The Industry Is Poised for a Breakout Year, If That Infrastructure Plans Comes Through.
By Mark S. Kuhar and Josephine Smith
Last year, everyone eagerly anticipated the “bold, visionary plan for a cost-effective system of roads, bridges, tunnels, airports, railroads, ports and waterways, and pipelines” that was supposed to be released in the first 100 days of the Trump Administration.
Anticipation for the plan was evident at ConExpo-Con/Agg in March 2017, where aggregates producers turned up in droves to spend valuable capital upgrading equipment and technology. By all accounts it was a record show.
The industry is still waiting. But there is new hope. According to recent media reports, President Trump plans to release his long-promised infrastructure proposal early in 2018, and at press time some details were being leaked.
The White House plan calls for allocating at least $200 billion in federal funds over 10 years and counts on states, localities and the private sector to kick in $800 billion to reach the promised $1 trillion in investment. No word yet as to where that $200 billion in federal dollars will come from.
Not the plan everyone expected, but it could work.
“Last year, we pressed our priorities of an increased fuel tax and robust infrastructure investment and strongly supported regulatory reform efforts by Congress and the administration,” said Michael Johnson, president and CEO of the National Stone, Sand and Gravel Association (NSSGA). “Transportation Secretary Elaine Chao has said that an infrastructure bill is still on the administration’s priority list for 2018, following efforts to reform health care and the tax code. It will take a massive concerted effort to move the needle on an immediate and long-term solution to fix our nation’s highways, ports and airport, and NSSGA is ready to team with general construction contractors, transportation and trucking associations and highway users to get the job done.
“A new MSHA administrator will also bring changes to the industry in 2018,” Johnson said. “NSSGA opened discussions with David Zatezalo and his team to push for a culture of encouraging compliance versus the punitive enforcement environment of the last administration.”
The Public Is On-Board
If states and localities are going to be kicking in more money, the public is on board. Voters in 20 states approved more than 80 percent of 215 transportation investment ballot measures on election day, Nov. 7, 2017, mostly at the local level, according to analysis conducted by the American Road & Transportation Builders Association’s Transportation Investment Advocacy Center (ARTBA-TIAC).
Preliminary results show voters approved 176 of the 215 measures, or 82 percent. Results are still pending in six Michigan localities. The approved measures will support $2.9 billion in new transportation investment revenue and $1.3 billion in continued funding through tax extensions or renewals. The timing of the market impact of these actions is difficult to project as revenue approved will last as long as 25 years.
Maine voters approved the only statewide measure – a $105 million transportation infrastructure bond – with 72 percent support. This was the state’s fifth successful transportation bond in six years.
Voters in Pinal County, Ariz., approved a half-cent sales tax that will total $640 million for highway construction over the next 20 years. In Pinellas County, Fla., a renewal of a 1 cent countywide sales tax will provide a total of $412 million for road, bridge and trail projects. Voters in Denver also approved a measure to provide a $415.5 million bond to fund road and bridge repairs as part of a larger $937 million bond package that voters signed off on.
Georgia voters approved all 12 sales tax measures on the ballot. As part of the state-wide transportation funding increase passed in 2015, legislators included a provision to allow local governments to raise revenue for infrastructure investment through ballot initiatives.
The largest number of measures were in Michigan and Ohio – representing more than two-thirds of the initiatives tracked by ARTBA-TIAC. Many of these were smaller property tax measures to renew local funding for roads, streets and bridges for a five-year period.
Voters also approved several other measures earlier in the year, among them a $1.6 billion bond in West Virginia approved Oct. 7 with 73 percent support.
Including the most recent results, voters have approved 74 percent of over 1,200 transportation investment ballot measures tracked by ARTBA-TIAC since 2007.
New Jersey voters showed their support for transportation funding by reelecting lawmakers who backed the state’s 2016 gas tax increase. ARTBA-TIAC tracked New Jersey state legislative elections as lawmakers faced voters for the first time since approving the October 2016 state gas tax increase.
On Nov. 7, 100 percent of 61 New Jersey lawmakers who voted for the gas tax increase in 2016 and ran for reelection won their seats. The results compare to 97 percent of 36 lawmakers who voted against the gas tax increase and won reelection.
The findings corroborate an earlier ARTBA-TIAC report that found voting for a state gas tax increase does not hurt reelection chances. The analysis of more than 2,500 state legislators from 16 states who voted to increase state gas taxes for transportation funding found that 91 percent were returned to office in the next general election. This included 89 percent of Democratic legislators and 95 percent of Republican lawmakers. The reelection rates are similar among lawmakers who voted against raising gas taxes.
