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Backlog Construction Forecast Fall 2017

11-9-17

Total Construction Starting Backlog is at a record high, up 30% from the previous high in 2008.

Infrastructure and Residential sectors dropped to a decade low backlog in 2010. In 2013, nonresidential buildings hit the lowest starting backlog since 2004. Combined, total backlog hit a low-point in 2011, the lowest since 2003. Total Starting Backlog has been increasing since 2011, up 65% in 2018.

Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Residential backlog is at a post-recession high, although as will be explained later, it is new residential starts that are more important and starts have tripled since the 2009 low. 70% of all residential spending in the year comes from new starts. Residential starts are still 20% below the 2004 peak.

Starts Generate Backlog

New Starts increased at an average rate of 11%/year from 2012 to 2016. 2017 starts slowed to less than half that pace.

Nonresidential Buildings starts, even though there was a 1% decline in 2015, averaged 13%/year growth for the last 4 years. 2017 will post an 8% increase. The 6 months from Aug 2016 to Jan 2017 was the highest starts since Jan-Jun 2008, also the year nonresidential buildings spending peaked. The 6 months Apr-Sep 2017 just surpassed both those previous peak highs.

Non-building Infrastructure starts were the highest in the 1st 6 months of 2015 than any 6-month period in history. Total 2015 starts increased 26%. 2016 is down just 2% from the peak 2015 starts and 2016 is the 2nd highest starts on record. Those early 2015 starts will still generate 10% of all spending in 2018. 2017 starts are level with 2016. After revisions, 2017 starts may set a new peak high.

Residential starts in 2016 posted the best year since 2005-2006. New starts in 2016 were revised up to show an increase of 10% over 2015. That follows five years of growth averaging 20%/year. New starts in Q1’17 reached an 11 year high.

Entering Backlog

New Backlog is added every month from New Construction Starts. When projects first enter backlog, the amount counted to backlog is the total value of project revenues under contract that are about to start construction, or the same as the new start values. For purposes of predicting future construction spending, as each month of project construction passes, work that has been put-in-place is subtracted from the total value to get the amount remaining in backlog.

Starting Backlog

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or three years ago. The amount counted in backlog is the value of the project that remains or that has not yet been put-in-place. Backlog is the total amount of future spending that will be generated by the project, commonly referred to as the ETC. The sum of all ETCs represents current backlog.

  • Nonresidential buildings 2018 starting backlog is up 10%
  • Non-building Infrastructure 2018 starting backlog is up 12%
  • Residential buildings 2018 starting backlog is down 3%
  • Starting Backlog is at an all-time high for nonresidential buildings and non-building infrastructure.

Typically, starting backlog is a reference to the amount of work in backlog on January 1st. It is referred to as the Starting Backlog for the coming year. The sum of all ETCs as of December 31st represents Starting Backlog.

For any project that has a remaining duration going out past year end, backlog at the start of year does not represent the amount that will be spent within the year. Some of that project backlog will be spent in future years. For this reason, backlog is not representative of spending within the year and the change in Starting Backlog from year to year is not an indication of a change in spending from year to year.

Values and duration of projects that make up backlog help to better predict spending activity over time, particularly in the coming year.

A cash flow schedule of all ETC backlog and predicted new starts provides a tool to predict future spending. It is not enough to look at just the change in backlog to get an indication of the strength of the market. While continued growth in backlog is important, the predicted cash flow from backlog and cash flow from new starts is necessary for predicting spending.

Construction spending is strongly influenced by long duration projects in backlog, more-so than normal monthly starts growth rate. The pattern of continuing or ending cash flows from the long duration backlog projects causes fluctuations in spending that supersede the balance cycle of one month of old jobs ending for every new month of jobs starting. This often can be responsible for some of the monthly fluctuations of construction spending.

The following table shows predicted cash flow from backlog on record as of October 1, 2017 and predicted starts that will generate future backlog in 2018.

Backlog Cashflow 2018 and 2017 11-10-17

Look Ahead to 2018

Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2018.  For four years, from 2010 to 2013, all nonresidential backlog remained nearly constant. Since then, growth has been similar to the pre-recession construction boom of the early 2000s.

