The title shows my west coast bias and how I don't want most (all?) of the people who read this to panic. Things are OK on the west coast (particularly in the Bay Area). The real headline from the American Institute of Architects (AIA) is that the Architectural Billing Index (ABI), a leading indicator for construction activity by nine to 12 months, is down for consecutive months for the first time since May to June 1012. It fell from 49.8 in November to 48.5 in December 2013. Any figure below 50 shows a contraction in architectural billings (and hence, less building construction down the road). The 48.5 figure for December represents the total U.S. building market as a whole. Breaking the number down by region and sector type tells a nuanced story:

Regional averages:

• West: 53.2
• South: 51.2
• Midwest: 47.0
• Northeast: 42.8

Sector averages:

• Multi-family residential: 53.8
• Mixed practice: 51.0
• Commercial/industrial: 47.1
• Institutional: 44.8

The ABI is essentially being dragged down by the Northeast (and to a lesser extent, the Midwest) and by the Institutional and Commercial/industrial sectors. The AIA's Chief Economist, Kermit Baker, states part of this overall decline in ABI this may be hangover affects from the Federal government shutdown last year. I buy that, particularly for Institutional projects (schools, college campuses, corrections facilities). But it doesn't explain why the West is showing continued strength. My hope is that things are just temporaily slow in the Northeast and Midwest due to the harsh winter and people working less. I guess we'll find out in the spring. Commercial construction continues to face headwinds in retail (malls are dying a slow death) and office (relatively high unemployment means less need for offices).

One last thing: building construction is highly dependent on local markets. Some cities are up, others are down. Same goes for sectors. This adds to the volatility of the regional numbers, which snowball into volatility in the national number, as the figure below from Bill McBride at the Calculated Risk Blog so elegantly demonstrates:

The recent slide in ABI is not encouraging, but keep it in perspective. The design/construction is volatile, and it's more important to keep an eye on your respective market.

To read the full AIA press release, click here. 

Total single-family home sales were down 20% in Sacramento from December 2012 to 2013. Cash buyers for home accounted for 19.5% of all sales, down from 25% a year ago. The inventory of homes increased 44.2% year-over-year in December. Sounds like bad news, right? Supply is up and demand from cash buyers, seemingly the best kind, is down. But trow into the mix that conventional sales (those where your typical buyer takes out a conventional mortgage) were up in December 2013 over the previous December and you have signs of a healthy housing market. Cash buyers are typically investors looking to rent homes. Conventional buyers signal improving consumer sentiment, a precursor to a recovering economy. The increase in inventory leads to slower price increases (with more options of houses to buy, purchasers have some leverage over sellers, keeping prices down). All this equates to an improving market in Sacramento after years of distress.

The winners:

• Transportation sector (mostly for highway projects; now up to $40.3 billion)
• Army Corps of Engineers projects
• Environmental Protection Agency (for clean water and drinking water projects)

The big loser:

• Military construction (cut to $9 billion)

Read ENR's summary of the bill here.

As with the beginning of every new year, the prognosticators put on their thinking caps and give their forecasts for the coming year. Iv'e read a couple of good articles (links provided below), but I'll summarize them as to make your life easier. Keep in mind these forecasts are for the United State as a whole. They may not directly represent regions or specific cities (San Francisco, for example, is marching to its own beat).

Here's my very basic summary of both articles:

2013: decent year, particularly since we’re still climbing out of the crater of the Great Recession, but most of the growth was in private residential. 2014: expected to be better, with the growth more evenly spread throughout construction sectors, except public infrastructure, which will continue to struggle due to a lack of investment.

2014 Construction Outlook (by EC&M Magazine)

(The link above is behind a registration wall and is a long read)

The nuts and bolts:

• Consensus among industry analysts is that 2014 will see modest growth; mid- to high-single digit growth rates for spending and square footage in 2014.
• The good news: construction volume and backlogs are improving, signs of growth in terms of GDP, employment and lending activity, and prospects of cheaper energy due to increasing U.S. production
• Bad news: still a lot of uncertainty in the market, including overall high unemployment, chance of higher interest rates, unresolved fiscal policy, lower GDP growth, dysfunctional government, unwinding of Federal Reserve stimulus (meant to keep interest rates low), etc.
• AIA's ABI is holding steady above the threshold "50" mark for 12 out of the past 13 months (ABI is a 9 to 12 month leading indicator):

Simonson Says: For Now, 2014 Looks Fortunate for Many (published by AGC)

(Link above is a short read and requires no registration to read)

The gist:

• More work to bid
• Material prices are in check
• Labor shortage may be the complicating factor

What happened in 2013:

• Construction spending rose 5% for the first 11 months of 2013, but the growth was unevenly spread and dominated by private residential.
• Institutional construction was hurt by an 8% decrease in spending on public education projects in 2013.
• 2013’s top performer in private nonresidential sector was lodging/hotel construction (up 26%). Worst performers were communications construction (down 13%) and power construction (down 11%, but only after a huge surge in wind facilities in 2012 to beat a tax credit that ended at the end of the year).

What to expect in 2014 in terms of construction by market:

• In 2014, power and manufacturing are expected to improve the most, with lodging and warehouse construction also showing strength (double-digit growth expected).
• 2014 should see modest growth in office and retail construction.
• Hospitals and educations construction is expected to remain weak in 2014.
• Overall non-residential construction should grow by 5-10% in 2014, with private residential expected to grow by 10% or more, goosed by double-digit growth in apartments in the near term and single-family housing later in the year.
• Public construction is expected to drop again, but less than the 3% drop in 2013.

What to expect in 2014 in terms of material prices:

• Bureau of Labor Statistics (BLS) reported that producer price indexes (PPI, or the measure of what contractors would charge to construct industrial, warehouse, school, office and healthcare buildings) increased 3-4% from November 2012 to November 2013. That increase in PPI is moderate but higher than those of the most recent years.
• Material index rose 1% over the past year.
• Modest (3%) increases in material prices are expected (no wild price spikes like in 2004-2008) and plenty of supply.

What to expect in 2014 in terms of labor:

• A lot of skilled labor ditched the construction industry during the Great Recession and have not (yet?) returned.
• To entice skilled workers to return or to enter the construction industry, employers will have to pay higher wages, benefits and bonuses. If new workers are not coaxed into the industry, employers will have to pay increasing amounts of overtime.
• Compensation is expected to increase 3-4% in 2014.

I recently wrote about how architectural billings, a leading indicator for construction, has slowed. It has in specific market regions and sectors, but multi-family housing is holding strong. The most recent data on overall construction shows similar trends.

Residential construction spending is going strong. This is typically dominated by single-family housing, which is not the focus on my construction interest, but that is also considered a leading indicator for construction activities. Private non-residential construction spending lags the economy, so there's no surprise that it's been low.  Bill McBride from the Calculated Risk blog thinks it will pick up in 2014 based on his analysis of the AIA's ABI. Public construction was down in November after inching up from its April low water mark. It is currently at 2006 levels (or 2001 in real terms). This is not surprising given that many elected officials are pushing austerity measures.

The above figures are courtesy of Bill McBride at the Calculated Risk blog. His full write-up can be read here.