Q2 New Construction Starts Lower Than Expected

Total construction starts in 2015 downgraded from 9% to 7.1% after both residential and nonresidential sectors underperform in Q2

U.S. construction starts came in below expectations during the second quarter, held back by disappointing business investment. Both residential and nonresidential sectors underperformed relative to forecast, according to construction data provider CMD’s latest quarterly report.

The forecast, which combines CMD’s proprietary data with macroeconomic factors, showed total starts performing lower than expected primarily due to the sluggish U.S. economy at the beginning of the second quarter. As a result, total construction starts in 2015 are expected to grow 7.1%, a downgrade from the 9% forecast in the previous report.

“Last quarter saw the wider U.S. economy post somewhat disappointing results, and the construction industry followed suit,” said Alex Carrick, CMD chief economist. “However, the transitory nature of many of the economy’s ailments and positive signs from the labor market should translate into more robust growth in the construction market over the long term.”

Among nonresidential sectors, commercial office, education and medical construction all underperformed relative to expectations. However, industrial construction surged ahead on the strength of several large developments started in Q2, notably the $2 billion Tesla Motors battery factory in Nevada and a $1 billion methanol plant in Louisiana.

In the residential market, single-family starts grew 9% over a year earlier, marking the fifth quarter of consecutive growth. Multi-family starts were less buoyant, but there are reasons to think the underlying trend is stronger than is currently appearing.

“The multi-family market has become harder to read,” said Carrick. “The growth of mixed-use projects with a combination of retail, office and residential space is causing some confusion about how projects get labeled, meaning some multi-family developments in these larger projects are getting counted in different categories.”

One other area of growth in new construction last quarter was civil engineering, which grew 7.7% from the same period last year. Spending on infrastructure projects from local and state governments is making up for tightened federal budgets in this area.