Nonresidential buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle. Starting backlog has increased for 5 years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for 5 years at an average 9%/year. Buildings will reach a new high for spending in 2018.

Non-building Infrastructure 2018 starting backlog is up 35% since 2014 but spending from backlog is up only 10%. Infrastructure starting backlog has been increasing for more than 10 years, sometimes only a fraction of a percent per year. Since 2010, backlog increased only 3%/year for the first 5 years then it jumped 35% in the last 3 years. Spending within the year from starting backlog is up 8% in 2018. Infrastructure spending will hit a new high in 2018.

Backlog incld Res Starts 2005-2018 11-8-17

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much residential spending within the year. New residential starts in Q1’17 reached an 11 year high.

  • Cash flow models of construction projects in backlog are indicating substantial acceleration in nonresidential spending over next year, perhaps most notable in infrastructure.
  • 75% to 80% of nonresidential spending within the year comes from Starting Backlog.
  • 70% of residential spending within the years comes from New Starts. Residential starts are at a post-recession high.
  • Share of spending within the current year from backlog is at an all-time high for nonresidential buildings and non-building infrastructure.

Nonresidential Buildings

Nonresidential buildings experienced a decline in starting backlog as recently as 2013. Since 2013, nonresidential buildings starting backlog is up 60%. Backlog will hit a new all-time high for 2018, 5% over the previous high in 2009 . Not only is starting backlog higher coming into 2018, but also spending from backlog is predicted up by 10%. This will produce a new high in current dollar spending.

Revenues from starting backlog account for 75% of all nonresidential buildings construction spending within the year.

Backlog for Nonres Bldgs 2014-2019 11-12-17

Educational starts, backlog and spending has been increasing for 5 years or longer. 2018 starting backlog is up 16% from 2017. Starts for 2018 are predicted to go up 13% and this will push 2019 starting backlog even higher. This should produce good spending growth for the next few years.

Office construction starting backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018 it’s up 27% over 2017. Office starting backlog increased an average of 28%/year for the last 5 years. Actual spending increased an average of 17%/year. Backlog growth looks like it will support very strong spending increases into 2019.

Commercial Retail backlog will hold steady from 2017 into 2018. This should level off spending after 7 years of strong growth. 2018 backlog still produces a spending increase but current projections show a slight drop in 2019.

Lodging backlog increases slightly for 2018. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.

Manufacturing posted a 100% increase in new starts in 2014 that drove starting backlog to new highs for the next two years. With new starts slowing back to normal by 2016, starting backlog dropped 20% in 2017 and spending dropped 12%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts and that pushed 2018 starting backlog again to a new high. This will support a spending rebound in 2018-2019 after a drop of 18% in the last two years.

Non-building Infrastructure

Non-building infrastructure backlog stood at $180 billion in 2008, the last pre-recession year. At the beginning of 2017, non- building infrastructure backlog hit an all-time high, $260 billion, up 45% from 2008. For the last three years, starting backlog is up 40%. In 2018, it’s up 13%, another new high.

Revenues from starting backlog account for 80% of all non-building infrastructure construction spending within the year.

Backlog for Nonbldg Infra 2014-2019 11-12-17

Power backlog has doubled since 2014. It’s up 11% for 2018. Starts are down 14% from the 2015 peak, but spending from backlog is increasing. Most relevant is that backlog increased much stronger than spending. Backlog is being driven higher by very long duration projects that started in 2015, 2016 and 2017.

Highway starts declined the last two years from the peak in 2015, but starting backlog increased the last 3 years and is now 25% higher than 2015.  The last three years of highway starts are still feeding spending in 2018. There is very little change in the amount of spending from backlog, so 2018 spending won’t change very much from 2017.

Transportation new starts shot up by 70% in 2017, pushing 2018 starting backlog to a new high, up 75% from 2017. That will help increase 2018 spending by more than 15%, but a larger spending increase could come in 2019.