While the industry was left waiting for the infrastructure plan, the aggregates industry spent most of 2017 treading water. An estimated 656 million metric tons (Mt) of total construction aggregates was produced and shipped for consumption in the United States in the third quarter of 2017, a slight decrease compared with that of the third quarter of 2016, according to Jason Willett, crushed stone commodity specialist for the U.S. Geological Survey (USGS.) The estimated production for consumption in the first nine months of 2017 was 1.69 billion metric tons (Gt), a slight decrease compared with that of the same period of 2016.
An estimated 387 Mt of crushed stone was produced and shipped for consumption in the United States in the third quarter of 2017, a slight decrease compared with that of the third quarter of 2016. The estimated production for consumption in the first nine months of 2017 was 1.01 Gt, a slight decrease compared with that of the same period of 2016.
The estimated U.S. output of construction sand and gravel produced and shipped for consumption in the third quarter of 2017 was 269 Mt, virtually unchanged compared with that of the third quarter of 2016. The estimated production for consumption in the first nine months of 2017 was 673 Mt, a slight decrease compared with that of the same period of 2016.
The estimated production for consumption of construction aggregates in the third quarter of 2017 decreased in four of the nine geographic divisions compared with that sold or used in the third quarter of 2016. Production for consumption decreased in 21 of the 39 states for which estimates were made.
The five leading states were, in descending order of production-for-consumption, Texas, California, Pennsylvania, Ohio and Michigan. Their combined total production for consumption was 184 Mt, a decrease of 3 percent compared with that of 2016.
The estimated production for consumption of crushed stone in the third quarter of 2017 decreased in four of the nine geographic divisions compared with that sold or used in the third quarter of 2016. Production for consumption decreased in 23 of the 44 states for which estimates were made.
The five leading states were, in descending order of production for consumption, Texas, Pennsylvania, Ohio, Florida and Illinois. Their combined total production for consumption was 120 Mt, a decrease of 4 percent compared with that of the same period of 2016 and represented 31 percent of the U.S. total.
The estimated production for consumption of construction
sand and gravel in the third quarter of 2017 decreased in five of the nine geographic divisions compared with that sold or used in the third quarter of 2016. Production for consumption decreased in 23 of the 43 states for which estimates were made.
The five leading states were, in descending order of production for consumption, California, Minnesota, Texas, Michigan and Washington. Their combined total production for consumption was 101 Mt, a slight increase compared with that of the same period of 2016 and represented 38 percent of the U.S. total.
Construction spending during October 2017 – the most current available at press time – was estimated at a seasonally adjusted annual rate of $1,241.5 billion, 1.4 percent (±1.5 percent) above the revised September estimate of $1,224.6 billion, according to the U.S. Census Bureau. The October figure is 2.9 percent (±1.6 percent) above the October 2016 estimate of $1,206.6 billion.
Highway construction was at a seasonally adjusted annual rate of $86.8 billion, 1.1 percent (±6.3 percent) above the revised September estimate of $85.9 billion.
During the first 10 months of this year, construction spending amounted to $1,029.6 billion, 4.1 percent (±1.2 percent) above the $988.8 billion for the same period in 2016.
Spending on private construction was at a seasonally adjusted annual rate of $949.9 billion, 0.6 percent (±0.8 percent) above the revised September estimate of $943.8 billion.
- Residential construction was at a seasonally adjusted annual rate of $517.7 billion in October, 0.4 percent (±1.3 percent) above the revised September estimate of $515.4 billion.
- Nonresidential construction was at a seasonally adjusted annual rate of $432.2 billion in October, 0.9 percent (±0.8 percent) above the revised September estimate of $428.4 billion.
In October, the estimated seasonally adjusted annual rate of public construction spending was $291.6 billion, 3.9 percent (±2.6 percent) above the revised September estimate of $280.7 billion. Educational construction was at a seasonally adjusted annual rate of $79.0 billion, 10.9 percent (±2.5 percent) above the revised September estimate of $71.2 billion.
“One could scarcely imagine circumstances more consistent with rapid growth in nonresidential construction spending,” said Associated Builders and Contractors (ABC) Chief Economist Anirban Basu. “The U.S. economy is humming, coming up on two consecutive quarters of 3 percent growth on an annualized basis. Consumers, who have been the driving force of the recovery to date, are more confident than they have been in 17 years.
“Stock prices have surged, due in part to liquidity swirling around the growth,” said Basu. “The worldwide economy has not been this healthy for roughly eight decades and global policymakers continue to pursue pro-growth agendas. Interest rates remain extraordinarily low, resulting in greater demand for assets that have the capacity to generate significant income, including commercial real estate. On top of this, there are hopes in corporate America for tax reform, which would presumably accelerate economic growth and bolster corporate profitability.
