MARKET ANALYSIS: Outlook for Non-Residential Construction
FEA’s analysis reveals a few bright spots in this growing area.
This month we wanted to bring you up to date on developments in the non-residential construction market. We have not spent too much time on this segment, in part because the residential sector remains the primary market for most wood products and also experienced the biggest cyclic swing in expenditures. Even so, the non-residential sector is still a key driver for some customers and certain products.
The fundamentals for private non-residential structures look great.
Private non-residential spending did experience a very big drop during the great recession. The segment was growing over 20% in 2007, lagging the strong employment growth periods. Then investment fell 20-30% for two years. Growth since 2011 has been modest.
Total private non-residential structures were up 10.5% in 2014. Year-over year growth slowed in the first quarter of 2015 due to a contraction in the Power segment. Power grew nicely in 2014—up 13.7%, but dropped so dramatically in late 2014 and early 2015 that investment was 16.2% below year ago levels in the first quarter. The reason lies with one hard hit business—oil production.
The reason non-residential structures fell so sharply in the first quarter was due entirely to one event—the sharp drop in oil rigs after the collapse in oil prices.
Positive fundamentals for Office, Commercial and Manufacturing markets.
Office, Commercial and Manufacturing grew rapidly in 2014 and continued to surge in the first three months of 2015. The fundamentals (vacancy rates, rent and expected returns) for these three markets look very strong and will sustain high growth rates through 2016 and 2017.
Demand for office space was very strong in the last two years.
The key driver for this market is office using employment, which rose by 2.4% in 2014. This translated into the strongest absorption rate since 2007 and was nearly 30% above the long term average. The strongest markets were where technology or financial services jobs are growing. The office building market is split between downtown metro and suburban locations. Suburban office construction is clearly more wood intensive. Absorption rates were running above completion rates in both areas. Downtown vacancy rates have dropped from 15% to 12%, while suburban office vacancy rates have dropped from 19% to 14%.