OVERVIEW OF U.S. CONSTRUCTION OUTLOOK
Non-residential to lead growth in U.S. construction spending
Infrastructure to rise, residential to decline
Non-residential construction spending in the U.S. is forecast to grow by 4.7% in 2018 and moderate slightly to 4.0% in 2019. Overall construction starts are expected at $808 billion for 2019, inching slightly ahead of 2018’s $807 billion. The anticipated moderation comes against a backdrop of an expected slowing of the country’s economic growth, rising interest rates and increased materials costs. The U.S. GDP growth is forecast to rise to 3.1% in 2018 and moderate to 2.5% in 2019.
The leading non-residential sectors and projected growth rates for spending in 2019 include:
- Public Safety – 5.9%
- Education – 5.2%
- Industrial – 4.9%
- Healthcare – 4.4%
- Office – 4.0%
Public works construction will increase 4%, with growth across most of the project types. A federal appropriations bill is providing greater funding for transportation projects that will carry over into 2019. Among the transportation sub-sectors that are seeing some of the healthiest growth are airports. Multiple airport expansions and redevelopments are using the Public Private Partnership (P3) model, with spending on pre-launch and in-progress P3 projects valued at $51.7 billion.
Among those using the P3 Model under construction are the $4-billion LaGuardia Airport CTB Project and the $3.9-billion LaGuardia Terminal C & D project. The $1-billion Consolidated Rent-A-Car facility at Los Angeles International Airport achieved financial completion in 2018.
Single family is expected to see a 3% decline in housing starts to 815,000, with multi-family projected to have an 8% drop in units to 465,000. The moderations are due partly to increases in mortgage rates, reduced affordability, and tax reform that reduced tax advantages for home ownership.
Rising materials costs, such as import tariffs on steel and aluminum products, price increases in diesel fuel, lumber, gypsum products and plastic construction products could slow growth in 2019. By mid-2018, year-over-year increases in materials costs for construction had risen by 10%.
With the U.S. unemployment rate expected to remain below 4% into 2019, persistent labour shortages are expected to continue. The construction industry workforce
is estimated to be close to one-third immigrant labour, and largely Hispanic. The ongoing immigration issues at play in the U.S. could further reduce the number of workers available.
FMI Construction Outlook, American Institute of Architects (AIA) Construction Consensus Forecast, 2019 Dodge Construction Outlook, ConstructConnect
In the shadow of uncertainty over Brexit, the UK construction industry is expected to dip slightly in 2018 by 0.6% before rebounding to 2.3% growth in 2019 and 1.9% in 2020.
Home building and infrastructure will lead growth as many commercial and retail developers are taking a wait-and-see attitude before committing to delivering new projects. Other impacts of Brexit uncertainty include a decline of 15% to 20% in the value of GBP against the Euro, which drives up the cost of imported material items, and a potential reduction in the labour pool.
The infrastructure sector–forecast to rise by 5% in 2018 and 2% in 2019 – remains the growth engine for the industry. Output is forecast to hit a historic high of £23.6 billion by 2020, driven by large projects such as HS2 and Hinkley Point C, two new nuclear power stations.
Housing demand remains strong. Even with 27,160 new-build homes completed in 2017, the London Plan for that year identifies current demand at close to 65,000 new homes a year in the capital, which accounts for 20% to 30% of construction in the UK.
While prime residential housing remains stagnant, the number of planned homes in London increased by 86% year-on-year in July 2018, with several large housing association and private rental sector (PRS) developments registered in that time.
Public Sector Housing is also set to rise with the removal of borrowing caps set in 2012 on Council Housing Revenue Accounts. The removal is expected to enable Councils to build another 10,000 homes a year.
The challenges of low availability of land, high land prices and high property prices in London are helping the Build-to-Rent (BtR) sector thrive there and across the country. The total number of BtR homes completed, under construction and in planning across the UK rose by 30% between Q1 2017 and Q1 2018. The number of completed BtR homes jumped by 45% in the same period, increasing from 14,371 to 20,863. Industry estimates project that the sector, which is now attracting institutional investment, could provide a further 15,000 homes each year.
BTY’s experience in BtR schemes, in combination with expertise in Employers’ Agent services in the UK, makes our offering unique. BTY’s RICS professionals provide owners, developers and architects project solutions from early concept design and business case development to finalisation of design and construction project controls.
RICS, Office for National Statistics, Inside Housing, Reuters
GDP growth is forecast at 8.9% in 2018 and 4.5% in 2019 — roughly double the projected average growth rate for the EU — with a critical underlying assumption being that the same customs and trading conditions will continue during a Brexit transition next year.
This strong performance will support healthy growth across sectors. Total construction output is expected to top €20 billion, an increase of two-thirds over three years, but still far from the overheated late stages of the pre-2007 Irish construction market crash. By comparison, output in 2006 was estimated at €35.5 billion.
