Trends in U.S. construction, 1996 to 2000 – economic factors point to modest year-to-year increases – includes list of additional references
In 1996, the constant-dollar value of new construction put in place will increase 4 percent from its record level of 1995. The homebuilding sector will recover as mortgage interest rates decline. The surge in nonresidential construction will continue through 1996. Public works construction will increase slightly from 1995, despite a decline in Federal Government investment. Shipments of manufactured housing (mobile homes) will increase a further 6 percent.
Review of 1995
In 1995 the inflation-adjusted value of new construction put in place increased nearly 1 percent, to match the all-time record set in 1986. (The 1995 current-dollar value of about $530 billion was easily an all-time record.) This strong year was achieved despite a 7 percent decline in the number of housing starts, to 1.33 million units in 1995. Solid increases in nonresidential construction more than offset the weakness in homebuilding. In addition, 340,000 manufactured (mobile) homes were shipped, a 12 percent increase from 1995. Public works construction increased 6 percent, with nearly every category registering increases. The recovery in private nonresidential construction continued in 1995, led by increases in stores and service buildings, hotels, manufacturing facilities, telecommunications, and office buildings. (See Table 1).[TABULAR DATA OMITTED]
A highlight of the construction market in 1995 was the surge in demand for apartments and commercial buildings. Although there is a general oversupply situation in commercial real estate, there is also increasing investor interest because of financial and regulatory factors. It is unlikely that there will be a 1980s-style boom (with surging construction in spite of rising interest rates) because of tax-law changes, tighter regulatory scrutiny, and greater wariness in the investment community.
Remodeling and repair work increased in 1995, reflecting the growing stock of housing and a fairly heavy turnover of used homes. Although the data for maintenance and repair construction are not as complete as those for new construction, the available information indicates that 1995 was a record year for maintenance and repair work. Nonresidential building improvements (commercial remodeling and renovation) decreased slightly from 1994. (See Table 2).[TABULAR DATA OMITTED]
The latest available Census of Construction showed that about 66 percent of the construction industry’s work was for new construction; 19 percent was for additions, alterations, and reconstruction; 10 percent was for maintenance and repair; and 5 percent was unspecified. In 1995, new construction probably accounted for about 65 percent of the industry’s business.
In 1995, the value of new construction put in place was equal to about 7.3 percent of GDP. This share was about the same as in 1994, but is well below the post-World War Il peak of 11.9 percent of GDP attained in 1966. (See graph on cover.) This measure tends to understate the importance of construction in the economy because several types of construction activity that are not included in new construction data have grown rapidly during the past decade. These include maintenance and repair, commercial/industrial renovation, and environment restoration.
Construction costs increased by about 4 percent in 1995, as measured by the Census Bureau’s fixed-weight construction cost deflator. This was about double the average annual rate of increase during the previous five years, and was faster than the rate of increase of the Consumer Price Index. Building materials prices also rose an average of about 4 percent in 1995, Land prices were fairly stable, on average, although there have been double-digit increases in some of the stronger markets. (Land prices are not included in the construction cost index.) Insurance and bonding costs have continued to increase, although the overall availability of insurance is better. Labor costs have increased moderately, with average hourly earnings of construction workers increasing by about 2 percent in 1995. Interest costs for real estate and construction loans increased during the early part of 1995, but declined after spring, and averaged slightly lower than in 1994.
There were about 5.2 million employees in the construction industry in 1995. This was about 4 percent above the 1994 level, and was an all-time record. In addition, about 1.5 million people were self-employed as proprietors and working partners. Construction is one of the higher-paying industries in the United States, as measured by average hourly and weekly earnings. (See Table 3).[TABULAR DATA OMITTED]
Outlook for 1996
The constant-dollar value of new construction in 1996 will increase slightly from 1995. Homebuilding will gain more than nonresidential construction. (See Tables 1 and 2). The most promising markets are multifamily housing, commercial buildings, educational, telecommunications, and water supply. The weaker construction markets will be sewerage systems and military facilities. (Detailed prospects for various types of construction are discussed in Appendix 1.)
The following broad economic factors will affect construction demand in 1996: (1) economic growth is expected to continue at a moderate rate; (2) interest rates are assumed to remain near December 1995 levels, with mortgage rates averaging 8 percent; (3) housing prices are expected to be stable; (4) plant and equipment expenditures are expected to increase, but at a slower rate than in 1995; (5) vacancy rates for apartments and commercial buildings will rise, but investor interest in commercial real estate will remain strong; (6) Government investment is expected to be about the same as in 1995; and (7) demographic factors are bullish for the construction of schools and hospitals but bearish for apartments and offices.
Housing starts will be about 1.45 million units in 1996, about 7 percent more than in 1995. This increase will be mostly in single-family housing, although multifamily housing will also increase. Private nonresidential construction will increase, with gains in nearly all categories, as the economic expansion continues its fifth year. Public works construction will be about the same as in 1995, as a decline in Federal spending is barely offset by increases state and local construction expenditures.
Construction activity is likely to remain stronger in the Midwest and the South than in the Northeast and the West. Many of the smaller Western states will also do well. The recovery in California will continue, but the amount of construction activity will remain far below the levels of the late 1980s. The Midwest has had less overbuilding than than most of the nation, and a relatively strong economic outlook. The South has received the greatest share of industrial construction during the past two decades, and will probably continue to grow faster than the national average as the economy recovers. Although the Northeast has pockets where construction is booming, the region as a whole will be a slow-growth construction market.