Environmental Public Works, Sewer/water/Conservation is experiencing declining starts, declining backlog and declining spending from backlog. All are at the lowest since 2014. We may not see any increase in construction spending until 2019.

Public Work

Public vs Private starts are not tracked separately, but the public share of markets is known. Therefore a projection of public backlog is possible. Highway and Environmental Public Works are 100% public.  Educational is 80% public, Transportation is 70%, Amusement/Rec is 50%, Healthcare is 20% and Power is 10% public, along with few other smaller shares. Starting backlog for 2018 is up 40% from 2014 due to the predominantly long duration projects that make up public work. This is a post-recession high and is nearing the all-time high of 2008. Increased backlog is indicating the best construction spending increases since 2008 for the next two years.

Residential Buildings

Residential new starts hit bottom in 2009 and starting backlog hit bottom in 2010. Residential on average has the shortest duration and new starts has a dramatic impact on the amount of available work. Both new starts and backlog are now 3x higher than the lows. New residential starts have increased every year since the 2009 bottom, but are still 25% lower than 2004-2005. Residential spending reached its peak of $630 billion in 2005. Current spending is still 15% below that peak. In constant $, spending is 30% below that peak.

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike longer duration nonresidential projects, backlog does not contribute nearly as much. If no new work started within the year, within a matter of a few months there would be no backlog ETC left to support the residential construction industry.

New starts slowed in 2017 to only 4% growth and similar growth of 6% is expected for 2018. This is not unexpected after 5 years (2012-2016) of new starts growth at an average 20%/year. This leads to a prediction of 2018 spending up only 6%.

All construction starts data in this report references Dodge Data & Analytics starts data.

See this companion post for  Starts Trends Construction Forecast Fall 2017

Also see 2018 spending forecast Spending Summary Construction Forecast Fall 2017

So, About Those Posts “construction spending declines…”

You know those articles you’ve been seeing, “Worst year for construction spending since 2010″, well there’s some truth to that, BUT

2017 is the 6th year of the expansion. It has slowed, but… Here comes the BUT!

10-4-17 – Construction numbers are at all-time highs! Slowing or not, activity is very strong. Looking behind the headlines, here’s what we see;

Residential construction spending is slowing the most, from +11% in 2017 to only +2% in 2018 after six years averaging 13%/yr. Nonresidential buildings spending this year just kept up with the rate of inflation (4%), none-the-less, it’s at record highs. It doubles that rate of growth to 8% in 2018. Non-building infrastructure, down 2% in 2017, next year expect growth of 10%+, coming from long duration jobs.

The real performance numbers in Infrastructure are completely hidden. Spending was near flat for three years. But during that time, contrary to every other sector which experienced inflation of 15%, Non-building Infrastructure experienced deflation of 7%. (Gee, didn’t I read somewhere that activity within a sector is a primary driver of inflation?) Anyway, flat spending means volume really increased by 7% during that time. Spending by itself never tells the whole story!

There were some expected dips in spending recently, Manufacturing, Power, Highway, and there will be more in early 2018. BUT, there are also expected boosts in spending, Office, Commercial/Retail. Some of these already have matched up with the forecast, and there are more to come in 2018, Power, Transportation.

All Nonresidential Backlog is at record highs.

Backlog incld Res Starts 2007-2018 10-2-17

Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2017 and again in 2018.  For four years, from 2010 to 2013, all nonresidential backlog remained fairly constant. Since then, backlog for infrastructure is up 30% and for buildings it’s up 60%. (75% to 80% of nonresidential spending within the year comes from backlog at the start of the year. For residential, 70% of spending comes from new starts within the year.) Buildings will hit spending records in both 2017 and 2018. Infrastructure spending will hit a new high in 2018.

Ignoring for the moment that comparing any month to the same month last year can be grossly misleading as to the direction the markets are headed (for reasons explained in other recent posts on this blog), 2017 total spending growth is the lowest % yr/yr growth since 2011 (not 2010). Does that make it “worst”?

Spending will gain +5.6% in 2017, the least gain in six years. Last year was +6.5%, 2013 was +6.6%. The average for the last six years is +8%. So 2017 is the worst. Pretty damn good worst!

