Welcome to the 2014 fall economic forecast presentation entitled, Is the Pace of Construction Investment Set to Quicken? Today's webcast is jointly presented by CMD, the Associated General Contractors of America and the American Institute Architects.
Once again, we're privileged to present the industry's chief economists, Ken Simonson of the AGC of America, Kermit Barker of AIA and Alex Carrick of CMD. Before we start, thank you all for joining us today. For the next 90 minutes, we'll be discussing how 2014 has so far been a generally positive year for design and construction sectors, but with results they vary greatly by sub sector and by geography.
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This is the beginning of the AIA accredited portion of the program. This webcast is registered with the AIA, CES, for continuing professional education. All AIA members attending the live broadcast can earn 1.5 CEU credits. Without further ado, we begin today with Alec Carrick, CMD's North American Chief Economist.
Alex Carrick has been Chief Economist with CMD's CanaData, the leading suppliers, statistics and forecasting information for the Canadian Construction Industry, since 1985. Having written thousands of articles for CMD, he's frequently quoted by major news outlets. In fact, he is fresh off an interview with US News and World Report today.
His online video analysis are a popular feature with the daily commercial news and Journal of Commerce. Alex has a BA in Economics from the University of Western Ontario, and an MA in economics from the University of Toronto. Alec will begin by presenting a brief overview of the general economic situation and outlook.
Over to you Alex.
Oh! well, thank you very much Wendy, it's my pleasure to be here, and I will begin by just talking about the US economy in general. The fourth quarter growth rate was 3.5%, quarter to quarter annualized that was on top of a 4.6% gain in the second quarter and a 2.1% contraction in the first quarter.
Year over a year growth, is about 2.3% and I think that's what most people expect a year,so a whole will be, next year increase into about 3%. I wouldn't be surprised if that 3% is exceeded. There's a lot of news about the US economy that's more positive than people may be realizing or expecting.
This first map here, this shows that one in three Americans lives in only one of four states in the US, California, Texas, New York or Florida. The bureau of labor statistics publishes a report every month on the 12 top labor markets in the country and half of those labor markets are in those four states, so six of the top cities, Dallas and Houston and Miami and New York, Los Angeles and San Francisco are in those four states and of the 12 cities, those six cities that I mentioned, are among the seven fastest.
The only other one that made it in there was Atlanta. And when you're looking at the US economy overall, I thinks it's being driven right now by an energy sector boom by a strong high tech sector and a resurgent manufacturing industry as a possibility as well. I usually like to think in terms of the top 10 US oil producing states, that they're in clusters, clustered around Texas and then you've got Wyoming and Colorado and Utah and some outlyers as well as, California and North Dakota down to Alaska, and with the coming on of the shelf racking, eventually we maybe seeing West Virginia and Pennsylvania as well, but when you're thinking about the overall impact upon the economy, you have this kind of positive effect.
The US traditionally runs a trade deficit of something like $800 billion, that has been reduced by a third because of the increased self reliance in energy, and a reduction in that kind of deficit is very positive for the bottom line of gross domestic product. Manufacturing gains on account of the the increasing self reliance on energy as well.
If you think of any production process that uses energy in terms of transportation, or heating or cooling or as an input like a [xx] into petrochemicals and building products like plastic pipes, [xx] on, they all benefit from lower world oil prices, and so these are the states where manufacturing is mainly centered, and then a big part of manufacturing, of course, is motor vehicle assembly, and again, many of those same states are represented, although some of that production has moved to the southern states because that's where the shift or the legislation of the right to work legislation started to have an impact and it reduced the power of unions, and then in the mid-west regions as well, some of those states have moved to right to work legislation.
And then in terms of the IT sector, again those four most popular states, they're represented here, and there's other clusters as well. In particular, around the Washington area and the academic community in the north east of the country. One of the reasons that I say IT has been so important, you can just look at this chart here, computer system design services, yes, there was a slight decline in employment at the time of the recession, but that curve has just kept on increasing, this is an area where the US has a tremendous advantage on the world scene.
