CED

August 2013

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Industry Overview ("Construction Confusion: Activity Moves Up, Down, and Sideways" continued from page 43) Manufacturing has benefited from the "fracking" boom, which generated demand for pipe for drilling and pipelines; equipment to mine "frac sand" to be injected with water and chemicals in the wells; pumping and processing machinery; and a variety of new plants. The amount of plant construction to date has been modest but the American Chemistry Council counts nearly 100 projects – new construction, expansions and upgrades – that may occur in the next few years. U.S. manufacturing has experienced a comeback thanks to strong productivity gains, modest wage and benefit increases, favorable exchange-rate movements against certain other currencies, high air and ocean shipping costs, and a desire among some producers to broaden supply sources following the disruptions from the tsunami in Japan and flooding in Thailand in 2011. These forces have led to some manufacturing construction, with more likely in 2014 and beyond. But for now, the lengthy slump in Europe and slower growth in China and other developing countries may lead manufacturers to defer some previously announced construction. The full-year increase is likely to be between 5 percent and 10 percent in 2013, followed by slightly strong growth in 2014. Private "commercial" construction has many different interpretations; Census limits the term to retail, warehouse and farm construction. In 2012, the category rose 9 percent, and it was up 4 percent year-to-date through May 2013. But the retail piece, accounting for half the total, is down 4 percent through May, while warehouse is up 21 percent and farm is up 9 percent. New retail construction is probably in much worse shape, as much of the spending reflects remodeling of closed stores and repurposing of ailing shopping centers. Warehouse construction is benefiting from the rapid expansion of fulfillment centers by Internet sellers that are intent on providing same-day delivery to millions of customers – thus eroding one of the primary reasons to shop at brick-and-mortar retailers. These trends appear likely to continue throughout 2013 and 2014, producing low-single-digit percentage growth in commercial construction both years. Of the retail that is built, a smaller share than last decade will be shopping centers and stand-alone stores, while more will be in the first floor of mixed-use facilities. Private health care construction increased 6 percent in 2012 but has fallen 4 percent in the first five months of 2013 compared to the same span last year. One reason is the slowdown in overall health care spending, which began in the recession. The Altarum Center for Sustainable Health Spending reported on July 12 that national health expenditures in the first quarter of 2013 grew only 3.8 percent from a year earlier, the slowest pace since its data began in 1990. It appears more patients are seeking treatment in stand-alone surgical and emergency care facilities or in clinics in retail stores, curbing the demand for new hospital emergency, operating and patient rooms. As a result, demand for hospital construction is likely to remain depressed into 2014, and overall private health care construction will show little change for 2013 or 2014 as a whole. Private office construction jumped 18 percent in 2012 – from a very low base by historical standards in 2011 – and was up another 9 percent in the first five months of 2013. But, as with retail, much of the activity probably represents renovations, not new construction. There appear to be only a few areas with a substantial revival of office construction: Seattle, San Francisco, Silicon Valley and Houston. Other large markets may have a few more projects than in recent years but nothing like the boom times of a decade ago, while suburban markets are plagued by high vacancy rates and little prospect of new construction. Holding down private office construction is the still-sluggish pace of hiring. Although the private sector has added jobs at a rate of 200,000 per month for the past two years, total private nonfarm employment is not likely to exceed its January 2008 peak until early 2014, implying that there is still plenty of vacant office space available. Meanwhile, more of those workers are temporary, part-time or teleworkers who have smaller offices than their predecessors – or no dedicated office space. Firms are also reducing their space needs by replacing computer rooms, law libraries and filing cabinets with cloud-based computing. Consequently, private office construction (including renovations) is likely to grow by only single-digit figures for 2013 and 2014. 44 | www.cedmag.com | Construction Equipment Distribution | August 2013 42_Simonson_Feature_KP.indd 44 7/25/13 12:49 PM

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