“In October, nonresidential construction spending rose as one might expect given broader macroeconomic dynamics. There were even signs of life in certain publicly financed categories,” said Basu. “It is likely that construction growth will pick up further next year due to numerous factors, including growing confidence among policymakers in rapidly expanding communities. That confidence should translate into more spending on public works. Of course, whether this logic prevails will depend in part on tax reform legislation outcomes in Congress.”
While overall construction spending reached a record high in October, public-sector investments in infrastructure continued to lag earlier levels, according to the Associated General Contractors of America. Association officials said federal, state and local officials should address the growing shortfall in transportation, water and wastewater infrastructure in the interests of economic growth and public health and safety.
“There was healthy growth this October in both public and private construction spending, with an exceptionally strong surge in public educational construction,” said Ken Simonson, the Associated General Contractors of America’s chief economist. “But for the first 10 months of 2017 combined, public investment – specifically in infrastructure – has fallen short of the already inadequate amounts posted in the same period of 2016.”
In contrast to the increase between September and October, public construction spending year-to-date shrank 3.4 percent from January through October combined, compared with the same months of 2016, with year-to-date losses concentrated in infrastructure categories, Simonson noted. Public spending year-to-date on highway and street construction declined 4.3 percent from 2016; spending on transportation (transit, airports, rail and ports) slipped 1.6 percent; investment in sewage and waste disposal tumbled 15.9 percent; and water supply construction dollars plunged 9.6 percent.
In contrast to infrastructure spending, which generally depends in part on federal funds, school and university construction – funded largely by local property taxes and tuition, respectively – climbed 2.2 percent from 2016 to 2017. Private construction spending fared better, the economist pointed out. Private residential spending rose 11.2 percent year-to-date, with gains for new single-family construction (9.0 percent), multifamily (3.9 percent) and improvements to existing housing (17.2 percent).
Private nonresidential spending year-to-date edged up 1.5 percent. The largest private nonresidential category, power (electric power plus oil and gas field and pipeline construction) declined 2.5 percent year-to-date, while the second-largest segment, commercial (retail, warehouse and farm construction) soared 14.7 percent as warehouse construction boomed.
Association officials called on federal, state and local officials to boost funding for infrastructure. The officials said that new infrastructure funding is vital for supporting economic growth, as well as public health and safety.
“It is essential to increase the nation’s investment in roads and other transportation facilities to keep the economy growing,” said Stephen E. Sandherr, the Associated General Contractors of America’s chief executive officer. “And investment in safer highways, drinking water and wastewater systems are important for public safety and health.”
Transportation Construction Forecast
The U.S. transportation infrastructure market is anticipated to rebound slightly next year, following a 2.8 percent drop in 2017, according to the American Road & Transportation Builders Association’s (ARTBA) economic forecast released Nov. 30.
Total domestic transportation construction and related-market activity is forecast to reach $255 billion in 2018, a year-on-year increase of 3.2 percent after adjusting for project costs and inflation. The 2017 market performance is expected to come in at $247.1 billion.
The 2017 market drop was largely driven by the overall national decline in state and local highway and bridge spending, which is expected to be down 6.4 percent and 7.7 percent, respectively.
ARTBA Chief Economist Dr. Alison Premo Black shared the findings in her multimodal forecast during a webinar for analysts, investors, transportation construction market executives and public officials.
Although the overall U.S. transportation infrastructure market will see modest growth in 2018, the situation will likely vary significantly by state and region, according to Black. The market is forecast to grow in 20 states and Washington, D.C., and slow in 23 states, with the remaining seven expected to be relatively flat.
“The fundamentals of this market are positive,” said Black. “There are a lot of things going on that could help support growth in the coming years, including the local and federal investment part of it. It really depends on where you are working. We are seeing much more variation in the regional, state and even local or urban level. There are states and areas that are showing very strong, significant growth and potential for growth over the next few years.”
The largest 2018 market growth is anticipated in California, Florida, Hawaii, New York, Virginia and Washington, ARTBA said. The association anticipates a slowdown in new work in Arizona, Colorado, Delaware, Maryland, Nevada and Oklahoma. The Minnesota, New Jersey, Ohio, Texas and Iowa markets are anticipated to be steady.
Federal highway funding of state DOT programs provided by the 2015 FAST Act will continue to show inflationary growth in 2018, providing a degree of market stability in every state.