This chart here just shows population growth, and again, if you're a state that has ties to energy or IT at the high, the high-tech sector, you're much more likely to be at the top of this chart. This is where young people are moving to find jobs. So looking at median household incomes, yes, again, when you look at the list, Alaska's energy, Washington's high-tech, Colorado's energy and then on the East Coast, you've got high-tech activities around Washington, of course, and then also in the North East corner, where the real best schools are, I hesitate, to say that there are good schools there, and other locations as well, but we know that lots of states like Massachusetts and Connecticut, New Jersey have some of the Ivy League colleges, and New York as well, and median age of the population, the older portions of the population, all of new England is represented among the older states, the younger states.
The states with the younger population to the South and to the West. OK, really everything changed as of May. That was a real turning point for the economy overall. In May, the total employment level in the country reached its pre recession level, and prior to them we spent a lot of our time looking in the rear view mirror at the monster that was chasing us from behind and monster was the problems in Europe, and it was the problem that was to stop prime mortgage crisis and so on.
From this point on, more of the focus should be on looking towards the future, and this is the statistic I just love. The is initial jobless claims. It comes out every Thursday morning and this tells you a great deal about what's happening in labor markets. This number has been 300,000 or less for the past four months and when you've got a figure that low, your month to month employment change is going to be 200,000 or more, and your unemployment rate is going to keep coming down.
The figure was as high as 670,000 in the recession, but even today, it came out this morning, it was almost 291,000, that's really positive. Construction unemployment rate, it's now down around 6.5%, a year ago it was 9%, that showing a tightening market. The odd thing or the funny thing, and it's that it's funny so much, but it's something to remark on, or no it that employment, and construction is still no where close to being back to where it was before the recession or during the peak period and that's because a lot of people have left the industry, so there's still a short fall for about a half and a million jobs and we're going to have get more people back into the industry.
This is a table that just ranks the best and the worse labour markets among the 49 major cities in the country, and it's a composite ranking based on year over year employment, growth fastest to slowest, and unemployment rates lowest to highest. And again, if you look at that table, the top ten cities, four of them are in the energy state of Texas, and nine of the top 10 have either an energy component or are a very strong high-tech component, and the next two charts, you can look at those at your leisure, these are CMDs own start figures through the third quarter, ranked according to the daughter volume in the first chart and ranked according to percentage change in the second chart, and I put color coding on there, red for hot markets, and blue for cooler markets, but we'll come to that as we go through the slides more.
One of the things that we'd like to add, of course, in terms of construction activity jobs, site construction activity, is what's going on in the design services and Kermit will be talking about that with his building index, but employment in architectural and engineering services, it's almost back to where it was at it's last peak, the year over year figure is about +3.9%, year over year total US employment is +1.9%.
So that's a leading indicator for construction overall. Here are our forecast numbers as calculated by CMD in a partnership with Oxford Economics, and one of the really useful features of this table, is that it shows you the definitions of what make up some of the sub-components, and you'll be able to apply that as we look further at some of these sub-categories of construction.
Total construction starts, they'll be improving in a cyclical fashion in the years ahead. Almost in every category, there are some mitigating circumstance though, and I'll mention some of those as we go through this. The determinants of residential construction, the residential side, it's been very interesting, the multiple units starts, they're just above back to where they should be, frankly.
They're usually about 400,000 units, that was before the recession. They're getting pretty close to that figure, so single family side that continues to be very weak. It's only returned to about half of what it was before. And the pattern's fairly easy to understand. People who were forced out of their homes due to foreclosures, they had to live somewhere, so they drove up the demand for rental accommodation and multiple unit demand.
But the single family market just hasn't recovered as quickly as in previous recovery periods and maybe because there's something that I would call a legacy effect. If you think back to the Great Depression in the 1930s, our grandparents or greatgrandparents, a lot of them became hoarders because that very difficult time affected them psychologically, and that's something to be conscious of going forward with a single family market.
