February construction spending edges up; retail, warehouse trends continue to diverge

Construction spending totaled $1.273 trillion at a seasonally adjusted annual rate in February, up 0.1% from the upwardly revised January rate and up 3.0% from February 2017, the Census Bureau reported today. Public construction declined 2.1% for the month but increased 1.6% year-over-year (y/y). Of the three largest public segments, highway and street construction fell 0.2% for the month and 5.1% y/y; educational construction slipped 0.5% from January but increased 3.0% y/y; and transportation dropped 2.2% for the month but increased 9.2% y/y, including a 35% y/y jump in state and local airport construction and an 8% decrease in other public transportation (port, transit and passenger rail) construction. Private residential spending rose 0.1% in February and 5.5% y/y. New multifamily construction climbed 1.2% and 0.9%, respectively; new single-family construction gained 0.9% and 9.5%; and residential improvements fell 1.5% for the month but rose 1.4% y/y. Private nonresidential spending rebounded 1.5% in February and 1.1% y/y. Of the four largest components, power (electric power plus oil and gas pipelines and field structures) gained 0.9% for the month but declined 8.5% y/y; commercial increased 1.2% for the month and 7.6% y/y (comprising retail, down 2.2% y/y, and warehouse, up 26%); manufacturing added 1.2% in February but declined 5.6% y/y; and office rose 6.5% and 2.1%, respectively. Comparisons between February and the previous January or February can be affected by unusual weather conditions in any of those months.

"Real-estate data firm Reis Inc., which studies 77 metropolitan areas, reported that retailers occupied 453,000 more square feet of shopping center space at the end of the first quarter than the fourth quarter of 2017, but that amount of 'absorption' was the lowest for any quarter in more than five years," the Wall Street Journal reported today. "The completion of 712,000 square feet of new shopping center space also was 'much lower' than average, Reis said." In addition, "The vacancy rate in big [regional] U.S. malls increased to 8.4% in the first quarter of 2018, up from 8.3% in the fourth quarter and the highest since the fourth quarter of 2012...Meanwhile, neighborhood and community shopping centers in 41 of the 77 areas experienced an increase in vacancy during the 12 months ended March 31." Rising vacancy rates are a negative indicator for future construction. Today's Census spending report showed shopping center construction increased 5.4% year-to-date in the first two months of 2018 combined from the same period in 2017; shopping mall construction fell 8.9%. However, the Census numbers do not distinguish new construction from renovations and tenant improvements as owners try to attract new stores and customers.

Warehouse construction remains hot. The Census figures show spending on general commercial warehouses jumped 27% year-to-date in January and February combined. "Pete Quinn, national director of industrial services for the U.S. at Colliers [International Group, a real-estate service company, said] vacancy rates are at 'historic lows,' and despite a lot of construction, warehouses are being leased as soon as the cranes come down," Bloomberg News reported on Wednesday. "Indianapolis, Phoenix and California's Inland Empire are among the hot markets....Amazon.com Inc., naturally, is the top occupier of industrial space in the U.S., with 102 million square feet spread over 258 facilities and plans to add 37.8 million more square feet by the end of the year, Quinn said. Amazon's competitors, including those that started out with traditional physical stores, such as Kohl's Corp., are modernizing their own supply chains to keep up, he said, adding to the demand."

Multiple steel price increases, along with the threat of tariffs that will further raise prices and may cut supplies, have led to a surge of orders. "In mid-March, distributors of steel construction products and rebar fabrication shops placed orders for several months' supply with mills in hopes of beating more future price increases," New South Construction Supply reported on Wednesday. "This buying frenzy, coupled with already strong demand and limited supply of some steel construction products, has caused shortages of some steel construction products in the U.S., which may last for several months....Domestic rebar mills increased prices between $40 and $50/ton within a few days after President Trump's announcement to impose a 25% tariff on imported steel. This is the fourth consecutive month than domestic mills have increased prices and domestic rebar is now 20% more than it was on January 1. Most domestic mills' rollings are sold out through April and May....Concrete reinforcing wire mesh manufacturers, which increased prices by approximately $45/ton in late February and early March, announced another price increase for April. One manufacturer announced a 13% increase while most others will increase prices by 10%. As distributors booked several months' supply after the tariffs were announced, some manufacturers are experiencing stock outs of some sizes of concrete reinforcing mesh. This coupled with the nationwide shortage of flatbed trucks have caused lead times for truckload orders to be as much as one week to two weeks. Wire rod manufacturers have already announced another hefty price increase for April, so concrete reinforcing wire mesh manufacturers are likely to increase prices again in May."

On Friday, the Bureau of Labor Statistics issued annual estimates for occupational employment and wages in May 2017, including for 48 construction and related occupations. The agency noted that for these occupations: the largest were construction laborers, 962,060; carpenters, 693,050; and electricians, 631,080. The highest paying were elevator installers and repairers, $77,130, and first-line supervisors of construction trades and extraction workers, $69,200. The lowest paying included helpers of roofers, $29,710, and helpers of painters, paperhangers, plasterers, and stucco masons, $30,570. The 2.8 million specialty trade contractors accounted for almost half of employment in construction and extraction occupations. An additional 26% of employment was in construction of buildings, 915,340; and heavy and civil engineering construction, 574,960.

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