Black noted that although there have been significant increases in state and local revenues for transportation purposes in a number of states over the past several years, some of that revenue is dedicated to debt reduction or has been delayed from reaching the transportation market due to state budget issues.
These factors, combined with receding state markets due to completion of bond programs or declining or inflation-eroded state revenues, continue to cause a drag on the overall U.S. transportation infrastructure market.
The bright spots of the transportation construction market continue to be airport terminals, public transit, Class 1 railroads and private driveway, street and parking lot construction associated with residential and commercial developments. These markets saw real market growth in 2017, and are forecast to continue growing in 2018.
Among the findings in Black’s forecast:
Public and Private Highway, Street
and Related Construction
- The real value of public highway, street and related work by state DOTs and local governments – the largest market sector – is expected to increase a modest 2.4 percent in 2018 to $58.1 billion after falling 6.4 percent to $56.8 billion in 2017.
- Six highway-related public-private partnership (P3) projects came to financial close in 2017, totaling over $7.5 billion in investment.
- Work on private highways, bridges, parking lots and driveways will increase from $62.4 billion in 2017 to $63.3 billion in 2018, and will continue to grow in the next five years
- Overall, highway program contract awards are up in 13 states compared to a three-year historical average, down in 26 states and Washington, D.C., and within a 5 percent range up or down in 11 states.
Bridges and Tunnels
- With some major projects, such as the New NY Bridge and Ohio River Bridge reaching conclusion, the pace of bridge work has slowed.
- The public bridge and tunnel construction market is expected to increase slightly in 2018, to $31.3 billion.
- Work in 2017 is expected to be $30.5 billion, down from $33.1 billion in 2016.
Railroad, Subway and Light Rail
- Public transit and rail construction is expected to grow from $20.3 billion in 2017 to $21.3 billion in 2018, a 4.6 percent increase.
- Subway and light rail investment is expected to reach a new record level, increasing from $7.7 billion in 2017 to $8 billion in 2018.
Airport Terminals and Runways
- Airport terminal and related work, including structures like parking garages, hangars, air freight terminals and traffic towers, is expected to increase from $11.7 billion in 2017 to $13.4 billion, a 14 percent increase.
- Runway work, which has been down the last few years, is forecast to increase from $3.6 billion in 2017 to $4.1 billion in 2018.
Ports and Waterways
- The value of port and waterway investment is expected to remain flat at the $1.8 billion level.
- Construction activity in 2017 was down from $2 billion in 2016 and $2.4 billion in 2015.
Momentum Going Forward
The Dodge Momentum Index surged again in November, climbing 13.9 percent to 149.5 (2000=100) from the revised October reading of 131.3. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year.
The November increase was the second month of strong gains after a four-month period of softness. November’s advance was the result of healthy gains in both the commercial and institutional sectors.
From October to November, the commercial portion of the Momentum Index advanced 19.6 percent, while the institutional portion grew 5.5 percent.
On a year-over-year basis, the Momentum Index is now nearly 21 percent higher, with the commercial portion up 24 percent and the institutional side up 17 percent. The turnaround in October and November suggest that building activity should continue to expand in 2018.
In November, 21 projects each with a value of $100 million or more entered planning. For the commercial building sector, the largest projects include a $300 million mixed-use facility containing two hotels at Atlanta’s Hartsfield-Jackson Airport and a $230 million Hayden Ave Life Sciences office campus in Lexington, Mass.
The leading institutional projects were a $200 million UPMC Vision and Rehabilitation Hospital in Pittsburgh and a $200 million project that will provide additions and alterations for several schools within the Uniondale (N.Y.) School District.
Nationwide housing starts rose 3.3 percent in November to a seasonally adjusted annual rate of 1.297 million units after a downwardly revised October reading, according to newly released data from the U.S. Department of Housing and Urban Development and the Commerce Department. The November reading is a post-recession high.
Single-family production rose 5.3 percent in November to a seasonally adjusted annual rate of 930,000, which also is the highest post-recession report. Year-to-date, single-family starts are 8.7 percent above their level over the same period last year. Meanwhile, multifamily starts fell 1.6 percent to 367,000 units after a strong October reading.
“The increase in single-family production is consistent with builder confidence gains, and shows builders are optimistic about new federal policies aimed to promote small business growth,” said Granger MacDonald, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Kerrville, Texas.
“The strong November reading indicates that builders are continuing to increase single-family production to meet growing demand for housing,” said NAHB Chief Economist Robert Dietz. “With low unemployment and increasing owner-occupied household formation, single-family starts should continue to make gains in 2018.”