Construction Forecasting Presentation

Attached PDF of my Forecasting presentation delivered 5-22-17 at Advancing Building Estimation in Houston

EdZ presentation ABE Forecasting Costs 5-22-17

A few bullets from this presentation

  • Construction Starts is not construction spending
  • Cash flow = Spending = Revenue
  • Revenue is not Volume of work
  • Spending minus inflation = Volume
  • Understand what’s in an Index to avoid misguided inflation adjustments
  • We can’t ignore productivity
  • Spending activity has just as much influence on inflation as labor and material cost.

 

Slides in this presentation come from the following articles:

1st Qtr Update 2017 Construction Spending Forecast

Inflation Index vs Spending

Construction Jobs Growing Faster Than Volume

Construction Inflation Index Tables

Infrastructure Spending & Jobs

3-22-17

This is a summary of the main points on Infrastructure from several recent articles. Those articles detail current market conditions, growth already in backlog and future growth potential. The articles (linked here) are:

Non-building Infrastructure spending in 2016 will finish at $290 billion, down 1% from 2015. Negative drivers were Transportation, Sewage/Waste Disposal, Communications and Water Supply.  However, Power and Highway/Bridge, 57% of all infrastructure, were both up. Spending based on projected cash flow from Dodge Data Starts predicted this drop.

  • In 2017, Non-building Infrastructure, following two slightly down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets.
  • Headlines point to a 6% decline in new infrastructure starts in 2017
  • Starting backlog for 2017 increased 6% over 2016.
  • The cash flow in 2017 from starting backlog will be up 10%.

Infrastructure currently has the highest amount of work in backlog in history. Starting backlog accounts for 80% of all spending within the year. Even with an anticipated decline in new starts in 2017, starting backlog for 2018 will still be at another new high. Spending from starting backlog is predicted to reach record levels in both 2017 and 2018.

  • Total Construction spending for 2017 is more than $1.200 trillion.
  • Infrastructure, public and private, is $300 billion, only 25% of total construction spending.
  • Public is only 60% of all infrastructure, $180 billion, so 15% of total construction.
  • Public Nonresidential Institutional Buildings referred to as infrastructure (Educ, HlthCr, Safety) adds another $95 billion, 8% of total construction.

The two largest markets contributing to public spending are highway/bridge (32%) and educational (25%), together accounting for 57% of all public spending. The next largest market, transportation, is only about 10% of public spending.

  • Total Construction spending average constant $ growth post-recession is $50 billion/year. It exceeded $75 billion/year only once.
  • Infrastructure, only 25% of total construction spending, increased by more than $25 billion in a single year only once. The average annual growth for the past 20 years (excluding recession yrs) is less than $10 billion/year.
  • Public Infrastructure annual growth averages only $6 billion/year, has never exceeded $16 billion in a single year.
  • Public Institutional Buildings annual growth averages only $6 billion/year, has never reached $20 billion.

Current backlog already accounts for 80% of all spending. Current spending growth from backlog (Public infrastructure + Institutional) is predicted to add $20 billion/year in work over the next two years. This will absorb some current jobs and create 100,000 to 150,000 new heavy engineering and nonresidential jobs.

For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 new construction jobs per year.

Any infrastructure plan added, for the most part, needs to be considered as added on top of the current spending plan, $20bil/yr next two yrs, already at all time highs.

  • Average growth in total construction jobs is about 270,000 jobs per year. The largest growth was 400,000 in 1999.
  • Average post-recession growth in public infrastructure + institutional jobs is about 35,000 jobs per year. The best growth was 50,000 jobs/year.

Current data predicts public institutional and infrastructure spending and jobs growth, already above the long term average, is expected to increase by $20 billion/year for the next several years.

Spend Public Only 2015-2019 3-23-17

Adding $20 billion/year more in spending for an infrastructure expansion plan would push total public work to double record levels. It’s doable, but would be difficult to achieve and is probably not sustainable at that rate. 