It may take quite a while for that market to recover, it's going to be recover gradually, not sure it's going to get back to the 1.2 million units that quickly because of the legacy effect. And the legacy effect is the pain, if you went through a mortgage foreclosure, that's going to stay with you, you're going to really have to think very hard about whether you want to make the major gamble or the major commitment that is buying a single family home.
OK, in terms of a total non-residential building starts a game, cyclical recovery, as much as there's been pent up demand on the residential side, there is also significant pent up demand in non-residential building construction. total commercial starts, it's interesting that the proportion of non-residential building is taken by commercial, is almost an exact match for institutional.
So getting into some of these sub categories, when you're considering office building, or the outlook for office building construction, kind of where you start, is in terms of office based employment, and the major categories of office based employment are professional business services, information services and financial activities, and if you add those three categories up, the increase in employment there has been 2.6%, which is almost exactly the same as one of the sub-categories which is accounting and book keeping services.
So that's positive in terms of office building construction. Mitigating circumstance, however, is the fact that vacancy rates remain high in offices, very high. There's only about five cities that have an office vacancy rate that's less than 10%, and those cities would be Boston, parts of Manhattan, Charlotte, San Francisco and Portland, and another mitigating circumstance is the trend towards sharing office space.
Government offices, government employment year over year, it's basically flat, and of course, the real watchword for government or the real buzz word that they've adopted very vigorously is austerity. Now, government finances are improving, I'll talk about that later when we get into engineering construction, they're improving organically but still governments are going to be trying to cut spending wherever they can.
In retail construction, things like the improvement in jobs and incomes, those are positive, consumer confidence, the conference board, their most recent index figure was 94.5. That's the highest that it's been in seven years, so that's very strong for retail construction, as is the decline in gasoline prices.
Because that's the equivalent of a tax cut, and that's a nice thing to have getting into the holiday shopping season. But what you're looking for in retail is you are looking for year over year sales increase of above 5%. And it's not quite there right now, it's about 4%. You can see in motor vehicles it's higher.
Motor vehicles are about 20% of the total and even in terms of employment in retail trade that figure is 1.6% whereas total employment is ahead by 1.9%, so that lagging as well. Mitigating circumstances, it's the whole thing about, the whole idea, the notion that some sales are increasingly gravitating to the internet.
I find it very interesting and I don't know whether ironic is the word or not, but in terms of bricks and mortar construction, Amazon has recently announced that it will be building its first bricks and mortar store, or at least opening an actual physical store in New York. It's already happened or it'll happen shortly, and to the extent that work does gravitate or retail sales do gravitate to the internet, that should give an uptick to warehouse construction, and you can see that this year there has been a real uptick in the volume of warehouse starts. And one of the things that I would like to mention in connection with this particular subject matter, is that when you're looking at the labor market and where there is shortages, just Google on the Internet and you'll find that truck drivers are in particular demand that logistics firms just can't find enough truck drivers.
Hotel/motel construction, again consumer confidence, jobs and incomes, higher stock market values make people feel wealthier. Americans are starting to relent with the belt tightening, that there's been years of belt tightening, we're starting to relax and enjoy ourselves a bit more and this will show up in terms of hotel construction.
Two mitigating factors here. The value of the US dollar is climbing relative to other currencies that might cut down on the number of visits from foreigners, and also there's the sharing economy, there's a lot of publicity about how firms like Airbnb out of San Francisco are increasingly taking some of the businesses away from hotels and motels.
I like to call this slide here my Sodom and Gomorrah slide, this shows employment in the gaming industry versus employment in the motor vehicle sector. And I just love this because I like to think about what the Puritan founding fathers would think if they were to see this chart. The number of workers in the auto sector, a very big dip, it's starting to recover now.
