Single-family housing, infrastructure may be boons for construction industry

The construction industry should see moderate growth in 2018, but various factors—such as whether an infrastructure funding bill will pass Congress this year—are still unclear.

Dodge Data & Analytics, a Chicago-based firm specializing in analytics and software-based workflow integration solutions for the construction industry, said in its 2018 Dodge Construction Outlook that it expects the value of construction starts to increase 3 percent over 2017 to $765 billion.

"The U.S. construction industry has moved into a mature stage of expansion," said Robert Murray, chief economist for Dodge Data & Analytics, in connection with the 2018 Outlook.

After rising 11 to 13 percent annually from 2012 to 2015, construction starts climbed only 5 percent in 2016, according to Murray.

Multifamily housing and hotels pulled back in 2017 from their 2016 levels, he said, while single-family housing, offices and warehouses had strong starts last year, as did transportation terminals, schools and health care facilities, he said.

Dodge broke down its 2018 projections as follows:

• Single-family housing starts will rise 7 percent to 850,000. "Continued employment growth has eased some of the caution shown by potential home buyers, while older Millennials in their 30s are helping to lift demand for single-family housing," Dodge said.
• Multi-family housing starts will fall 11 percent to 425,000. "This project type appears to have peaked in 2016, helped by widespread growth across major metropolitan markets," Dodge said.
• Commercial building activity will grow 2 percent in 2018, compared with 3 percent in 2017 and a whopping 21 percent in 2016. Office construction should be strong, but store and hotel construction should remain weak in the wake of the 2016 boom, according to the company.
• Institutional building, which leaped 14 percent in 2017, will fall back to 3-percent growth in 2018, according to Dodge. The recent passage of school bond measures should keep school building starts strong, it said.
• Manufacturing plant construction will drop 1 percent after advancing 27 percent in 2017 because of several massive petrochemical projects, according to Dodge. There should be moderate growth in manufacturing construction, thanks to planned additions in square footage, it said.
• Road and bridge construction should grow by 3 percent after 1-percent improvement in 2017, according to Dodge. "Highways and bridges should be helped as federal funding rises to the levels called for by the FAST (Fixing America's Surface Transportation) Act, while the environmental categories will partly reflect reconstruction efforts related to Hurricanes Harvey and Irma," it said.

Accella Tire Fill Systems, the Chattanooga, Tenn.-based manufacturer of TyrFil polyurethane flatproofing systems for off-the-road tires, said it was encouraged by the latest ARA Rental Market Monitor issued by the American Rental Association.

The ARA's projection of a $51.5 billion market for rentals in 2018 bodes well for the non-residential construction and OTR tire industries, Accella Tire said.

"It points to the fact that the economics around equipment rentals are positive—exhibiting performance that nearly doubles the growth rate of the economy," the company said.

Although the effects of passage of the recent tax reform bill are currently unclear, tax reform could help accelerate growth in the construction and other markets, Accella Tire said.

Also, the ARA study indicates that equipment rental remains a strong option for construction businesses, it said.

"All of the above generally create a scenario for the construction equipment marketplace that shows positive forward-looking growth and an outlook of health for the rental equipment marketplace overall," the company said.

Outlook for bill

Dodge's outlook for the construction industry was highly optimistic for 2017, but part of that optimism was based on the new Trump administration and its anticipated infrastructure package, which was estimated as high as $550 billion.

The political difficulties in January 2018—including a brief government shutdown Jan. 20-22—make the prospects for passage of an infrastructure funding package in 2018 unclear.

"Beyond the budget, the biggest agenda item that we expect to see the White House pushing Congress on this year is infrastructure," the Tire Industry Association said in the Jan. 15 issue of its Weekly Legislative Update.

Whereas infrastructure spending tends not to be controversial, the Republicans and Democrats are already taking sides on the issue, according to TIA.

The Democrats released their infrastructure plan when it became apparent Republicans wouldn't include Democrats in infrastructure discussions, it said.

"With the increases to the deficit created by the tax-reform bill, there may be challenges on both sides of the aisle both with respect to the funding and details of an infrastructure bill," TIA said.

On Jan. 22, the news website Axios leaked a six-page document purporting to be the funding principles for the Trump administration's infrastructure package.

The document begins by outlining an "Infrastructure Incentives Initiative" that would encourage state, local and private investment in core infrastructure by providing grants.

Federal incentive funds would be conditional on achieving milestones within an identified timeframe, according to the document. This program would account for 50 percent of total infrastructure appropriations, it said.

