Construction Spending Hits 10-year High; Apartments and Warehouses Remain Hot

            Construction spending totaled $1.182 trillion at a seasonally adjusted annual rate in November, an increase of 0.9% from the October rate and 4.1% year-over-year (y/y) from the November 2015 rate, the Census Bureau reported on Tuesday. The rate was the highest since April 2006. Private residential spending increased 1.0% in November and 3.0% y/y. New multifamily construction slumped 2.7% for the month but increased 11% y/y; new single-family construction gained 1.8% from October but declined 0.9% y/y; and residential improvements rose 1.5% for the month and 6.8% y/y. Private nonresidential spending climbed 0.9% for the month and 6.4% y/y. By subsegment, in descending order of November size, power (electric power plus oil and gas pipelines and field structures) edged up 0.5% for the month and 1.5% y/y; commercial (retail, warehouse and farm) added 0.3% for the month and 12% y/y; manufacturing skidded 1.1% in November and 8.0% y/y; office jumped 1.9% in November and 31% y/y to an all-time high; and health care fell 0.2% in November and 2.6% y/y. Public construction increased 0.8% for the month and 2.6% y/y. The largest public component, highway and street construction, rose 1.1% for the month and 10% y/y. The other major public segment, educational construction, climbed 2.1% for the month and 6.2% y/y.

            The multifamily construction market appears to be moving away from major metros and high-end apartments. Analytics firm Axiometrics reported on Wednesday, "Half of the top 10 metros issued fewer multifamily permits [New York, Houston, Dallas, Los Angeles and Seattle] in the 12 months ending in November 2016 than they did the year before. Because of these declines, the annual total of permits issued in the top 10 metros...was 23% lower than...in the previous 12 months. Multifamily permits had been heavily concentrated in the top 10 metros, but multifamily construction is ramping up in several smaller markets as it slows in some of the top markets." Analytics firm RealPage, Inc. reported on Tuesday, "Demand in 2016 topped completions that totaled 289,704 apartments. As usual, however, demand in the fourth quarter didn't keep pace with deliveries. Properties finished during the final three months of the year totaled 87,939 units. The late 2016 additions marked the biggest block of quarterly new supply seen since the mid-1980s....Quite a few of the country's individual metro rent growth leaders have economies where recovery trailed the national norm and apartment construction hasn't yet reached aggressive levels. Sacramento and Riverside-San Bernardino, holding down the first and second positions for rent growth, are key examples....There are now 49,955 apartments under construction in Dallas-Fort Worth, representing about 9% of building activity nationally. That's the country's biggest block of product on the way by a giant margin....Ongoing apartment construction in the nation's 100 largest apartment markets totals 542,446 units, with 364,730 of those apartments found in properties scheduled for 2017 completion. Thus, new supply in the coming year could top 2016's total by 26%....It is important to realize, however, that labor shortages and other factors consistently have held completions in this market cycle about 10%-15% below the volumes scheduled initially. If that same pattern holds true moving ahead, 2017's deliveries could line up almost exactly with the demand total posted over the past year, suggesting that concerns about market softening could be overblown."

            Warehouse construction is another segment that has done very well. Year-to-date spending in the first 11 months of 2016 combined topped the same period in 2015 by 21%, Census data show. General commercial warehouse spending rose 17% and mini-storage soared 102%. However, Bloomberg reported on December 13, "For builders, labor and materials costs have recently risen, and regulatory hurdles have popped up as cities seek to limit storage centers, which—unlike manufacturing plants or traditional warehouses—don't come with a lot of new jobs. Trouble spots for industry growth include New York and Miami, which is considering new zoning rules that would require storage centers to include ground-floor retail and prevent warehouses from going up near old ones.

            New "construction starts in November retreated 6% from October" at a seasonally adjusted annual rate, Dodge Data & Analytics reported on December 22. "Each of the three major construction sectors experienced reduced activity in November. Nonresidential building continued to recede [-5% from October to November] from its elevated September pace, even with the November start of several large projects, most notably the $3.0 billion new football stadium for the Los Angeles Rams in Inglewood, Calif. Residential building in November settled back [-5%] after strengthening in October, maintaining the up-and-down pattern that's been present since August. Nonbuilding construction in November declined [-9%] after its public works segment had been lifted in October by the start of several large projects....During the second half of 2016, the year-to-date performance for total construction starts has shown consistent improvement, even with the recent deceleration, given the comparison to the weaker activity reported during last year's second half. Excluding the volatile manufacturing plant and electric utility/gas plant categories, total construction starts during this year's January-November period would be up 4%." 

            The American Council of Engineering Companies reported on Tuesday that its three-year-old "Engineering Business Index [recorded] its largest-ever quarterly increase. The 4th Quarter 2016 (Q4/2016) EBI surged 5.1 points to 66.5, up from the 61.4 score of Q3/2016. The previous largest increase was 1.5 points between the Q1/2014 and Q2/2014 surveys. Any score above 50 signifies that the market is growing....The Q4/2016 survey of 317 engineering firm leaders was conducted November 30 to December 12."

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