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Associated Builders and Contractors economist breaks down what that means for the nation's infrastructure

While it looks like numerous new buildings are going up around town, a national study shows that nonresidential construction spending fell in July — even as the sector continues to hire, based on census employment data.

Nonresidential construction spending fell 1.7 percent in July, according to a study released in September by the Associated Builders and Contractors (ABC). The percentage totals $688.4 billion on a seasonally adjusted, annualized basis according to the analysis of data from the U.S. Census Bureau.PAMPLIN MEDIA GROUP: FILE PHOTO - An example of how local government is funding new nonresidential facilities, the new Hannah Mason pump station (shown here under construction) was funded by the Water Bureau and construction fund revenues like bond sales and water sales. It replaces the Fulton Pump Station, which was built in 1912 and despite expansions couldnt meet Portlands future water needs. The Hannah Mason Pump station was completed fall 2016.

That means construction firms' customers — developers and owners — are hiring them to build nonresidential developments like offices, shopping centers, distribution centers, infrastructure, roads, bridges, airports, seaports, prisons, jails, fire stations and police stations.

The numbers are at the lowest level of nonresidential construction spending since December 2015.

"The data doesn't necessarily tell a coherent or consistent story," Anirban Basu, ABC chief economist, told the Business Tribune. "Here's what I mean: if one looks at the Census Bureau's construction spending data, the data suggests that overall nonresidential construction spending has been in slow decline in recent months, but at the same time the Department of Labor employment data indicates hiring among nonresidential firms."

While society collects data to clarify the nature of our circumstances, this data is confusing, so Basu said economists rely a bit more heavily on anecdotal, qualitative data in circumstances like this.

"I have the good fortune of being able to speak to construction operators, many of them owners," Basu said. "In general, people continue to tell me they are busy, that their backlog is healthy, that they in fact have some pricing power and therefore profit margins have expanded a bit in recent quarters."

That story is consistent with employment data from the census.

"(That is) indicating that hiring remains robust in the nonresidential construction sector, which means that for whatever reason the nonresidential construction spending data are failing to capture some of the activity now taking place," Basu said. "It is possible that what is happening is that the construction spending data are neatly picking up the declines in public construction spending, but not fully capturing the gains in private, nonresidential construction spending."Basu

Because public projects tend to be larger, they're easier to identify than private, smaller projects. While nonresidential construction activity remains reasonably robust despite the dip, private activity has seen the growth while it's public construction spending that languishes.

Anecdotally he's heard construction firms are under contract with a healthy backlog into 2018.

"Most construction firms are expecting a decent 2018, the exception being firms that concentrate on public work, because we have not seen an increase on infrastructure in this country," Basu said. "Private work remains relatively active. We don't expect construction firms to have trouble until 2019-2020."

Spending

Judging by the correlation between the number of people employed by a construction firm and overall spending, Basu found firms are spending more money to operate their business, based on the employment data.

"What's peculiar about that therefore, the construction spending data focused on the spending of people who hire construction firms (developers) has not been rising," Basu said. "One would think, given that set of circumstances, that's pretty bad news for construction firms."

Construction costs are rising, but jobs are not.

"My beliefs are based on anecdotal and quantitative. For whatever reason, construction data is failing to capture a fraction of overall activity," Basu said. "In fact, the spending of the overall market on construction activity is flat, or perhaps a bit better than that."SUBMITTED: ASSOCIATE BUILDERS AND CONTRACTORS - The study shows that during the summer of 2017, nonresidential construction spending dropped compared to the last two years of the recovery.

While the homeowner rate hit a 51-year low in 2016, there hasn't been a recovery in single-family home construction because most of the capital has been going toward multi-family rental activity — an apartment building boom across the country that is beginning to shift, said Basu.

"We have, based on the data, apparently reached an inflection point," Basu said. "We're now beginning to see single-family (home construction) pick up a bit, and see the growth and supply of new apartment units slow."

Effects on Portland

"Oregon itself has been the fastest-growing state in the country over the past year in terms of job growth, and much of that revolves around the dynamics of the Portland metro area," Basu said. "Much of that relates to significant in-migration of younger knowledge workers, meaning millennials with college degrees."

Branding itself as a creative hub from tactiles, art and skilled labor to technology and apparel, Portland is drawing people from all over the country.

"Portland is a magnet for millennials, no surprise — it's a beautiful city, also offers plentiful approximate recreational opportunities, the cost of living in Portland is much less than it is in relatively approximate metro areas like Seattle and San Francisco — though of course, Portland is much more expensive than it used to be," Basu said. "But, it still offers a remarkable value proposition: all that in-migration has helped trigger the apartment building boom in Portland, which in turn has helped promote commercial construction — space in which people shop and work."

But residential and commercial markets tend to move together.SUBMITTED: ASSOCIATE BUILDERS AND CONTRACTORS - The Multnomah County Health Headquarters has a construction budget of $64.8 million and an estimated total budget of $94.1 million. More than $36.4 million of the project is being funded by the Prosper Portland.

"That's what we've observed in the Portland area," Basu said. "Portland is also special to urban planners around the world because of its early adoption of restraints on sprawl and so that sits very neatly with tastes and preferences of millennials — the desire for density and abundant activity in smaller areas."

Because of that, Portland's metro area has seen faster construction growth than other comparable places.