One limiting factor will be jobs growth. Also, the supply chain may not have the capacity to increase so rapidly, especially to think the industry could continue to expand at a historical rate of growth for years to come. In years past, expansion like this has led to rampant inflation within the industry.

Adding $100 billion in a single year to public infrastructure and institutional work is unrealistic. That is greater than the maximum level of growth for the entire construction industry. The portion of the industry we are dealing with here is less than 25% of the entire industry.

Adding $100 billion, a one third increase in annual spending for this sector, would require the distribution network surrounding the industry to expand equally as fast. It would need 300,000 to 400,000 new jobs filled in a year, in a sector that has at maximum grown 50,000 jobs in a year. That’s unrealistic.

The public infrastructure subset of the construction industry appears too small to accommodate an increase of $10 billion/year and 40,000 new jobs/year over current growth. When the potential projects pool is expanded to include public institutional buildings, that total pool may then accommodate an increase of $10 to $15 billion/year over normal growth.

Excessively rapid growth will only take volume and jobs away from normal growth, generally leads to rapid inflation and has a devastating effect when a massive program ends and all those jobs disappear.

Construction Backlog March 2017

3-20-17

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of the year. Projects in starting backlog could have started last month or last year or three years ago. The requirement is that those projects have not reached their end-date and some portion of the revenues generated by those projects is still ETC. The sum of all ETC represents current backlog.

A cash flow schedule of all ETC backlog and predicted new starts provides a tool to predict future spending. The $ reported here are the results of a cash flow analysis using Dodge Data & Analytics Construction Starts. Do keep in mind the DDA Starts value represents a survey of about 50% to 60% of the industry. While the percent change of values from year to year is relevant, the $ value does not compare directly to the actual spending $ values.

It is not enough to look at just the change in starts or the change in backlog to get an indication of the strength of the market. While continued growth in backlog is most important, the predicted cash flow from backlog and new starts is necessary for predicting future spending.

Backlog incld Res Starts 2007-2017 3-20-17

Nonresidential Buildings

The last time nonresidential buildings experienced a decline in starting backlog was 2013, Total construction spending on nonresidential buildings in 2013 registered a weak 0.8% gain. Since 2013, nonresidential buildings starting backlog is up 60%, reaching a new all-time high at the beginning of 2017. The previous high in 2009 was $241 billion. In 2016 it was $230 billion. For the start of 2017 it is $248 billion.

Revenues from starting backlog account for 75% of all nonresidential buildings construction spending within the year. If no new work started within the year, by year end there would be only 25% of the total in backlog needed to support the industry.

Not only is starting backlog higher coming into 2017, but also spending from backlog is predicted up by 5% and 2017 new starts are predicted up 8%. New starts are very strong in Office, Lodging, Educational, Healthcare and Amusement/Recreation.

This supports my predictions that 2017 will be another banner year for spending on nonresidential buildings, up a strong 10% from 2016. Similar growth is expected in 2018. This will produce a new high in current dollar spending, but will still be 15% below the constant $ all-time highs.

Backlog Cashflow 2017 ONLY 3-21-17

(edit 3-21-17 updated table)

Non-building Infrastructure

Non-building infrastructure experienced declines in starting backlog in 2012 and 2015. Fortunately, in both of those years, new starts were up. For the last eight years infrastructure starting backlog has been near $200 billion, +/- $10 billion. In 2008, the last pre-recession year, backlog stood at $178 billion. At the beginning of 2017, non-building infrastructure backlog is at an all-time high, $243 billion, up 36% from 2008. In the last two years starting backlog is up 20%.

Revenues from starting backlog account for 80% of all non-building infrastructure construction spending within the year. However, because infrastructure projects are long duration, only about 60% of total backlog gets spent within the year. If no new work started within the year, by year end there would still be 55% of the total in backlog needed to support the industry.

In 2016, although starting backlog was up, new starts were down and spending from backlog was also down. That cemented a decline in spending in 2016. New starts in 2016 declined for power, highway, transportation and public works, but due to long duration projects contributing to strong backlog in these markets, spending will be up in all except public works. New infrastructure starts in 2017 are predicted down 5%, but spending from backlog is predicted to increase by more than 10%, and that more than offsets the decline in new starts. 2017 will post a solid gain of 4% to reach a new high in spending and that is expected to increase again in 2018.

