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Leading lender projects strong nonresidential market, contractor investment patterns

Source: GE Capital Americas, New York

The 2015 U.S. construction outlook could be analogous to a tale of two cities, with stabilizing and perhaps flattish residential demand offset by continued strong, if not strengthening demand, both reflecting a relatively improving economy and rising interest rates. Among the new directions GE Capital Americas construction industry analysts see for this year:

  • Nonresidential activity should be solid, propelled by elimination of slack in the economy. GE Capital forecasts real GDP to grow 2.6 percent in 2015, up from a projected 2.1 percent in 2014 with modestly slower but continued solid growth in industrial production of 3.5 percent. As a result, the American Institute of Architects projects overall nonresidential building work climbing 8 percent in 2015, compared to a rise of 4.9 percent in 2014, driven by office building, industrial facility and hotel contracts.
  • U.S. construction machinery capital expenditures are projected to rise almost 14 percent year-over-year, after growing 7 percent in 2014, according to IHS Global Insight. As with nonresidential construction, machinery outlays will be driven by project demand rooted in relatively low office and industrial vacancy rates as well as an uptick in hotel construction due to growth in revenue-per-available room. In particular, industrial space demand should remain strong as retailers build out distribution facilities to speed order fulfillment.
  • Residential construction could be a wild card for the year, as rising interest rates may lead to a further rise in 30-year mortgage rates, hindering the market. However, this could take time to play out with rates currently at about 4.0 percent, against the historic lows of about 3.3 percent in the winter of 2012, but still below the recent peak of over 4.5 percent of fall 2013, according to the Federal Reserve Bank of St. Louis. Under these conditions, GE Capital Americas analysts would expect to see existing home sales up high single digits to approximately10 percent, but this will strictly be a function of the rise in mortgage rates.
  • Public construction is slated to rise in the low single digits, according to the Manufacturers Alliance for Productivity and Innovation, as ongoing improvement in state budgets is offset by constraints on federal spending. Expect continued growth in transportation spending, with a rise of about 2.2 percent as it recovers from a large pullback during the recession and the impact of Recovery Act funding tapers off. Overall transportation work could be hampered by the need for a more permanent Highway Trust Fund revenue solution.