Regionally in November, combined single- and multifamily housing production rose 19.0 percent in the West and 11.1 percent in the South. Starts fell 12.9 percent in the Midwest and 39.6 percent in the Northeast.
Overall permit issuance in November was down 1.4 percent to a seasonally adjusted annual rate of 1.298 million units. Single-family permits rose 1.4 percent to 862,000 units while multifamily permits fell 6.4 percent to 436,000.
Permits rose 1.4 percent in the South. Permits declined 3.0 percent in the West, 4.7 percent in the Midwest and 5.7 percent in the Northeast.
Dodge Construction Outlook
Dodge Data & Analytics released its 2018 Dodge Construction Outlook, a mainstay in construction industry forecasting and business planning. The report predicts that total U.S. construction starts for 2018 will climb 3 percent to $765 billion.
“The U.S. construction industry has moved into a mature stage of expansion,” stated Robert Murray, chief economist for Dodge Data & Analytics. “After rising 11 percent to 13 percent per year from 2012 through 2015, total construction starts advanced a more subdued 5 percent in 2016. An important question entering 2017 was whether the construction industry had the potential for further expansion. Several project types, including multifamily housing and hotels, have pulled back from their 2016 levels, but the current year has seen continued growth by single-family housing, office buildings, and warehouses. In addition, the institutional segment of nonresidential building has been quite strong, led especially by transportation terminal projects in combination with gains for schools and healthcare facilities. As for public works, the specifics of a $1 trillion infrastructure program by the Trump Administration have yet to materialize, so activity continues to hover around basically the plateau for construction starts reached a couple of years ago. Total construction starts in 2017 are estimated to climb 4 percent to $746 billion.”
“For 2018, there are several positive factors which suggest that the construction expansion has further room to proceed,” Murray continued. “The U.S. economy next year is anticipated to see moderate job growth. Long term interest rates may see some upward movement but not substantially. While market fundamentals for commercial real estate won’t be quite as strong as this year, funding support for construction will continue to come from state and local bond measures. Two areas of uncertainty relate to whether tax reform and a federal infrastructure program get passed, with their potential to lift investment. Overall, the year 2018 is likely to show some construction project types register gains while other project types settle back, with the end result being a 3 percent increase for total construction starts. By major sector, gains are predicted for residential building, up 4 percent; and nonresidential building, up 2 percent; while nonbuilding construction stabilizes after two years of decline.”
The pattern of construction starts by more specific segments is the following:
- Single-family housing will rise 9 percent in dollars, corresponding to a 7 percent increase in units to 850,000 (Dodge basis). Continued employment growth has eased some of the caution shown by potential homebuyers, while older Millennials in their 30s are helping to lift demand for single family housing. A modest boost will also come from rebuilding efforts in Texas and Florida after Hurricanes Harvey and Irma.
- Multifamily housing will retreat 8 percent in dollars and 11 percent in units to 425,000 (Dodge basis). This project type appears to have peaked in 2016, helped by widespread growth across major metropolitan markets. That strength has begun to wane in 2017, given slight deterioration in market fundamentals (rent growth, occupancies) and a more cautious bank lending stance.
- Commercial building will increase 2 percent, following a 3 percent gain in 2017, and continuing to decelerate after the sharp 21 percent hike back in 2016. Office construction should see further growth in 2018, helped by broad development efforts in downtown markets, and warehouse construction is supported by greater demand arising from e-commerce. However, store construction will remain weak, and hotel construction will continue to pull back from its 2016 peak.
- Institutional building will advance 3 percent, maintaining its upward track after this year’s 14 percent jump. Educational facilities should see more substantial growth next year, lifted by the passage of recent school construction bond measures. The robust volume of transportation terminal projects in 2017 may not be repeated in 2018, but activity should stay at a high level.
- Manufacturing plant construction will recede 1 percent in dollar terms, after surging 27 percent this year due to the start of several massive petrochemical projects. Next year should still see moderate growth for manufacturing plants in square footage terms.
- Public works construction will improve 3 percent, slightly more than the 1 percent growth in 2017. Highways and bridges should be helped as federal funding rises to the levels called for by the FAST Act, while the environmental categories will partly reflect reconstruction efforts related to Hurricanes Harvey and Irma. Additional benefit may come from the infrastructure program proposed by the Trump Administration, should it achieve passage in some form.
Electric utilities and gas plants will drop 13 percent, falling for the third year in a row after the exceptional amount reported in 2015. Power plant construction starts will ease back as new generating capacity comes on line.
The 2018 Dodge Construction Outlook was presented at the 79th annual Outlook Executive Conference held by Dodge Data & Analytics at the Swissotel in Chicago.