Residential Buildings

Residential new starts hit bottom in 2009 and starting backlog hit bottom in 2010. Residential on average has the shortest duration and new starts has a dramatic impact on the amount of available work. Both new starts and backlog are up about 300% from the lows. New residential starts have increased every year since the 2009 bottom, but are still lower than 2006.

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much. If no new work started within the year, within a matter of a few months there would be no backlog ETC left to support the industry.

Coming into 2017, starting backlog is up, and new starts are up and spending from new starts is up. But the rate of growth in new starts and spending from new starts is slowing. This is not unexpected after 4 years (2012-2015) of new starts growth averaging greater than 20%/year. The last two years it’s 12%/yr. This leads to a prediction of future spending increases ranging between 5% to 7% for the next two years. 

See Also Behind The Headlines – Construction Backlog

Behind The Headlines – Construction Starts is not Spending

3-17-17

A major construction industry news source has a series of articles referencing Dodge Data New Construction Starts, listing the starts data, but then incorrectly refers to the data as construction spending and looks at the yr/yr trend in values to predict % change that construction spending will rise or fall. This is incorrect use of starts data and misrepresents how to use Dodge Data New Starts. The starts data, as it is being used, isn’t a valid indicator to get a spending projection in the next year.

New Starts for the year is the total value of project revenues that came under contract in that year. The values reported by Dodge are a sampling survey of about 50% to 60% of the industry. The percent change in values is very useful. The total dollar volume is not comparable to actual spending.

The entire value of a project is considered in backlog when the contract is signed. That’s a new start. Projects booked on or before December 2016 that still have work remaining to be completed are in backlog at the start of 2017. Simply referencing total new starts or backlog does not give an indication of spending within the next calendar year, particularly for infrastructure and residential. Projects, from start to completion, can have significantly different duration. Whereas a residential project may have a duration of 6 to 12 months, an office building could have a duration of 18 to 24 months and a billion dollar infrastructure project could have a duration of 3 to 4 years. So new starts within any given year could contribute spending spread out over several years.

Backlog at the start of 2017 could include revenues from projects that started last month or as long as several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of 2017 is not the total amount recorded when that project started, but is the amount remaining to complete the project or the estimate to complete (ETC). And all of that ETC may not be spent in the year following when it started, dependent on the duration remaining to completion.

The only way to know how much of total starts or total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects that have started over the past few years. The sum of the amounts from all projects in each month gives total cash flow in that month, or monthly spending in that year. Spending in any given month could have input from projects over the last 36 months.  That’s what shows the expected change in spending.

Construction Starts provide the values entering backlog each month. Except for residential, new project starts within the year contribute a much smaller percentage to total spending in the first year than all the backlog ETC on the books at the start of the year. New residential projects contribute the most to spending within the year started because generally residential projects have the shortest duration. Residential projects started in the first quarter may reach completion before the year is over. New infrastructure projects generally have the longest duration and may contribute some share of project value to backlog spread over the next several years.

The following table clearly shows there is not a correlation between starts in any year with spending in the following year. The practice of using construction starts directly to predict spending in the following year can be very misleading in an industry that relies on data for predictive analysis to plan for the future. Not only does it not predict the volume of spending in the following year, it does not even consistently predict the direction spending will take, up or down, in the following year. It’s a false indicator and it’s not a good use of data.

Dodge Data New Construction Starts is powerful data if used properly.

Starts vs Spending 2010-2017 Dec 2016 3-17-17

 

Infrastructure & Public Construction Spending

3-5-17

Infrastructure work does not normally grow in leaps and bounds.

Seldom does infrastructure construction spending grow by more than $10 billion in a year. Rarely does it grow by more than $20 billion.

Currently at about $300 billion a year, infrastructure represents only about 25% of all construction spending. The infrastructure sector is comprised of the longest duration type projects such as energy, highway/bridge, transportation terminals, railway and water/waste water resource development. It is not unusual for projects to take four to five years to reach completion.