During the 1996-2000 period, new construction is expected to increase modestly from current levels, with an overall growth rate about the same as the GDP. (The Congressional Budget Office predicts an average annual growth rate of 2.4% for the GDP.) Remodeling and repair construction will increase a little faster than the GDP. (See Table 2.)
A key factor supporting construction during the next 5 years will be declining interest rates. This forecast assumes a declining Federal deficit and modest inflation rates, which should lead to lower interest rates and a fairly good macroeconomic climate for construction.
A major drag on construction spending is the oversupply of commercial buildings, which will be gradually absorbed by attrition, remodeling, and a growing economy. The demand for new housing construction will be limited by demographic factors and by the declining investment appeal of homeownership. Federal Government spending for public works will decline, although state and local governments will pick up some of the slack in infrastructure investment.
The recovery of the U.S. manufacturing sector is expected to result in strong demand for industrial construction during the rest of this decade. Electric utility construction and repair will also be a large growth market, Hospital construction will continue to gain, despite strenuous cost-cutting efforts by businesses and health care providers. Remodeling and repair work, both residential and nonresidential, will continue to increase, as the U.S. stock of structures becomes older and more extensive.
Despite the general oversupply situation in commercial real estate, investor interest in commercial construction has been strong because of financial and regulatory developments. It is unlikely that a 1980s style boom (Characterized by surging construction in spite of rising vacancy rates) will result, because of tax law changes, tighter regulatory scrutiny, and greater wariness in the investment community. The recovery in the office-building cycle is likely to be slow, and the store-building cycle is near its peak. Commercial construction will not reach 1990 levels again during this decade. Before the end of the century the demand for commercial buildings will be affected by technological trends favoring telecommuting, electronic shopping, home offices, teleconferencing, and globalization of information services; as well as business management trends in downsizing, temporary work forces, and inventory reduction. The boom in construction of “big box” stores will abate, while a potential growth area could be automobile “megadealers” selling used cars and multiple brands of new cars.
In addition to market factors, the U.S. construction industry will face a number of supply-side challenges during the next five years, including foreign competition, the supply of workers, and the cost of insurance. Most of the foreign construction contractors competing in the U.S. market are extremely well-financed and often possess construction expertise equal or superior to that of most U.S. builders. The supply of young workers (who make up most of the construction labor force) is dwindling because of demographic trends. In 1995 there were labor shortages in some local markets, but most of these shortages were eased by migration from labor surplus areas. As the economic recovery continues, shortages of labor and skills could become more general problems. The cost of liability insurance has stabilized for the time being, but the cost of health insurance and worker’s compensation insurance has continued to increase at rapid rates.
PRIVATE RESIDENTIAL CONSTRUCTION
In 1995 the pace of homebuilding slowed from 1994 levels. The current dollar value of new residential construction amounted to $236 billion, of which $144 billion was for single-family housing. After adjusting for inflation, this was a 4 percent decline from 1994. All of the decline was in single-family housing – multifamily housing and home improvement gained.
Total housing starts were 1.33 million units in 1995, a 7 percent decline from the 1.46 million starts in 1994 but the second-highest total of the 1990s. (See Table 4.) Single-unit starts, which are the most sensitive to interest rates, were impacted by the run up in mortgage interest rates which occurred in late 1994 and early 1995. Although interest rates declined gradually in the second half of 1995, this was not enough to produce an increase in housing starts for the year. Meanwhile, multi-family starts surged by 11 percent, chiefly because of greater investor demand.
Although multifamily housing starts increased by 11 percent, the 1995 total of 277,000 units was very low by the standards of the 1980s. Much of the demand for apartment investment is the result of easing restrictions by lenders and increasing interest by investors. (This surge is part of a general upswing in commercial real estate, and is discussed further in the nonresidential construction section.) Vacancy rates increased in most rental markets during 1995, so there is little evidence of a major shift in consumer demand toward multifamily housing.
Home improvement expenditures rose 2 percent in 1995. the fourth consecutive annual increase. Home repair expenditures also increased. (See Table 2.) Spending for home improvement and repair has been less volatile than new construction, and the long-term growth trend has been higher. Maintenance and repairs continue to account for the bulk of spending for rental properties, while improvements account for the greater share of spending on owner-occupied units.
Manufactured housing (mobile homes) shipments have risen rapidly since 1992. Shipments in 1995 were about 340,000, more than double those of 1991. Affordability is a major factor in the success of manufacturing housing gains, as manufactured housing costs about half as much per square foot as site-built housing. Quality improvements and more attractive designs have also helped. The share of double-wide manufactured homes has increased to about half of the total number shipped.
The 1995 decline in single-family housing is largely attributable to higher interest rates, slow growth in the economy, and slower growth in homeowners’ equity. In addition, homeownership has lost some of the investment appeal that it enjoyed in the 1970s and 1980s. Alternative investments, such as mutual funds, have often outperformed real estate in the 1990s. This competition is especially serious for trade-up housing, which is the largest segment of new construction.
Outlook for 1995
The total number of housing units started is expected to total 1.33 million units, which would represent a 7 percent decline from 1994. All of the decline will be in single-family housing, which will drop 10 percent. Multi-unit starts will gain 8 percent, and home improvement will increase about 4 percent.
The decline in interest rates is expected to be a powerful boost for single-family homebuilding. Nevertheless, there are other factors which will restrain the upswing: the modest growth expected in GDP and consumer income, the lure of other investment options, slow growth in homeowner equity, heavy debt load of consumers, and the large inventory of unsold homes. The inventory of unsold homes grew steadily during 1994 and 1995, and by the end of the year it was at its peak level of the decade. This over-sized inventory, of approximately 350,000 homes, will delay an up-swing and reduce its magnitude by as much as 50,000 units in 1996.
