Rebuild and Renew: Construction Industries Have Experienced Varying Growth

construction thumbnailSince the housing bubble burst nearly 10 years ago, the residential and commercial real estate markets in the United States have both strongly rebounded. Aided by low interest rates, a healthier job market and record-high consumer confidence, homebuilders and developers of commercial real estate have dramatically increased spending on construction projects. For example, the number of new home developments has increased from 1.2 million in 2012 to 1.5 million in 2017, contributing to a sharp rise in total construction spending, which is expected to stand at an estimated $1.1 trillion in 2017.

However, there has been uneven growth in construction and real estate markets across the country, with some states faring much better than others. For instance, the value of residential construction in Illinois is estimated to grow at nearly double the five-year rate of its national counterpart, while commercial construction spending in New York has outpaced its national counterpart nearly six-fold. Below, IBISWorld has taken a closer look at each of these states’ respective construction markets to make sense of the numbers.

Illinois’ Residential Market

When residential construction industries are analyzed at the state level, both similarities and divergences from the national counterparts are prominent. Over the five years to 2017, residential construction has experienced robust growth, driven by low interest rates and rising income levels. The Home Builders industry in the United States is expected to have grown an annualized 9.7% to $89.0 billion during the five-year period. In comparison, the Home Builders industry in Illinois is anticipated to expand an annualized 10.9% to $1.9 billion during the same period. When measured in terms of revenue growth during this five-year period, home building in Illinois has demonstrated growth above national levels, with year-over-year growth reaching as high as 19.3%.

A simple comparison of revenue growth rates can be misleading, as these numbers omit underlying structural issues in Illinois. The percentage of mortgages more than 90 days past due in Illinois is well above the national level, as the state has experienced a prolonged effect from the recession. Structural factors like this detract from the positive momentum experienced prior to the recession, and are expected to limit future growth. According to IBISWorld estimates, the Illinois industry is not forecast to recover to prerecessionary highs. This represents a sharp divergence from the national industry, which surpassed its prerecessionary levels in 2015.

A similar dichotomy can be established with the Apartment and Condominium Construction industry in the United States and its counterpart in New York. These industries have experienced similarly robust growth over the five years to 2017. Despite this, the two industries are expected to exhibit deviating trends in 2017. The industry in New York is expected to grow in 2017, while the national industry is expected to decline as it normalizes. New York tends to have a much higher incidence of multifamily units relative to single-family housing, which is expected to enable steady growth. In the United States overall, the expansion of incomes and persistently positive employment figures are expected to support a greater level of single-family home buying. This has limited demand for new housing construction activity.

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New York’s Nonresidential Market

The nonresidential construction sector in New York has experienced strong growth over the five years to 2017. Accommodative interest rates maintained by the Federal Reserve have stimulated private nonresidential construction investment, which is expected to have increased at an annualized rate of 1.8% during the period. Additionally, rising corporate profit and increased consumer spending have produced favorable demand conditions for the construction of office, retail, hotel, agricultural and entertainment buildings. Overall, these positive trends have enabled the Commercial Building Construction industry in the United States to have grown at an annualized rate of 10.4% over the past five years to 2017. The Commercial Building Construction industry in New York is forecast to have expanded similarly, at an annualized rate of 10.3% during the same period.

Revenue growth for the Commercial Building Construction industry in New York mirrors the pace of growth at the national level. However, New York has several advantages that have produced particularly favorable conditions for the state’s commercial building market. For example, in recent years, the office rental vacancy rate in New York City has fallen to the lowest of any major US city, according to a report by commercial real estate agency REIS. Additionally, low office rental vacancy rates indicate demand for new commercial construction, bolstering revenue for the industry in New York. Furthermore, New York Governor Andrew Cuomo proposed the $100.0 billion “Built to Lead” infrastructure program in 2016, which prioritizes rebuilding roads, bridges, public buildings and other critical infrastructure across the state. With many projects already underway, the infrastructure plan has stimulated demand for several nonresidential construction industries in New York State.

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However, unlike the Commercial Building Construction industry, not all nonresidential construction industries have performed similarly at the national and state levels. For example, the Heavy Engineering Construction industry in New York is expected to have grown at an annualized rate of 3.4% over the five years to 2017, while its national counterpart is estimated to have declined an annualized 0.3% during the same period. These divergent trends can be primarily attributed to New York’s enormous mass transit sector, which is one of the fastest growing industry segments. In 2016, the New York Metro Transit Authority announced a $26.1 billion, five-year capital program to upgrade, expand and rehabilitate the New York City and regional public mass transit systems, providing a substantial boost to industry revenue in New York during the five-year period. However, millions of subway, bus and rail riders in the Tri-State area still experience commute-related headaches on a near-daily basis. As this construction segment is much larger in New York than the industry at large, the program has aided industry revenue expansion during the five-year period, while the industry at the national level has contracted.

Uneven Growth

Over the past five years, while the United States has experienced a construction spending surge, growth has not been evenly distributed among the states. Illinois’ residential market and New York’s nonresidential market have both significantly outpaced their national counterpart, while other states have lagged behind. However, taking a closer look reveals some states have moved forward from the recession while others still contend with its lingering implications.

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