Increasing new construction starts by $40 billion for new infrastructure work in any given year on average might add only $8 to $10 billion in spending in each of the next four or five years. To increase spending by $10 billion a year we would need to increase new starts by $40 billion every year. We’ve only ever come close to adding $40 billion in new starts once, in 2015.

In 2015, new infrastructure starts increased by $38 billion or 27%, due to an increase of $13 billion in new power generation plants and an increase of $21 billion in new LNG plants and port facilities. That will keep infrastructure spending growth elevated throughout 2018 and 2019. Measuring a total increase of 250% in power projects, that is a scenario unlikely to be duplicated in coming years.

2017 spending comes from: 10% 2014 starts; 35% 2015; 35% 2016 and 20% new starts in 2017.

Although new infrastructure starts were down in 2016 and are expected to decline again in 2017, the amount of work in backlog at the start of 2017 is the highest its ever been and spending in 2017 is forecast near the all-time (2015) high. Spending in 2018 from backlog will increase again and 2018 will hit another all-time high. There are no annual declines in spending predicted for the next four years. Some very large public infrastructure projects that started in 2014, 2015 and 2016 still contribute large amounts to spending in 2017 and well into 2018.

Increasing infrastructure spending by $10 billion a year would require adding about 35,000 to 40,000 new construction jobs per year. To accommodate all growth since the recession bottom, this sector averaged adding only 20,000 new jobs per year. Current spending growth is predicted to add $40 billion in work over the next three years and this will absorb all new heavy engineering jobs growth. The non-building infrastructure sector does not have the capacity at this time to increase spending by another $10 billion/year over its current growth rate, nor does it have the capacity to add an additional 40,000 jobs per year.

This summary of current projected spending does not include any future infrastructure work that might be generated from a proposed $1 trillion spending plan.

It is important to note here that 90% of all work in the power sector is private work. Only 60% of infrastructure work is publicly funded. However, some nonresidential building is publicly funded.

spend-infra-jan15-to-jan20-3-5-17

Public spending is not all public works projects.

Most public work is infrastructure, or public works projects. However, not all infrastructure is public work. The power market is the largest infrastructure market. But, already noted above, power work is mostly private. So the market responsible for one third of all infrastructure work is 90% private. Educational projects, typically considered nonresidential buildings, are 80% public and 20% private.

Spend PubPriv 2016 totals detail 3-22-17

The two largest markets contributing to public spending are highway/bridge (32%) and educational (25%), together accounting for 57% of all public spending. The next largest market, transportation, is only about 10% of public spending.

Highway/bridge work fluctuates the most with large monthly swings up or down. However, 4 out of 5 times over the last 12 years, any large monthly move up or down was accompanied by a partially offsetting opposite move the following month. Highway spending hit an all-time high in 2015 and again in 2016.

Two of the three largest annual growth increases ever recorded in public spending were driven by educational spending. In the third largest growth year, highway just barely edged out educational spending for the top spot.

If educational work were to be considered part of future infrastructure expansion, then the maximum capacity to increase public infrastructure spending obviously increases. Together with other public works projects this could potentially provide a large enough market base to increase public infrastructure spending by $10 billion a year over and above the growth already in backlog or anticipated. But most of the added work would need to be to the education market. Even with potentially adding educational market work to the infrastructure expansion plan, the hope of expanding infrastructure spending by another $10 billion/year remains difficult at best.

Any increase to future work needs to be considered as over and above the spending growth patterns already due to work in backlog and new starts anticipated. This plot of predicted public spending does not include any future infrastructure work that might be generated from a proposed $1 trillion spending plan. About 80% of all spending in 2017 is already in backlog. About 50% of all the spending from Jan. 2018 through Jan. 2020 will already be in backlog by Jan. 2018.

spend-public-only-015-2019-3-3-17

The following article is an extension of this discussion Calls for Infrastructure Problematic

Office Buildings Lead 2017 Construction Spending

New construction starts in 2016 for Office Buildings is setting up a very strong spending growth pattern for the next 2 years.

spending-office-2017

The five largest metropolitan areas comprise more than one third of total national new starts in commercial-multifamily construction. Total commercial-multifamily starts are up 7%. Commercial starts alone are up 11%. New starts for office projects increased more than 30% in 2016. The following percentages are growth in starts for new Office Buildings. Reference Dodge Data & Analytics New Commercial and Multifamily Construction Starts.