"What we observe around the country is that municipal governments are simply not spending that much on infrastructure. There's many reasons for this," Basu said. "Medicaid's exponential growth is gobbling up state operating budgets and reducing their capacity to grow. Governments are still recovering from the Great Recession and loss in property tax collection, even though housing markets have been recovering for quite some time."

Extreme weathers and country-wide effects

"Politicians seem reluctant to balance city budget sheets to drive capital projects, which often translates into work for construction firms," Basu said. "The federal government is also not contributing to infrastructure spending the way it had in the past."

As a result of extreme weathers and aging facilities, during the past three years Basu has observed significant resources spent on flood control, wastewater treatment, water systems and other public works instead.

"So this, of course, is important not only for construction firms, but for all Americans, because the nation continues to under-invest in its infrastructure and that's not good for anybody," Basu said. "It's one of the reasons productivity growth in America is much less than it had been in the late 1990s — one of the reasons, not the only reason. It also means construction spending is not as apparent as it otherwise would be."

America is in the ninth year of its economic recovery, making it the third-longest recovery in the nation's history so far. The U.S. has added 2.1 million jobs over the past 12 months, and recently achieved a 16-year low in the official unemployment rate.

"The stock market is booming, foreign investment has also been surging — in part because of a weak global economy," Basu said. "Private activity has been fairly robust, but public activity has sagged, so overall it's bad for the construction industry."

Another factor putting firms in the positive is, unfortunately enough, the extreme weathers 2017 has seen so far.

"Obviously, there will be some inducements to activity from the need to recover in Texas, Louisiana, Florida, Georgia and perhaps other states," Basu said. "That's meaningful, particularly to contractors in those communities, and that may help stimulate the construction spending numbers over the next few months." PAMPLIN MEDIA GROUP: FILE PHOTO, COURTESY HENNEBERY EDDY - Clackamas Fire Districts new Fire Station 16 in Oregon City is an example of local public spending on nonresidential facilities — the current firehouse is from the 1970s.

In the past, this has resulted in an initial rush to recovery which gradually tapers off. Concurrently, the construction spending numbers will steadily abate after an initial flurry of activity.

"One of the reasons to believe we might have to wait a few months to see this data (is because) there's not a public policy debate about what we should be constructing in our nation's floodplains," Basu said. "For four or five decades, the federal government has effectively been subsidizing insurance for developments in floodplains, and people are quickly asking the question regarding whether or not that makes sense. Predictably, as construction in floodplains has skyrocketed over the past five decades, so too have claims for damages when flooding inevitably ensues."

The future of urban planning

"As we as a society go through that public policy today, you can imagine for larger projects there might be some hesitation to rebuild what had previously existed," Basu said. "That probably is less true with homes, but probably more true with large-scale infrastructure that has been damaged by these storms."

Some homebuilders may choose not to rebuild and commission themselves for further losses — also, the cost of flood insurance is going to skyrocket.

"I think you can make the argument that Americans — and maybe this is true for people around the world — Americans have been building in many of the wrong places," Basu said. "We build in places where it gets to 120 degrees in the summer and we need an enormous amount of air conditioning. One can ask whether or not that's good public policy: it's putting an enormous burden on our capacity to build energy."

Historically, cities were pioneered near hubs — at the time, that meant waterways being used for ports, trade, transportation and energy. Today, that's dated and is being replaced with active lifestyle planning — for example in Oregon City, a whole set of old factories built near the nation's second-most powerful waterfall, at the Willamette Falls Legacy Project, are set to be demolished after decades of disuse. The site is now being master planned into a modern-use hub with a riverwalk, residential units and commercial space.

Acreage

Floodplains' historic usage has changed from energy and port functions to active lifestyle trends. Because of the high value of waterfront property, developers are building on floodplains more than in the past.

"Floodplains see events like (Hurricanes) Katrina, Rita, Andrew, Harvey, Irma and so on. One can reasonably ask the question; does that make sense to have done that (and built there)?" Basu said. "Not everyone can live in Portland, not everyone can afford to live in such an exquisitely-planned community, but some of this is common sense — some of the outcomes we are observing."

Historical U.S. cities such as New York and Baltimore are built in sheltered harbors.

"People who traveled the seas understood how the ocean worked: they understood there would be floods and hurricanes, they didn't have electricity but they still had common sense. Not to say they're not victims occasionally of natural disasters — occasionally, they were — but they realized you want to have other protections from the wrath of mother nature," Basu said. "But now, what do we do? We build on the barrier islands. We put enormous developments on the front lines of these hurricanes."

The market valued waterfront property, but it came at a cost for the whole community.

"You can understand why — they're beautiful places surrounded by water — but you can ask why this makes sense," Basu said. "Is it fair for taxpayers to subsidize this by subsidizing insurance for people who live in this area?"

Basu foresees a major shift in urban planning.

"In Houston, there are enormous numbers of skyscrapers and enormous surface parking lots often adjacent to those structures. The amount of impervious surface is mind-boggling — water has no place to go other than flood the streets. Look, one should be fair in this: which city could handle 50 inches of rain? Most cities can't handle 50 inches of rain, but people can also agree if there were less impervious surfaces the outcomes would not be quite so devastating," Basu said. "That will be another aspect of the urban planning debate going forward."

By Jules Rogers
Reporter, The Business Tribune
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