The upswing in multifamily construction will probably continue into 1996, driven by investment demand and lower interest rates. The projected level of 320,000 starts would be the highest annual total of the 1990s, but would be lower than for every year of the 1980s. (See Table 4.) On a nationwide basis apartment vacancy rates are still high, thus most new construction will occur in high-growth locations.[TABULAR DATA OMITTED]
Spending for residential upkeep and improvements is expected to increase about 2 percent in 1996. This expected gain will be largely the result of solid sales of new and existing homes in 1994 and 1995. (More than half of all improvements occur within 18 months after a new owner moves in, or within 12 months before a home is sold.) In addition the moderately strong economy will allow more homeowners to improve their homes.
Manufactured housing sales are expected to continue to increase in 1996, although the rate of increase will level off. Modestly rising employment and lower interest rates will enable more lower-income workers to afford mobile homes. (For more detail on mobile homes, see Appendix 1.)
Over the 1995-2000 period, annual housing starts will probably average about 1.4 million units, which is approximately the 1995 level. There will be a modest shift in the mix of home construction, so that multi-family housing will account for a slightly larger share of the total. Home improvement and repair will continue to increase at about the same rate as the GDP.
Demographic factors will restrain the demand for new single-family housing in the last half of the decade. Because of the “baby bust” that occurred in the United States between 1965 and 1976, declining numbers of young adults are entering the 25-to-45 year age group, which is the prime homebuying age. The demographic factors for apartment construction are improving (although they still are not great) because the 18-to-25 age cohort will be increasing, as will the over-65 group
Financial factors affecting the demand for housing are much less certain than demographic factors. Interest rates are expected to decline over the next 5 years, steadily improving the affordability of homeownership. On the other hand, low inflation rates are likely to result in slow build-up of homeowners’ equity, which will limit the ability to trade up to newer and larger housing. The slower rise in housing prices is also likely to further reduce the investment appeal of homeownership, especially for more expensive homes. On the other hand the record capital gains that are being made by stock market investors may lead them to purchase luxurious new housing. The net effect of these mixed trends is likely to be slightly negative for homebuilding.
Home improvement and repair construction will continue to grow faster than new home construction. Much of this demand will result from homeowners adding rooms and amenities to keep up with newer housing. In addition, the stock of housing is steadily growing larger and older, thus providing a growing base demand for home repair construction.
In 1995, the value of new private nonresidential construction was $150 billion, of which $105 billion was for buildings, and $45 billion was for other structures. In constant 1992 dollars the total was about 8 percent more than in 1994. (See Table 1.) The largest increases were for stores and shopping centers, manufacturing plants, and office buildings. The gains were fairly widespread throughout the United States, although the recovery in California was still modest. The South and West accounted for over 60 percent of total nonresidential construction.
Although there is a general oversupply situation in commercial real estate, there is also increasing investor interest because of financial and regulatory factors. During late 1995 long-term interest rates approached their lowest levels in more than a decade. In addition, lending institutions have gradually eased restrictions on commercial real estate loan The value of new real estate loans has surged and the recovery in commercial construction has gathered momentum.
Developments in the retailing industry are having wide spread effects on construction of stores and warehouses Many existing retailers are being pressured by rapidly grow in, chains of “big box” discount stores which sell general merchandise or specialties such as electronics or pet supplies. This trend is spurring commercial construction because underutilized buildings are in the wrong locations or are not suitable for emerging uses.
Despite some signs of overbuilding in the commercial buildings area, enough projects are now underway to sustain a high level of construction through 1996. The number of new, starts may decline if investors and lenders fear that the boom is getting ahead of demand.
Outlook for 1996
New private nonresidential construction will increase by about 3 percent, as the economic expansion continues for its fourth year. Rising interest rates and other uncertainties will probably reduce the value of new starts, but the value put in place will gain because of lags in the construction process. The best construction increases in 1996 are expected to be in manufacturing plants, hospitals and other health institutions, office buildings, and telecommunications. The outlook is weaker for farm construction and gas utilities.
In 1996 business investment in plant and equipment is expected to gain sharply. Although construction of manufacturing facilities and utility plant are expected to increase, most of the investment will be in capital equipment rather than in buildings and other structures. Investments in equipment tend to be cost-saving measures, and are less risky than new industrial plants.
Nonresidential repair and renovation markets will probably continue to grow in 1996 and for the next five years. Electric utilities in particular are likely to increase their maintenance and repair expenditures substantially. Investment in nonresidential building improvements will remain at high levels, as owners of commercial buildings strive to keep their buildings attractive in the competitive rental markets. A side-effect of the turmoil in the retailing industry will be massive remodeling on existing stores. (See Table 2).
Total private nonresidential construction is likely to increase moderately over the next five years, in line with growth in GDP. Prospects look best for industrial, utility, and hospital construction. The repair and renovation market will grow about as fast as the new construction market during the next five years, and will be less cyclical.
The need to modernize the capital stock of U.S. manufacturers will provide strong underlying demand for new construction as well as for repair and renovations. Even though 75% of plant and equipment expenditures are for equipment rather than structures, the construction potential is huge. The gross replacement value of the manufacturing plant (excluding equipment) that existed in 1992 was estimated at $965 billion.
