6 51.4 51.2 50 45 40 Billings Design contracts Source: The American Institute of Architects ABI survey.

Recent ABI Strength Largely Missing the Institutional Construction Sector Billings scores since 2013; index: 50 = no change from previous month 6 0 Residential Commercial/ Industrial Institutional 5 5 5 0 4 5 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct '1 3 '1 4 '1 5 '1 6 '1 7 Source: AIA Architecture Billings Index

Commercial Gains Expected to Ease by 2019, Offset by Upturn in Industrial, Institutional Categories billions $ of construction spending on nonresidential buildings annual % change $600 30% 2017 spending level 2018 % change $419 2019 % change $400 20% $186 $200 10% $167 4.4% 5.2% 4.3% 4.0% 3.9% 3.8% $66 2.9% 2.8% $0 0% -$200 -10% Total Nonres. Comm. Industrial Instit. Source: AIA Consensus Construction Forecast Panel, December, 2017