Simonson Says: What Will Be Hot in 2016?

After a five-year slide in construction spending, it is tempting to believe that the industry will be “back to normal” sometime in the next five years. But it’s more likely some segments will never match their  peaks of the last decade, whereas other categories will far exceed past levels. The rapid growth of shale gas drilling in several parts of the country is likely to produce long-lasting changes in the economy and in demand for some types of construction. Already, the Marcellus shale in western Pennsylvania has led to modest growth in demand for roads, pipelines, hotels and housing. Recently, Dow and Westlake Chemicals have announced multi-billion dollar investments in chemical plants that will make use of Marcellus and other shale gas as feedstocks. How rapidly the effects spread will depend on the degree of state—and possibly federal—regulation of the hydraulic fracturing (“hydrofracking”) needed to bring the gas up, but growth appears assured. The outlook seems favorable for alternative power construction from various sources, as more states adopt “renewable portfolio standards” that require utilities to produce or buy power from sources that are not carbon-based. Whether the facilities that are built use wind, solar, geothermal, biomass, hydropower, ocean currents, nuclear or other sources will vary with the region, technological advances, regulatory and tax incentives. But demand for “clean” power of some kind, and for transmission lines to deliver it to customers hundreds of miles, will keep growing as the economy and population expand and more coal-fired plants are shut down. Demand for medical facilities is likely to intensify. Many people assume this is a natural result of the aging of baby boomers. But that is a gradual process and is offset in part by lower demand for obstetric and neonatal facilities. The biggest drivers for healthcare construction will be the continuing technological evolution of diagnosis and care, along with pressure to reduce costs. Hospitals will need to be rebuilt and more specialized structures erected. There may be a revival of manufacturing and distribution construction—two sectors that were very hard-hit in the past two years. The disruptions to airfreight deliveries caused by the Icelandic volcanic eruption last year and the threats to global supply chains this year from uprisings in North Africa and the triple disaster in Japan may convince more manufacturers to base production, or at least inventories, in the United States. High fuel and transportation costs, growing congestion, and a shift in consumer spending toward Internet purchases are encouraging the construction of optimally located and configured warehouses and fulfillment centers. On the downside, there is unlikely to be enough tax revenue—or will—at any level of government to fund prior levels of public construction. The huge overhang of unsold homes, tighter mortgage lending standards, and possible reluctance of households to commit to buying homes (giving the difficulty of selling when needed and the uncertainty of making a profit) will hold down home construction but also help multi-family rental construction. And the shift from brick-and-mortar to Internet retail sales, along with a possible trend toward living closer to central cities, will keep retail construction—especially of big-b ox stores and shopping centers in far-out suburbs—well below previous peaks. Contractors who can adapt to these changing markets can thrive in the next five years. But they will have plenty of competition, as the overall ratio of construction to gross domestic product may not reach prior peaks.