Changing global trade patterns will continue to have major effects on industrial construction, especially because of the NAFTA, the GATT Uruguay Round, and the modernization of the Pacific Rim economies. If the $170 billion trade deficit in manufactured goods were eliminated, the demand for industrial construction could increase by $3.5 billion annually. Regardless of the overall trade balance, those U.S. industries that are expected to gain from increased trade will probably need to invest heavily in new capacity.
By the end of the century, private nonresidential construction will have recovered to its record 1990 levels, but spending on factories, utilities, and hospitals will account for a much larger share of the total, and commercial construction will be a substantially lower proportion. Although the office building market has partly recovered, a dramatic building boom is unlikely this century. Currently, existing commercial buildings can be purchased for much less than the cost of construction in most markets. The current surge in construction of “big box” stores is near its peak. However, store construction may be supported by investor demand and by massive changes in automobile merchandising concepts.
The demand for commercial buildings is already effected by business management practices such as downsizing, temporary work forces, and inventory control techniques. In addition the location and type of commercial construction is increasingly influenced by technological developments that foster telecommuting, electronic shopping, home offices, teleconferencing, and globalization of information services. By 2000 these technologies may effect commercial construction demand as much as economic factors will.
PUBLICLY OWNED CONSTRUCTION
In 1995 the total value of publicly owned construction in current dollars was about $140 billion, of which $41 billion was for highways and bridges. The constant-dollar value of publicly owned construction put in place was about 5 percent greater than in 1994. Virtually every category of public construction increased except conservation and development, and Federal industrial facilities (See Table 1).
Public works construction set an all-time record in 1995, although in per capita terms it is still below the level reached in 1968. This recovery partly represents a commitment to stop the deterioration of U.S. infrastructure facilities. The condition of infrastructure is not only a quality-of-life issue, but it also is an important factor in U.S. productivity and international competitiveness. In particular, the vast U.S. highway network helps U.S. industrial productivity by allowing faster and cheaper transportation of products. Other types of infrastructure, such as airports, schools, waterworks, prisons, and mass transit also contribute to the productivity of the U.S. economy in more indirect ways.
The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) has set the direction for highway and mass transit construction through the mid-1990’s. ISTEA authorized increased levels of funding, totaling $155 billion over six years, and reoriented the huge Federal-aid Highways program. Mass transit construction has received proportionally more from ISTEA than highway construction. The proportion of funding for repair and reconstruction appears to gaining at the expense of new construction. States now have much more spending discretion with Federal grants-in-aid, and much of the funding that formerly would have been restricted to the 43,000-mile interstate highway system can be spent on other parts of the 155,000-mile national highway system.
Despite the tight Federal budget situation, Federal construction spending programs increased by about 10 percent in 1995. This was due to the high level of obligations incurred during FY 1994. Federal construction obligations declined in FY 1995, indicating a slower pace of construction outlays in future years.
State and local governments increased their total construction spending during 1995. This was the result of greater Federal grants, the recovering economy, and the need to curtail the backlog of deferred projects. Nearly every category of public works construction increased, especially education, highways, water and sewer, and public safety.
Outlook for 1996
The overall value of publicly owned construction will increase modestly from 1995. The largest increases are expected in public safety buildings, housing and redevelopment, prisons, water supply systems, and waste management. The biggest declines will be in military facilities, conservation and development, sewerage construction, and federal industrial facilities.
In 1995 both Congress and the Executive Branch made major revisions to Federal Government programs. Because of lags in procurement and construction, these changes did not substantially affect the level of Federal construction outlays during 1995. The current budget provides for Federal construction spending to increase by 1 percent, not adjusting for inflation. Large reductions are budgeted for military construction, federal industrial construction, and conservation and development, while military waste clean-up and housing and urban development are expected to increase. (See the Winter 1995 issue of Construction Review for more details.)
The slow-growth outlook for public works construction in 1995 is the result of two opposing trends: Federal spending for infrastructure will decrease by about 2 percent, while state and local spending (excluding Federal grants) will increase by about 4 percent.
Public works construction will increase modestly during the 1996-2000 period, assuming moderate economic growth and gradually declining interest rates. Federal construction spending will level off in 1996, unless there are major new infrastructure initiatives. The cuts in new construction obligations for 1995 and 1996 will be felt most from 1996 to 1998. The longe-range Federal budget agreement will necessitate cuts in most spending programs in order to reach a balanced budget. Since the $56.6 billion in Federal construction spending accounts for only 2 percent of the total Federal budget, it is not certain how this amount would be affected although the presumption would be for spending cuts. Fortunately, if the economy performs as predicted, lower interest rates and growing tax revenues will enable state and local funding for public works to remain at high levels.
As in the private sector, government maintenance and repair spending will probably increase at least as fast as new construction spending because the public works infrastructure is steadily becoming older and larger. While increased maintenance and repair expenditures will provide work for certain types of contractors, they will often consume funds that could have been spent on new construction.
Highway construction is likely to be the largest and most predictable public works market through mid-1990’s. However, further increases will be small unless it is decided to draw down the Highway Trust Fund. The Federal-aid Highways Program will need re-authorization by 1997, at which time there could be support for higher gasoline taxes to pay for needed improvements to roadway infrastructure. Water resources and marine construction are scheduled to increase, but may become victims of deficit reduction measures. Water and sewer construction will remain at high levels, but will not increase much. Construction of schools and other public buildings may also increase. Military construction and Federal industrial construction will probably decline as measured by new construction put in place, but environmental restoration funded by these programs will remain at high levels.