But employment in the gaming industry, yes, it went down a bit in the Recession, but it's been climbing since and it's been pretty steady over a long period of time. Industrial construction, the capacity utilization rate, say they've got to get up to a benchmark level of 80% and they are almost there.
This will be happening over the next year, so if there are going to be more construction of manufacturing plants, the strength in the stock market helps you to finance those expansions and the stock markets have been doing very well, the New York stock exchange, the DJI, it's up something like 150% versus February 2009, when it was last hit it [xx] period, and the standard imports is up about 180%. So, again, a category where they will take strength from the strong energy sector because it will be supplying products into the booming energy sector and it will be experiencing some cost relief from the drop in oil and gas prices.
Institutional starts, you're looking, you mainly take into account government spending and demographic factors and whether government's got the money to proceed with the projects and what's happening in terms of the age structure of the population. In terms of education, it all kind of revolves around the baby boom generation, which was born between 1946-1966.
The midpoint was about 1956. In olden times, there were 20 years between generations. That has lengthened out, it's now 30 years between generations. So you go from 1955-1985-2015. And that tells you that there's a bit of a sort of echo, echo baby boom and that's where the demand for school construction is going to come from, and at that levels of higher education, the increased demand for facilities for that's going to be somewhat delayed.
And when you get into colleges and universities, the high cost of schooling, that's impacting the way that some students feel about continuing with their education. And then there's things like MOOCS, the Multiple Open Online Courses, which makes it easier to stay at home and not have those high tuition costs and future education over the internet.
For healthcare, there's things like the introduction of medicare, and where certain states pick up on medicare. That I can get into that in the question period. I don't think I'll talk about it right now. Let me just talk about, again, the demographics and the aging population because this is a little easier to understand and a little faster presentation here. You can see that between 2010 and 2035, the number of people in the country aged 65 plus will double from 40 million to 80 million, but the number that I find really fascinating that I always like to bring up, is the number of people who will be aged 100 plus.
If the mid point for baby boomers was 1955, go forward 100 years to 2055. By 2055, and also on account of improving health care, there's going to be nearly, well, there's going to be somewhere between 400,000 and 500,000 centenarians in the United States and that's the equivalent of a city of the size of Reno.
So just imagine Reno all occupied by people who are 100 years plus, and that's why the demand for hospital construction can hardly be anything but a fairly strong growth market. So when you're talking about engineering construction, there's probably three major things and one of them is government finances, and another one is the strong energy sector, and so on. In terms of government finances, I said that I'd mention something about that, about the organic growth and government finances, and that's because regardless of whether there are legislative tax increases or not, taxes are increasing on account of the cycle and income taxes going up and property taxes going up and corporate taxes going up, and that sort of thing.
So taxes are increasing particularly state and local governments are starting to experience stronger revenue. And we know that even at the federal level, the deficits dropped from a trillion dollars to $500 billion. So government finances are starting to shape up. The third factor that I've mentioned, or I meant to mention before was residential construction, because there's portions of this market, such as sewer and water main construction, they very much tie into the level of residential construction.
And then bridge construction, well, we would like to see that number go on higher because we know that there's a lot of infrastructure need, and there's a lot of repairs that are needed, but that's more likely to come at the state levels acting laterally. Pennsylvania, for example, has a program of bridge reconstruction or rebuilding program that it wants to undertake.
And similarly for roadwork, it's a complicated world that we live in. The roadwork and bridge construction is financed largely out of the fuel, tax the 18.4 cents per gallon, and that number has stayed constant, and when you have success in something like reducing or being stinger with the amount lot of gasoline that's required in cars, well, that reduces the amount of gasoline that's required and that means you're going to have [xx] and things like the federal highway transportation fund. So, some means has got to be found to finance more of that kind of construction. Sewer and water, I have mentioned that, and that ties in very much with the residential markets, and I want to end on a high note, so just to show this slide, you can see [xx] stack index, skyrocketing.