A chronic lack of housing in Irish cities, particularly acute in Dublin, is worsening affordability nationwide. Housing completions are forecast at 18,000 in 2018, which is only about half the estimated demand for new housing stock required simply to meet natural demand. The shortage is also driving up rental prices and homelessness.
Several large-scale housing initiatives, including nearly 1,000 units of social housing being procured through PPPs, are in the pipeline. South Dublin County Council is planning for 975 new homes, and Dublin City Council is preparing to spend up to €1 billion on social housing. Privately led, internationally financed apartment and Build-to-Rent sector developments are also expanding.
The government’s Project Ireland 2040 program has set long-term targets to boost housing stock to meet estimated population growth of one million by 2040. Plans call for adding between 25,000 and 35,000 homes each year, roughly double the current number. By 2027, there will be 112,000 new social homes. State-owned land will be used to support the program. BTY is providing Lenders’ Technical and Lifecycle advisory services on Government’s Social Housing PPP Bundle Two – which will provide 465 social housing units to the market in 2020.
The need for infrastructure development in transportation, water, wastewater, and telecommunications is also driving increased investment through the Ireland 2040 and the National Development plans. Among the major transportation projects are:
- A second runway and new control tower for Dublin Airport as well as upgrades and expansions in regional airports.
- A new Atlantic Road Corridor connecting Cork, Limerick, Galway and Sligo, including the M20 Cork-Limerick motorway, and €7.3 billion for regional roads.
- The Metro Link to connect Swords and Dublin Airport to the city centre by rail has been extended south to upgrade the Luas Green Line.
While wider inflation is expected to remain relatively low at 1.0% in 2018 and 1.3% in 2019, the already high rate of construction price inflation could hobble the government’s ability to follow through on housing and infrastructure plans. Another threat is the acute shortage of labour and skills that extends in trades and construction related professional services as Ireland edges closer to full employment. The availability of labour from the EU’s large labour pool could help take the pressure off as it did in the pre-2008 building boom.
Government of Ireland, Economic and Social Research Institute, Irish Times, PWC Global Economic Outlook, Bank of Ireland
Investment increasing in projects across Central Asia
The steady expansion of China’s Belt and Road Initiative (BRI) across Central Asia has seen a marked increase in investment by international financing institutions in both transportation and energy projects in resource-rich CIS countries such as Kazakhstan across Central Asia.
The $1-trillion BRI aims to build trade and infrastructure networks connecting economies along the ancient Silk Route, allowing goods to be delivered from China’s Pacific coast to Europe. The trade corridor’s overland route through Kazakhstan – an alternate to shipping goods by sea — allows delivery time to be reduced from 40 to 60 days to 13 to 14 days.
One of the largest projects in Kazakhstan’s own ambitious highway, railway and airport expansion and upgrade programs is the Big Almaty Ring Road project, a six-lane ring road that includes 21 bridges and 19 viaducts. It’s the first PPP project in the county, and BTY is providing Environmental and Safety Advisory services on the project.
Improved transportation infrastructure would support the accelerated development of the country’s energy and resource sectors. Kazakhstan, the world’s 9th largest country, is estimated to have the 11th largest proven reserves of both petroleum and natural gas, the second largest uranium, chromium, lead, and zinc reserves, the third largest manganese reserves, and the fifth largest copper reserves. It also ranks in the top ten for coal, iron, and gold.
Israel is undertaking its largest ever PPP project, a $9-billion expansion of Jerusalem’s light rail system. The expansion includes the construction of the Green Line, for which BTY is providing Pre-Bid Technical Due Diligence Services. The line will include 22.6km of track, 33 stations, 60 to 70 LRT vehicles and additional depot and Operations Control Centre facilities.
Turkey, which also has a strategic position along the BRI, remains a strong performer in PPP infrastructure development with multiple healthcare and road projects completed. A robust energy pipeline has multiple offshore wind, solar, and geothermal projects, while proposed transportation projects include 8,000 km of motorways and rail upgrades.
Over the past five years, BTY has served as Lenders’ Technical, Environmental and Social Advisors – and continues to serve as Construction and Operations Term Monitor – on five of the country’s most notable Healthcare PPP projects. We have also added transportation PPP projects in the region with our involvement in refinancing services for the 3rd Bosporus Bridge, and expanded an offering to include social, labour, environmental impact and safety advisory services.
As Turkey faces challenging economic headwinds with financing, it is expected that only the highest priority projects will move forward in 2019. Economic growth is forecast to slow to 4.5% in 2018 and to 4.0% in 2019. At the same time, there is forward movement expected in refinancing and secondary market deals as the PPP healthcare and transportation sectors mature and new financing venues such as the Project Bonds market are launched.
World Bank, Trend News Agency, The Independent, Worldban, Globes