(Call the Bureau of the Census at (301) 457-1242 for information about how to order Census documents.) Census of Construction, 1992, Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 457-1242. Housing Starts (Construction Reports, Series C-20), Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 457-4666. Value of New Construction Put in Place (Construction Reports, Series C-30), Bureau of the Census, U.S. Department of Commerce, Washington, DC 20233. Telephone: (301) 457-1605. Expenditures for Nonresidential Improvements and Upkeep, 1992, Bureau of the Census, U.S. Department of Commerce, Washington, D.C. 20233. Telephone: (301) 457-1605. Construction Review (quarterly), International Trade Administration, Room H4045, U.S. Department of Commerce, Washington. DC 20230. Telephone: (202) 482-0132. America’s Infrastructure: Effects of Construction Spending, Associated General Contractors, 1957 E St. NW, Washington, DC 20006. Telephone: (202) 393-2040. Cahners Building & Construction Market Forecast (monthly), Cahners Publishing Co., 275 Washington, St., Newton, MA 02158-1630. Telephone: (617) 630-2105. Decisions for the 1990s, NAHB Publications, National Association of Homebuilders, 15th & M St. NW, Washington, DC 20233. Telephone: (202) 822-0200. Dodge/Sweet’s Construction Outlook, McGraw-Hill Information Systems Company, 1221 Avenue of the Americas, New York, NY 10020. Engineering News-Record (weekly), McGraw-Hill Publishing Co., 1221 Avenue of the Americas, New York, NY 10020. Telephone: (212) 512-4634. Infrastructure: Investing in Our Future, Portland Cement Association, 54 Old Orchard Rd., Skokie, IL 60077. Telephone: (708) 966-6200. Overseas Builder (monthly) Secant Communications and American Building Products Export Council, P.O. Box 1147, Frederick, MD 21702-0147. Telephone: (302) 663-8042. Worldwide Projects, Intercontinental Media, Incorporated, Westport, Connecticut, 06881-5017. Telephone: (203) 226-7463
Appendix 1: Forecasts for Detailed Categories
Single Unit Housing
Private single unit housing starts in 1995 were an estimated 1.07 million units, down from 1.198 million in 1994 and 1.126 million in 1993. The 1995 starts were 10 percent under those in 1994, but still 28 percent above the 1991 cyclical recession low. Over 90 percent of these starts were detached homes (See Table 4.) The median sales price of single family units rose 2 percent between 1994 and 1995, from $130,000 to $132,200.
This market is mainly driven by demand from both first-time buyers and trade-up buyers. In addition to family incomes and consumer confidence, affordability remains the key consideration affecting decisions to buy or rent. Among the factors affecting affordability are mortgage interest rates, funds availability, and the variety of mortgage options. Retirement housing is becoming a greater factor in this market, with the units usually smaller and having special design features that appeal to or may be needed by seniors. Many of these units for seniors are being built outside metropolitan areas.
The size of new homes in 1994 remained about the same as in 1993. The average size rose slightly while the median size declined slightly. In 1994, one-family houses completed averaged 2,100 square feet and the median size was 1,940 square feet. The size of these units has risen in most years, although they actually declined during the 1991 recession.
New one-family units also are characterized by greater inclusion by the builders of various amenities. Continuing to increase in 1994 were the percentage of units with central air conditioning, 2-1/2 or more bathrooms, fireplaces, and those with 3 or more car garages. Other popular amenities that did not crow in use in 1994 were units with basements, more than one fireplace, and units with 3 or more bedrooms. According to the Census Bureau’s report, Characteristics of New Housing: 1994,49 percent of the new units completed were one story, 47 percent had 2 stories or more, and only 3 percent were split level homes. Two thirds of new housing units utilized warm air heating systems, almost one quarter used heat pumps, and the remaining 9 percent had hot water, steam or other types. Vinyl siding usage has been growing rapidly with 28 percent of newly completed one-family home utilizing vinyl (up from 25 percent in 1993). Wood had a 27 percent siding share, brick 21 percent, stucco 15 percent, aluminum 4 percent, and other products 5 percent.
Multiunit housing is defined as housing units having two or more dwellings. Some are town house structures while most are apartments. About 80 percent of multiunit housing are rentals.
After rising 59 percent in 1994, multiunit starts in 1995 rose 12 percent to 290,000 units. Most (89 percent) are in structures with 5 or more dwellings. The 290,000 units started in 1995 compares to 375,000 in 1988, the latest housing peak year, and 670,000 in 1985, the all time peak. In 1995, multiunit housing accounted for 21 percent of all new private housing starts (compared to 18 percent in 1994 and 13 percent in 1993.) The peaks for multiunit housing starts as a percent of total new housing starts were in 1985 (38 percent) and 1988 (25 percent.)
The major factors influencing the levels of new multiunit housing construction are existing tax laws, demographics, the financial strength or weakness of the real estate and lending institution sectors, and various regulatory requirements such as handicapped accessibility. Another factor supporting greater multiunit construction is the aging of the population of the United States. Expected lower property appreciation might also encourage many to rent rather than buy, as would any changes in tax laws effecting mortgage interest deductions (some flat tax proposals.) General affordability problems and growing uncertainty among workers about their jobs would also tend to discourage some regarding the home buying investment option.
Upkeep and Improvement
This category encompasses spending for maintenance and repairs as well as improvements to existing residential structures. Included in the maintenance and repairs category are projects such as painting, appliance replacement parts and repair, and roof repairs. The improvements category involves additions to structures and major replacements to the structures and other property. Examples of improvements include major exterior and interior structure changes, fences, and replacing furnaces and water heaters. For do-it-yourself work, the cost of materials and parts are included in the data, but the labor cost element is not. Such costs are not included in the data in Table 1 but are shown in Table 2 under “Selected Maintenance and Repair.”
