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Construction Starts – Behind the Headlines

New Construction Starts data represents a share or a portion of all construction, on average about 60% of all construction. Dodge Data starts totaled approximately $740 billion and $785 billion for 2016 and 2017. Total construction spending was $1,246 billion in 2017 and $1,300 billion in 2018. What happens if within individual markets the share of information collected in the starts data is not constant from year to year?

Office starts increased by an average of 20%/year from 2012 to 2015. Spending increased by 20%/year from 2013 to 2016. But then in 2016, starts increased 31% and spending in 2017 turned to a 1% decline. 2018 spending gained only 10%. That was unusual and unexpected since 2016 starts indicated a very large increase in spending the following year.

Growth in starts can signify one of two things; future growth in spending, or growth in capturing a larger share of the market. To find share of market captured, starts need to be compared to the cash flow over the time for which those starts will be spent. Typical cash flows predict 20% gets spent in the year started, 50% in the following year and 30% in the 3rd year.

For the period 2011-2015, office starts compared to the value of cash flow over the next 3 years stayed within a range of 45% to 50% of total spent. For 2016 starts, the share of starts compared to cash flow of those starts jumped to 60%. In other words, the growth in spending in 2017 and 2018 did not correspond to the huge growth in starts in 2016. The 31% growth in 2016 starts did not produce future growth in spending but may have mostly represented growth in capturing a larger share of the market.

Analysis shows similar activity in Transportation starts versus spending and to a lesser extent is several other markets.

Starts vs Spending Cash Flow Offc Trans 4-22-19

Construction Starts Data can vary year to year as a share of total market activity. Commonly used to predict future spending, the share of market captured in the starts data, if not consistent, can skew any use to forecast spending. Starts share of market must be analyzed before starts can be used to forecast future spending.

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