CMD: Construction Starts Results Are In

Alex Carrick, CMD

CMD has released its quarterly forecast on construction starts and predicts improvement for residential and non-residential construction in the second quarter.

The forecast follows lower than expected U.S. construction starts in the first quarter, due to severe weather that greatly impacted construction activity. During the early part of the year, residential starts were hardest hit, with the Northeast and Midwest regions most affected.

“The construction market is improving. The cycle is back,” Alex Carrick, CMD’s chief economist, told Commercial Property Executive. “It’s still not all systems go. It’s hit and miss and there are sections that are certainly stronger than other sections of the market. So far, there really isn’t a lot of evidence of takeoff in labor rates or material costs, which is often what you’re worried about as your economy is improving.”

The CMD forecast is derived by combining proprietary data with macroeconomic factors. The new report predicted total starts performing nearly 14 percent lower than forecast in the first quarter. Carrick said these results could have been worse, but were buoyed by a dramatic increase in March starts in both the residential and non-residential sectors.

“There was certainly some modification of the numbers based on the first quarter being bad; the first quarter last year was also bad, which kind of evened it out,” he said. “If you go back a number of years, it seems like the first quarter has been difficult for the economy and the construction markets for a good long time now; more than the usual seasonality.”

After revising first-quarter projections, construction starts for North America are expected to grow 9.2 percent in the U.S. as the numbers forecast for total residential starts for the rest of 2015 was downgraded significantly to 14.7 percent growth, from 19.9 percent in its last forecast, while non-residential starts have been downgraded from 7.8 percent to 6.4 percent.

Data from the report showed extreme weather conditions negatively affected U.S. gross domestic product in the first quarter. However, despite the lack of construction activity, economic fundamentals remain positive, particularly for the consumer, which points to stronger growth for the rest of the decade in the residential sector and in consumer-oriented non-residential construction such as retail development.

Carrick explained that while a dramatic drop in the world price of oil and the appreciation in the value of the U.S. dollar versus many other currencies will negatively impact some investment plans, it will benefit construction starts and activity levels since it is revving up faster than almost anywhere else in the global economy.

“One of the big growth areas will be in mixed-use projects as everyone seems interested in these,” he added. “They are a little hard to quantify because the projects are usually categorized to the main use, but that sector of the market is where everyone is interested.”