Expenditures for residential upkeep and improvements in 1995 are expected to rise about 2 percent to $117.3 billion. This follows a 6.2 percent increase in 1994. Improvements over the last few years have averaged about 60 percent of all such expenditures, leaving maintenance and repair with the remaining 40 percent share. In 1994, improvements reached about $72 billion and maintenance and repairs almost $43 billion. In 1995, improvements expenditures are expected to be about $74.9 billion and maintenance and repairs $42.4 billion. In 1994, total maintenance/repairs/improvements work to owner occupied properties totaled $77.3 billion and to rental properties was $33.3 billion.
In 1995, shipments of manufactured housing (mobile homes) continued to climb at a substantial rate. Shipments went up another 12 percent, following increases of 20 percent or more for each of the previous three years. The 340,000 units shipped in 1995 were double those in 1991. Shipments in 1996 are expected to gain, although at a slower 6 percent pace, to about 360,000 units.
A wide range of factors has affected the market for these housing units. Affordability is even more important for mobile home customers than for conventional housing buyers. Mobile home shipments are more sensitive to shifts in the overall economy, but slightly less sensitive to interest rates. Another important factor is the relative cost of manufactured housing compared to other owner alternatives or rentals. Manufactured housing can be put in place and occupied very quickly and has become like more conventional housing in appearance. Over the years standards have changed to improve the safety and quality of the units. Financing options for the buyer have also improved to the point where sometimes financing is offered which is similar to that available for conventional housing. Design alternatives (including computer aided design) offer buyers a broad range of designs, features, and materials. The trend toward the production of larger and more multisection manufactured housing units which more closely resemble conventional housing, has broadened the market. In 1995, half of total units produced were for multisection structures. On the negative side, manufactured housing still faces some serious zoning restrictions and continues to experience image problems.
In 1994, the average new single-section manufactured housing unit sold for $23,900 and was 1,085 square feet. The average multisectional unit sold for $42,900 and had 1,565 square feet. Total estimated retail sales in that year were almost $10.2 billion.
The popularity of manufactured housing varies regionally. In 1995, shipments in South Atlantic states accounted for 30 percent of total U.S. shipments. The East South Central and West South Central area each accounted for 16 percent, and the East North Central for 11 percent. Mountain states accounted for 9 percent of shipments, West North Central 7 percent, Pacific 6 percent, Middle Atlantic 4 percent and New England 1 percent. Most units are sold by retailers (manufactured home dealers) but some are sold directly to developers, mainly multisection units.
Most manufactured homes are placed on individual lots or in manufactured housing parks in small towns and rural areas. Units used in urban markets are usually located around the fringes of metropolitan areas, on leased land in zoned parks. Some, however, are placed in planned manufactured home communities resembling conventional home developments in outer suburban or rural locations.
The construction and installation of these units are controlled by the Department of Housing and Urban Development’s National Manufactured Housing Standard. This is presently the only national building code in the United States and a program that has been threatened by possible Congressional action to remodel the Federal government and balance the budget. Excluded from this category are factory built units made to either state or local building codes, that are usually referred to as panalized or modular prefabs. Manufactured housing units are shipped from at plant as single-section units or as single-wide sections of multisection structures. Most are built for housing purposes but some are made for light commercial use, such as offices, clinics, or classrooms.
The major customers for these units remain first-time home buyers, rural inhabitants, retired people, lower income individuals and families, and various nontraditional households. A study of the population living in manufactured housing shows that most (by far) are married, have a median income of $26,000, and almost one third are blue collar workers (28% white collar, 19 percent retired, 21% other). The study also notes that the average age of the head of household is 45.4 years.
The inflation-adjusted value of industrial construction put in place increased in 1995, reflecting the continued growth of the U.S. economy. The long-term rate of increase may be slower than in most previous recoveries because of the rise in interest rates and slower economic growth.
Although the long-term outlook for industrial construction is subject to many uncertainties, it is likely to be one of the stronger construction markets during the next five years. Because the U.S. economy and U.S. exports are expected to grow during the period, the economic climate should be moderately favorable for industrial construction. Strong common stock prices and fairly low interest rates will make it easier to finance industrial expansion. Negative factors include continued uncertainty about the economy, regulatory burdens, and heavy debt loads of many companies.
Office construction increased by over 10 percent in 1995, but was still 57 percent below its 1985 record. Small gains are expected in 1996, but the current surge has probably neared its peak level.
Although the office supply/demand situation has improved, the office construction market remains burdened with high vacancy rates, slower growth in white-collar employment, and technology trends favoring substitution of home offices for office buildings. In many office markets prime office buildings are for sale at prices below the cost of construction. Nevertheless, a sizeable amount of office construction will continue because of strength in a small number of cities and market niches. Most banks have eased their qualifying requirements for commercial real estate loans, and many building projects that were shelved five years ago are now active.
In 1996, white-collar employment will increase very slowly because of tightening labor markets, modest economic growth, and corporate cost cutting. Over the next five years, growth in white-collar employment is likely to remain low for demographic reasons, which will tend to keep vacancy rates high at the current rates of construction. In addition, the trend toward telecommuting is gaining momentum, as the as the improving cost and availability of technology makes it feasible for more workers to work at home.
The office renovation business has fared better than new office construction in recent years. In some markets expenditures for office renovation are probably greater than new office construction put in place. Much of the growth in this market segment is the result of over-building during the 1980s, which compelled owners to upgrade their older buildings to retain tenants. Although expenditures for office remodeling are likely to remain at high levels, the era of rapid growth is largely over because of market maturation.