Three and a half fold increase between February '09 and now. In the stock markets, people think, well, what's that got to do with me? Well, when you won pension funds and when you own mutual funds, it makes you feel like you're more prosperous, and then the rest of my slides are basically appendix numbers and it's our actual forecast for the general economy, and then for housing starts, and then for regional starts broken down by non-res building and by engineering, and then the latest PPI results. And there we go, and I hand this over to Kermit, and I look forward to hearing from people during the question period.
Alec, thank you so much for that. Particularly, I found that interesting your description of the aging population in the city of Reno. That would be an interesting city to visit one day. I want to remind everyone that you can submit questions via your screen console, if you'd like to direct your question to a particular economist, fell free to note that in your question, Ken, Kermit and Alec will answer as many questions as possible at the end of this webcast.
Next up is Dr. Kermit Baker, chief economist for the American Institute of Architects. In this capacity, Dr. Baker anlayzes business and construction trends for the US economy and examines the impact on AIA members and architectural community. Dr. Baker is the project director of the remodelling futures program at the joint center for Housing Studies Harvard University.
He received his masters degree in Urban planning from Harvard University and a Ph. D from M. I. T in the same field. Commit will explain the challenges and opportunities facing the non-residential construction sector, business conditions that architecture farms concerning the out look for non-residential construction and what will construction recovery look like in 2015. Kermit.
Well, thanks Wendy and good afternoon to all of our listeners. I'm going to be covering four topics in my presentation what Wendy mentioned and then just touch on a few others too. So I'm going to start with a quick overview of construction's role in the US economy and where we stand at present, second topic is an overview of the residential sector, housing is an important end market for some of our audience but it's also an important indicator where the broader construction market is headed for the rest of our audience.
Thirdly, I'm going to run though how trends are shaping up in the building sector and some of the forces that are shaping the future of the non-residential building outlook and then I'm going to end up with the outlook for construction for next year. So let me start with a quick overview of construction's contribution to the broader US economy, what I've got here is direct spending on construction activity and it's an important but, as our viewers can see, now the dominant piece of our economy. In recent years, construction's averaged only about 5% of total spending in our economy, this year is below the traditional role that construction has played in our economy and I think it's fair to assume that the construction center continues to recover, we can expect to see the construction share grow, that it is more cyclical than the rest of the economy so it's going to pick up share as it continues to recover.
And we can see how little the non-residential construction sector has regained from its downturn during the recession, so this chart show the level of spending for each of these major construction sectors at the peak of the pass cycle, wherever that peak was for single family construction, that would have been 2005 for multifamily, 2006 and whatever, and then the second bar is the level at the trough of this past recession, whenever have that sector reach this trough, and then finally the third bar is the level of spending that's estimated or projected as of the end of this year. So single family construction and multifamily constructions are in the midst of strong recoveries but still well below their peak of the last cycle, at the peak single family construction was at a, I think it is fair to assume, an unsustainably high level, so it's not likely to get back to that peak at all this cycle.
Home improvement spending a third set of bars didn't fall as far and has largely recovered already. Non-residential building spending, the fourth set of bars is still in the early days of its recovery so it's likely to take several more years before we get back to levels approaching it's pre-recessionary high.
Let me move on to what's happening in the housing market, and even though housing is further along in its recovery than building activities I discussed in the last slide, it's still along way to go. So over the past three decades we've averaged somewhere between 1.6 million and 1.7 million units a year in terms of total housing demand, total housing demand is factoring in traditional site build construction, as well as modular homes that may be built offside as well as manufactured homes that are basically built in a factory, and we're running well below those levels now, and in fact, we're averaging less than half of these long term trends over the past five years, so clearly a lot of upside potential in the residential market.