The funding plan would apply not only to surface transportation but also to airports, passenger rail, maritime and inland ports, flood control, water supply, hydropower, water resources, drinking water facilities, storm water facilities, and brownfield and Superfund sites, according to the document.

A major feature of the infrastructure plan, accounting for 25 percent of appropriations, is a Rural Infrastructure Program to encourage investment in rural economies by facilitating freight movement, improving access to reliable and affordable transportation, and other methods.

"States are incentivized to partner with local and private investment for completion and operation of projects under this program," the document said.

The document does not mention an increase in the federal motor fuels tax, which has often been cited as an easy method of revenue enhancement, but explicitly endorses the concept of states placing toll booths on interstate highways to gain revenue for infrastructure improvements.

The Democratic Party plan, titled "A Blueprint to Rebuild America's Infrastructure," has as its stated goal a $1 trillion federal investment in infrastructure improvement, creating more than 15 million jobs as a result.

"The American Society of Civil Engineers says we must spend $1.6 trillion above current levels just to get our infrastructure in a state of good repair," the Democratic document said.

The four guiding principles of the Democratic infrastructure plan, according to the document, are:

1. Buy America provisions to guarantee the use of American products in rebuilding the infrastructure;
2. Strong protections for workers, such as the Davis-Bacon Act mandating payment of the prevailing local wage for public works projects;
3. Stronger participation of women- and minority-owned businesses; and
4. Accelerated project delivery while adhering to important environmental protections.

The Democratic plan would create a new infrastructure finance entity, like an "I-Bank," that would unlock pools of capital to provide low-cost loans or loan guarantees for infrastructure projects, the document said.

Murray said he expected President Trump to bring up infrastructure investment in his State of the Union address, but congressional passage of an infrastructure package is uncertain in 2018.

"If an infrastructure bill is not passed over the next few months, the construction industry should still be able to see moderate expansion during 2018," Murray said.

"The public works sector will continue to receive funding from bond measures passed at the state and local level in recent years, such as the $1.05 billion bond package passed by Dallas voters in the November 2017 elections," he said.

"And, even if an infrastructure bill were to achieve passage in 2018, the impact would be felt more in 2019 than 2018," Murray said. It would take that much time to distribute the money to the states and determine specific construction projects, he said.

What tire makers say

Among manufacturers of construction tires, Goodyear declined to discuss specifics, but did say it expected the North American construction industry to grow in 2018.

"Goodyear will be well-positioned to serve construction firms," the company said.

"We continue to invest in our portfolio of trusted products, reliable services and management tools to help construction companies optimize the performance of their equipment and help lower their operating costs."

Continental Tire the Americas L.L.C. said it too expects strong growth in the construction industry in 2018, based on market data.

"We see the construction industry continuing or even increasing its pace, based on strong consumer spending and business investment which are backed domestically by strong fundamentals and a fiscal stimulus package, and externally by ongoing strength in global activity," said Helmut Keller, head of brand and product management, Continental Commercial Vehicle Tires the Americas.

"Continental is well equipped with a comprehensive portfolio of new and retread tires and tire marketing solutions to help all construction fleets discover their lowest overall driving cost," Keller said.

In a similar vein, Magog, Quebec-based construction tire manufacturer Camso Ltd. said its smart tires and track technology will provide the construction industry with the technology it needs for innovation and sustained growth.

"Imagine having a dump truck with tires that can actually help the operator or a central computer avoid potential obstacles like jagged rocks, or a compact utility loader that can help determine if soft muddy ground conditions can support the weight of the machine," said Mike Dembe, Camso executive product director-construction business unit, in a Camso report on smart tires and track technology.

Camso has been working for several years with original equipment manufacturers and contractors to gather data and interpret information to provide added value to its customers, according to the company.

"While technology like autonomous construction equipment may still be years away for most of the industry, some of the new types of tracks and tires being introduced today are a result of the data collected by teams like the one at Camso," the company said.

"The advancements made to solid tires in terms of durability and ride comfort, the expanded use of rubber tracks and the incorporation of radial tires on larger, faster machines are ways manufacturers are responding to the market's need for versatility, efficiency and durability from their machines," it said.

Michelin North America Inc. said it expects the construction market to grow approximately 4 percent in 2018 because macroeconomic indicators are positive for Gross Domestic Product, housing starts and housing permits.

"We expect growth to slow down versus the last four or five years because the same previous indicators are slowing down as well," said Justin Brock of the Michelin B2B construction segment.

Brock quoted the American Institute of Architects as predicting slower growth for 2018 in the most recent AIA Consensus Construction Forecast.

"The commercial market is going to perform well, while the industrial market will dramatically slow," he said.