Hotels and Other Commercial Buildings
In 1995, construction of hotels and motels soared 40 percent above the 1994 level. Most gambling casinos are classified as hotels in the construction statistics, and much of the current boom is attributable to this factor. A further, though smaller, gain is likely in 1996. After 1996 the level of construction will be about in line with the underlying demand for hotel lodging. It’s a 50-50 bet that the casino-building boom will last through 1997.
The construction category of “other commercial buildings consists of all commercial buildings except office buildings and hotels, and includes warehouses, grain elevators, shopping centers, parking garages, banks, fast-food restaurants, and gasoline stations. In recent years, shopping centers have accounted for about half of the value of construction work in this-category, and warehouses for about one-fourth.
Store construction increased by about 10 percent in 1995 and another gain is likely for 1996. The surge in store construction has occurred despite the financial woes of many established retail chains, and despite weak gains in retail spending. Much of the current strength in store construction is in “big box” stores and centers. Big box stores are non-mall discount stores or large stores which carry a narrow category of products (such as electronics, building supplies, or pet supplies) in depth at discount prices. Another important segment consists of neighborhood shopping centers close to new housing subdivisions. The expected recovery in housing starts, along with lower interest rates, should boost neighborhood shopping centers in 1996.
After 1996 the boom in big box store construction is likely to level off. The softness in consumer spending is now affecting even the most successful discounters, and some of them are suffering from growing pains as well. A potential growth area in retailing could be automobile “megadealers”, with high-tech showrooms selling used cars and multiple brands of new cars.
Construction of service stations and auto repair garages increased sharply in 1995 and will remain strong in 1996. The auto service business has benefitted from the increasing complexity of automobiles and the increasing proportion of older cars that need more maintenance. Although the number of gasoline stations has declined sharply over the past three decades, most of the remaining stations are investing large amounts in construction to become high-volume sales outlets, convenience shops, fast food outlets, or specialized service stations. According to economic and demographic forecasts for the next five years, there will be further increases in the number of vehicle-miles driven and in the demand for auto service and repair.
Private Electric Utilities
Electric utility construction increased in 1995 and the trend should continue through the 1990’s. The rate of gain over the long term will be strongly affected by interest rates and general economic growth, with new construction gaining at about the same rate as the GDP and repair construction at a faster rate.
Although the industry enjoys good growth in the demand for electricity, competition has increased because of the National Energy Policy Act of 1992 and actions by certain state utility commissions. This has resulted in less construction by the regulated utility companies, but more construction on behalf of congeneration projects, non-regulated power generators, and municipal supplies. There will probably be a quickening in the pace of new power plant starts, but utilities are unlikely to order large numbers new power plants. Instead, the emphasis will be on energy conservation, expansion of existing facilities, and heavier use of existing capacity.
This category of construction includes new power plants, transmission lines, pollution control facilities, conversion of existing power plants from oil and gas to coal, and modernization of existing power plants and other buildings. This category does not include government owned facilities or power plants owned by manufacturers.
Expenditures for the maintenance and repair of electric utility systems have grown rapidly and are almost as large as new utility construction spending. Maintenance and repair expenditures will continue to grow rapidly through the 1990s, as the average age of operating power plants increases and as operations become more complex.
Hospital and Institutional
This category includes hospitals, outpatient clinics, nursing homes, convalescent homes, orphanages, and similar institutions for prolonged care. (Buildings that are primarily used as doctors’ offices are classified as office buildings.) About 70 percent of the value of this construction is for hospitals and clinics; the remaining 30 percent is for nursing homes and similar facilities. A noteworthy feature of hospital and institutional construction is that 70 percent of the value is for additions and modernization at existing facilities, while only 30 percent is for new facilities. About 75 percent of this construction is for privately owned facilities, and 25 percent for publicly owned facilities.
Construction of health care facilities declined slightly in 1995, in part reflecting uncertainty about health care financing. In 1996, hospital construction will probably resume its long-term upward trend, and between 1996 and 2000, health care will probably be one of the faster-growing construction markets.
In recent years the health care sector has been impacted by many of the down-sizing and cost-cutting trends that have effected the rest of the U.S. economy. A short-term result has been a decline in new hospital construction. This decline is likely to be brief and mild, as was the case in the mid-eighties, during a different round of cost containment.
Aside from health care financing, the most important factor in the longer term outlook for hospital and institutional construction is the rapid increase in the number of elderly Americans. People over 65 average about six times as much hospitalization, per capita, as persons under 65. Nearly 90 percent of the 1.8 million Americans in nursing homes are 65 or older.
Nursing home construction is likely to increase even faster than overall health care construction, because it is focussed on the most rapidly growing segment of the population. Between 1980 and 1990 the nation’s nursing home population grew by 24 percent, and demographic projections indicate it may row even more between 1990 and 2000.
Additional factors that will support health care construction are the increasing use of new sophisticated medical treatments. The prospect of major increases in Federally mandated health insurance coverage, the need for additional clinics for drug addicts, the increasing number of AIDS patients, and the need to modernize in order to attract paying patients and scarce health care personnel. Negative factors in an otherwise bullish outlook include the poor fiscal condition of hospitals with large proportions of charity patients, the declining proportion of workers with employer-paid health insurance, and aggressive cost reduction on the part of major insurance payers. Publicly owned hospitals are less able to cope with these negative factors, so their construction is expected to lag behind that of privately owned hospitals.