And house prices are really pretty scentful to understanding where the housing market is headed so, naturally housing prices fell by about a third between 2006 and early 2009, and then when they hit bottom or what appeared to be bottom, they bounced around that bottom for really about three years, but once the recovery began in house prices nearly 2012, it's continued to be really surprisingly strong, so to date, house prices nationally are up over 30% from their low during the downturn and they have regained about two thirds of what they lost in the downturn, and we probably wouldn't expect them to get back to their pre-downturn levels anytime soon since house prices were overheated many markets across the country, I really had, unsustainably high levels we're not likely to get back there, as I suggest this cycle.
We're seeing a lot of variation in the recovery of house prices across the country, so on this map I've got the 50 largest metrowares in the country, and I have identified the top 10 in terms of house price increases over the past 12 months and the bottom 10 in term of the house price increases. Our nationally prices were up almost 7%, so good healthy growth, but a lot of regional variations, a lot regional clustering that we are seeing in house prices, and I think the general pattern is that metros that solve the steepest a price gained recently are the ones that saw this deepest decline during the downturn, markets like Las Vegas, and Riverside California, the major Florida markets and Detroit, whereas the market seeing the slowest growths recently and prices didn't see much of in the way of declines during the downturn. So, in general, changes in house prices are bringing the various parts of the country back into balance making up for some of the steep declines that we saw during this last downturn, and that raises the question of how do we know when house prices have fully recovered?
And I think the best way to think about that is to look at house values in relationship to household incomes. When incomes are growing, people are willing to spend more for homes, when they go down, they are not willing to spend much, the general rule of thumb. We think about is that households pay somewhere between one and a half, and two times their annual income for they're home.
And, in fact, if you look at the data historically over the past 25 years, home value have averaged 1.85 times households incomes nationally, that's what the ratio has been over the last 25 years. And at present, this ratio is just below that, it's at 1.7, you see on the set of bars on the left of this graphic, which suggests that if house prices rose, just about 10% more nationally, they'd be back to their 25 year average in terms of their relationship to incomes. It varies a lot from metro to metro, and I've included some of the major metros in the countries here, San Francisco has averaged more than three and a half times household income in terms of what owners are willing to devote to house prices, that's the average that they have maintained over the last 25 years whereas the other extreme in metros like Dallas, Atlanta, Houston, Detroit, that ratio was averaged to less than one and a half times income. And I think, a second piece of information from these comparisons is that they do suggest where house prices seem to be above their long term trend, and we're seeing that currently in California markets, Seattle, Washington DC.
We're seeing this ratio of currently above what it's been averaging for last 25 years, and in another set of markets where they're below their long term trend, like Boston, New York, Chicago and Detroit. So that's the level, that's the direction we should see adjustment in coming years, I think, as these markets do continue to return to more normal house prices.
What's the outlook for home building for the next few years and in, as this market returns to normal, these are results from some of the major forecasters in the industry and I've simply averaged those to get a consensus for what the year may shape up to be in the coming years, so we had a 925,000 housing starts last year, forecasters are calling for starts to be just about a million this year, next year this group of forecasters see contraction levels accelerating on average by 25% over projected 19, I'm sorry, 2014 levels, and then another 20% plus in 2016, so very, very aggressive and optimistic forecast for this group in terms of what housing stats are likely to be over coming years, but I think the point to remember is that even if this aggressive targets are met, we're still really well below the traditional level we've seen housing starts at, which is, you can remember from previous slide, somewhere in the 1.7 to 1.8 million a year on average.
I'm going to move over now to the non-residential sector and some of the trends we're seeing there, and I'm going to start with looking at the composition of the market, what we're talking about when we talk about the nonresidential building market, and what share of the market each of these various sectors have.