  • New York City-Northern NJ-Long Island -2%, but from 2015 that was up 138%
  • Los Angeles-Long Beach-Santa Ana +67%
  • Chicago-Naperville-Jolliet  +22%
  • Washington DC-Arlington-Alexandria  +87%
  • Dallas-Fort Worth-Arlington +31%

Office construction starting backlog for 2017 (projects under contract as of Jan 1, 2017) is the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. Also, the share of spending in 2017 from starting backlog is increasing.

Office spending since 2013 has increased every year by an average of more than 20%/year and is expected to continue or exceed that rate of growth in 2017.

Office construction spending reached a new all-time high in September 2016. Growth in office buildings will lead all 2017 commercial construction spending. Spending will be near +30% year over year growth for 2017 with total expected to come in at $91 billion.

Regardless what market fundamentals change for 2017, this work is already under contract and will be the driving force for 2017 nonresidential buildings spending.

See Also these related articles

Nonresidential Bldgs 2017 Forecasts Vary
Nonresidential Bldgs Construction Spending 2017
Behind The Headlines – Construction Backlog

Behind The Headlines – Construction Backlog

1-16-17

tables updated 2-1-17

New Backlog is the total value of project revenues under contract that are about to start construction, or new starts. The entire value of a project is considered in backlog when the contract is signed. Projects booked in December 2016 or before are in backlog at the start of 2017. Simply referencing total backlog does not give a clear indication of spending within the next calendar year. Just because backlog is up going into a new year does not necessarily mean revenues will be up that year. You must understand some very important distinctions about backlog to determine how much revenue will occur within the next year.

Projects, from start to completion, can have significantly different duration. Whereas a residential home may have a duration of 8 or 9 months, an office building could have a duration of 18 to 24 months and a billion dollar infrastructure project could have a duration of 3 to 4 years.

Backlog at the start of 2017 could include revenues from projects that started last month or as long as several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of 2017 is not the total backlog amount recorded for the project at its start date, but is the amount remaining to complete the project or the estimate to complete (ETC).

The only way to know how much of total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects that have started in backlog. Then add up the amounts from all projects in each month to find the cumulative cash flow in that month, or in that year.

starts-vs-spending-2011-2017-dec-2016-2-1-17

Construction Starts provide the values entering backlog each month. Except for residential, new project starts within the year contribute a much smaller percentage to total spending in the first year than all the backlog ETC on the books at the start of the year. New residential projects contribute the most to spending within the year started because generally residential projects have the shortest duration. Residential projects started in the first quarter may reach completion before the year is over. New infrastructure projects generally have the longest duration and may contribute some share of project value to backlog spread over the next several years.

The distinction between backlog, backlog ETC and cumulative cash flow is necessary to predict spending. For example:

We start the year with $100 billion of residential projects in backlog and $100 billion of infrastructure projects in backlog.  All of the residential projects could have durations of 12 months or less. Therefore residential spending could total $100 billion within the year. However, the infrastructure projects could have durations of 2 years, 3 years or 4 years. Spending from infrastructure backlog this year might total only $50 billion with $30 billion in spending occurring next year and $20 billion the following year. Although both sectors start the year with the same total amount in backlog, we can see the amount spent within the year is determined by the duration of the projects and the cash flow schedule.

Backlog totals may not be a good indicator of total revenue spending within the year. In fact, backlog could be up and total revenues for the year could end up lower than the previous year. Unless you have a clear picture of the types and duration of projects that make up the backlog, you will not have a clear picture of spending activity in the coming year.

Backlog Cashflow pdated 3-21-17

See Also Construction Backlog 2017 3-21-2017

 

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