New road and bridge construction increased I percent in 1995 to set an all-time record, and is expected to remain at high levels in 1996. Expenditures for highway maintenance and repair have also increased, partly at the expense of new construction. This trend will probably continue through the 1990s.
The severe winter of 1995-96 will probably result in less new construction and more maintenance and repair than would normally be expected. In some jurisdictions excess snow-removal costs are charged against the capital budget, which reduces funds available forboth new construction and M&R.
For the rest of the century, highway construction expenditures will probably continue to increase to prevent a decline in the condition of the nation’s highway infrastructure. The huge Federal-aid Highways program, will expire in 1997. Although it will probably be renewed, the size and scope of the renewed program are impossible to predict. Any sustained increase in Federal funds would require an increase in Federal motor fuel taxes, but the large balance in the Highway Trust Fund could accommodate a substantial surge in expenditures. Although total state government spending on road construction has increased only slightly faster than the inflation rate, several states have committed themselves to massive road building programs.
About 25 percent of the value of highway construction put in place consists of bridges, overpasses, and tunnels, while flatwork (primarily roads) accounts for the remaining 75 percent. Bridge work is expected to grow faster the flatwork during the next several years because of the need to replace obsolete or unsafe bridges. According to the Federal Highway Administration, 23 percent of the highway bridges in the United States were structurally deficient, and an additional 21 percent were functionally or structurally obsolete in 1990.
Highway maintenance and repair expenditures have grown during the past two decades as the road network has become larger and older. In 1995, the current-dollar cost of highway maintenance and repair was about $29 billion compared with $42 billion in new highway construction put in place. While some of this work was routine maintenance such as mowing grass, much of it was typical construction activity such as repaving roads and painting bridges. Highway maintenance and repair expenditures will probably grow more rapidly than new construction over the next decade (Table 2).
Mass transit construction received a 10 percent boost from Federal spending in 1995, and a smaller increase is expected in 1996. Of the $155 billion in ISTEA funds that have been authorized from 1992 through 1997, $35 billion was earmarked for mass transit projects. In addition a large share of the discretionary Federal transportation grants are being diverted from highways to mass transit because of air pollution concerns and local development policies.
Airport construction has gained dramatically in the past decade in response to the large increases in air travel. Federal Government spending for airport construction is expected to decline by more than 5 percent in 1996, while local investments in airports will remain at high levels. In the longer term overall airport construction spending will level off or even decrease until more domestic airlines improve their financial performance.
Water and Sewer Systems
Water supply construction is expected to increase in 1996, but sewerage construction will probably decline. Both of these construction categories did well in 1995, reflecting the recovery in building construction as well as work on long-deferred projects.
After 1996 sewerage construction will probably continue to gain, although at a slower rate than the overall economy. Federal spending may not keep up with inflation, but state and local government finances are expected to improve. The relatively modest but sustained recovery in building construction will also support sewerage construction.
In the longer term, waterworks will probably be one of the more rapidly growing categories of public construction. The aqueduct systems of most older cities are so ancient that extensive replacement work must be done each year. For the United States as a whole, the current level of construction is much less than that needed to replace the waterworks every 50 years, which is recommended practice. Most water utilities are in a good position to raise the capital needed, so a steady increase in replacement construction is likely for the rest of the century. The Safe Drinking Water Act requires numerous upgrades and replacements of water supply facilities. The Water Resources Act has expanded the role of the Federal Government in municipal water supply and appears to have facilitated increased Federal funding for water supply construction.
Solid waste disposal facilities, including those for resource recovery, are a small but rapidly growing construction market. Resource recovery facilities are increasingly common because of improved efficiency, rising land prices, and environmental objections to landfills.
New construction expenditures for schools, libraries, and museums increased 7 percent in 1995. Another solid increase is expected in 1996. About 70 percent of the spending was for primary and secondary schools, while colleges and other higher education facilities accounted for an additional 25 percent. More than 80 percent of educational construction expenditures were for publicly owned buildings; the rest went for privately owned buildings.
The school construction boom, which began in the late 1980s, is encountering the budget problems of state and local governments. Despite strong underlying demand, budget problems will restrain expenditures for educational construction after 1996 and probably through the 1990s.
Conservation and Development
This construction category includes water resources development and protection expenditures, as well as the electric power construction programs of the Federal Government. Federal expenditures account for about 70 percent of conservation and development construction. Three Federal agencies – the Corps of Engineers, the Bureau of Reclamation, and the Tennessee Valley Authority (TVA) – spend most of the Federal funds for this purpose. (State and local government-owned electric power plants are classified under miscellaneous construction.)
Conservation and development construction will] decline in 1996 because of cuts in water resources programs and TVA power plant construction. Federal budget constraints are expected to result in declining investment in conservation and development for the rest of the decade. Although State and local governments have increased their investment spending for conservation and development, they still account for less than a third of this type of construction.
Federal Industrial Construction
This category consists of Federally owned manufacturing, assembling, and processing buildings and related facilities. More than 60 percent of this construction is funded through one Department of Energy program Atomic Energy Defense Activities. Most of the construction for this program is related to weapons R&D and production, atomic waste isolation and reprocessing and environmental cleanup. Another large segment of Federal industrial construction is for energy R&D facilities.
Industrial construction spending has been under severe budget pressure in recent years, and this trend is expected to continue through the decade. Construction spending in 1995 exceeded the 1994 levels primarily because of work needed to close defunct facilities. The Federal budget calls for a decline of at least 5 percent in industrial construction spending in 1996.
COPYRIGHT 1995 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group