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Construction Industry Outlook

Hello, and welcome to this edition of ElectricTV. Thanks for the click today on your home for electrical industry news, information and entertainment. I’m your host, Dominic Giarratano.

Today’s story probably falls within the first two categories: news and information. We’re going to spend some time today with Robert Murray, Chief Economist with Dodge Data and Analytics, to try to figure out his thoughts on where the industry is today, and where it’s going tomorrow. Bob, welcome. Thanks for taking the time to visit with us today.

Robert Murray: Glad to be here.

Dominic Giarratano: For our audience, give us a little background on who you are, and what you do.

RM: I set the broad forecast pattern for the construction forecast that we issue, and I am the primary economic spokesperson for Dodge Data.

DG: Bob – positive, negative, where do you stand today on where the economy is and how that relates to construction?

RM: You know, construction is a cyclical business. I think what stood out in terms of what happened in 2008 and 2009, there was a lot of thought that perhaps we’d established a new normal where the construction industry was going to be at a low level for an extended period of time.

That being said, I think what we’ve been seeing over the past two years is that the cyclical nature of the construction industry has been reestablished, but with a different flavor than what we’ve seen before. Any upturn in terms of the economy or the construction industry is generally more extended and gradual following a financial crisis. My sense in terms of looking at the data and looking at the progression of the construction industry is that perception tends to lag reality.

But that being said, what we’ve been seeing in terms of our construction start figures is that there has been an upturn underway, it’s just been very gradual. I think what we saw in 2014 was kind of a shift to more of a broad-based expansion, which is continuing into 2015.

DG: How do interest rates factor into this whole conversation, and maybe give us some background on whether they’re low, or are they high, and has that impacted construction?

RM: You know, I think that interest rates are still going to remain favorable, certainly through 2015 and into 2016. I think one of the benefits that we’re seeing right now is that while the U.S. economy has strengthened, the global economy overall continues to be quite sluggish. As a result of that, it’s somewhat it’s somewhat diminished global demand. Inflation has remained under control, and I think that gives the Federal Reserve some leeway to keep interest rates at a fairly low level, at least for the very near term.

With that, I think businesses are perhaps a little                bit more willing to go ahead with expansion. We’ve been seeing a pick-up in terms of employment. The growth of employment in 2014 was quite strong, in terms of the payroll employment numbers. What we saw last year was that payroll employment grew by an average of 260,000 jobs per month, which was considerably stronger than what had happened in the prior years. All this was taking place within the context of a low interest rate environment.

That being said, we do see the Fed beginning to tighten interest rates, if not in June then at some point during the third quarter. But essentially, we are moving from a zero federal funds rate up to maybe a quarter or a half a point, which is still quite historically low. I don’t see interest rates being a dampening element for overall construction activity for at least the next couple of years. I think it could be an issue by the time we get to 2017, but not so much in 2015 and 2016.

DG: When you talk about construction, what are some of the buzzwords you would use, and would “overheated” be one? What does that mean as it relates to where the industry is today capacity-wise, construction-wise, construction starts, your thoughts on that?

RM: Now is the time to go ahead, because now is the time where you’re seeing a low interest rate environment. Now is the time when the market has not become overheated. Last year, non-residential building, according to our statistics, was up 19 percent in dollar amount.

This year, we’re looking at only a 6 to 8 percent increase, but the thing is, the square footage is still going to be increasing, and if you pull out the manufacturing, what you see last year was about an 11 percent gain and this year it will be about an 11 percent gain. If you take out that volatile manufacturing construction sector, basically non-residential building is continuing to move upward at a fairly steady pace.

DG: From a more broad-based conversation, let’s drill down a little bit into electrical construction and your thoughts on where that side of the industry is today and going forward.

RM: Well, for us of course, we key in on specific project types. For electrical construction, I think we’re probably talking about what is happening, it really covers the spectrum of the industry. It certainly involves housing, it certainly involves non-residential building, and for non-residential building, we break it down into commercial building, institutional building, and manufacturing plant construction.

I think one of the things that has emerged in 2014, really 2013 and 2014, was a pick-up of office construction. Last year we saw a pick-up in the dollar amount for office construction in the range of 25 to 30 percent. When you look at market fundamentals for office construction, it suggests that further growth should be taking place.

To some extent, we’ve seen a number of large data centers, and I don’t really see any near-term change in that. That has certainly been a very important part of the recent office upturn. There’s certainly, I think, a lot of momentum. Vacancy rates for offices, and downtown vacancy rates are at about 11 percent. Suburban rates are still high in the 15 to 16 percent range, but it is still trending downward. In terms of market fundamentals, the office market is looking pretty good.

Some other commercial property types like hotel construction certainly continue to be on a pretty good upward movement. When you look at market fundamentals, revenue per available room last year was up about 8 percent. Certainly that is a good indicator in terms that there should be more lodging development taking place. I think one of the defining elements of this slow upturn is that when commercial building was beginning to show some life, the institutional building sector, specifically school construction, was lagging behind. Now we are seeing it turn the corner an contribute to the non-residential building upturn, which I think is a real plus for overall construction activity.

DG: Looking ahead into 2015, 2016 and beyond, is there any momentum behind this resurgence? Where would you say we are with respect to that?

RM: This is a construction expansion that I would saw is now approaching cruising speed. It still has a bit more to go. We’re looking at further growth taking place after 2015 into 2016. I think, though, by the time you get to 2017, the question would be, will higher interest rates at that time and sort of the higher levels of construction, lead to a flattening out and perhaps some slowdown in the expansion that we’ve had over the past few years.

DG: Can you speak to different regions of the country? Maybe spend just a couple minutes on what you’re seeing West, Central, South Atlantic, East Coast and your thoughts on the regional aspects of the construction industry today.

RM: Right now, if we sort of had to look at what’s happening regionally, I think the fact that the construction expansion is becoming more established is kind of like a rising tide that is benefitting all regions, with a qualification. Texas may not be seeing quite the same growth given this year’s pullback in manufacturing and petrochemical work for that state.

DG: What would your message be to the developer in the construction industry today looking ahead as we move forward into the second half of 2015 and even into 2016?

RM: For the developer, I would say, take advantage of this year. This could be, in terms of various factors, the best time to go ahead with projects.

DG: And your message or advice to the electrical contractor?

RM: For the electrical contractor, I would say, if you’ve experienced down times and you’re wondering where the recovery is, well, it is here. Now is the time, I think, to certainly actively scout out various opportunities because they are there and they are increasing. And again, I think now is the time to take steps toward expansion.

DG: Bob, thank you for your time today. We appreciate you coming down and talking with us today and giving us your insights.

RM: Pleasure to be here.

Thanks for tuning in to this edition of ElectricTV. Don’t forget to follow us on Facebook and Twitter for some behind-the-scenes extras and more. Until next time, I’m Dominic Giarratano. We’ll see you then.