The shares do vary a lot as we move across the cycle, so I've averaged 10 years of data here to get a sense of what the longer term trends are, and over the last 10 years, construction's spending on buildings has averaged just under $400 billion a year, about 45% of that spending is on commercial and industrial sector facilities, about 55% has been on institutional sector facilities, the biggest share of spending on the commercial side, or the retail and office market, and the biggest share is on the institutional side of the education and healthcare market. And in terms of where we're in the current non-residential construction cycle, we have been moving in the right direction for the last few years, but the pace of this recovery really so far has been disappointing, so at the peak of the boom, of the construction boom in 2008, we generated in the country half a trillion dollars in spending on non-residential buildings, we lost a third of that market spending between 2008 and 2011, and today we've gained back only a small fraction of that really. And generally, after such a precipitous downturn, we expect to see the market bounce back stronger, so it has been, I think, disappointing in recent years that we haven't seen a stronger recovery.
We've seen reasonable moderate improvements so far this year in non residential building construction activity what I'm looking at here is spending spending number through the first three quarters of this year, compared to the same period a year ago and the overall non-residential building market, you can see, spending is up almost 5%, it's been uniformly much stronger in the commercial industrial categories with overall spending in that sector up more than 13%, and in double digit for each of the major building categories.
The institutional sector, very different pattern, these are buildings that generally have a public or non profit focus and they're mostly still declining as they have been for the past several years, although, as one tracks this over time, this pace of decline has been slowing in recent months, so we seem to be approaching the bottom here in terms of construction spending activity.
With such a weak recovery that we've seen in the market as we saw on the residential side, we're seeing a fair amount of variation in terms of a conditions in commercial markets across the country, so here we, again, looking at, about the 50 or so major markets in terms of office vacancy rates of the markets track by a Cushman and Wakefield, national office, vacancy rates, Alec mentioned this still very high, 15% on average 15+% on average nationally as of the third quarter of this year and the top five in terms of the markets that they tracked that have the lowest vacancy rates are generally around 10% or less, again, as Alec mentioned, and mostly in the coastal area. And then the bottom 5, all over 20%, so tremendous variations still in terms of performance in the sector across the country.
There's been numerous reports about emerging labor shortages in the construction industry, and that's somewhat surprising given how many workers lost jobs during the downturn, however it does appear that many of these workers have left the industry and I think the question is, will they return or not?
So this is looking at sizes of labor force, this is based on a household service, I would ask members what industry they considered themselves to be in, what occupation they consider themselves to be in, whether they are employed or not, and I brought here several of the construction specialties, and what we're seeing, is that over this list of specialties at least, the labor force in 2007 was a lot higher than it was in 2012, in fact, declined about 19% for these specialties over this period. This is the labor force regardless of whether the employed or not, so that's really dramatically down, and the question is whether these folks are going to return to the industry once the market begins to recover. And I think, even more significant than the decline in the labor forces, the changing characteristics of the labor force that we saw before in this past downturn.
So it's an industry that hasn't been able to attract younger workers, as the recovery's gotten underway, so the labor force and construction labor force has gotten a lot older between this 2007-2012 period, education levels have increased, possibly indicating that less highly trained workers have left the industry, the foreign born share has declined slightly, possibly reflecting the slow down in immigration in recent years, and then finally this year, women in the industry declined from already very low levels got even a smaller share as of 2012, its a long way to go I think in terms of attracting people back into the construction industry.
Architecture buildings index, we at the American Institute of Architectures list a very important indicator where the construction industry is headed. Just to remind our listeners what this is, it's an index compiled from a monthly survey of US architecture firms where they are asked to report on design buildings at their firm over the prior month, the information is complied nationally into an index where any score above 50 indicates that we're seeing an increase in design activity nationally, any score below 50 indicates that it's declining nationally, and the AIA's been computing this index for almost 20 years, now it's done.
Just recently updated its analysis of how well design activity relates to construction activity, and the most recent analysis that we released this past spring shows that design activity is very highly correlate with construction activity. I'm guessing that's not a surprise to most people, but really, more importantly, the design activity leads construction activity by 9-12 months.
So our architecture billings index gives a very accurate prediction of where the construction market is headed over the next few year or so. And the recent trends are that the billings index has had its strongest score since before the last downturn suggesting that we should begin some healthy growth in construction as we move into 2015, particularly into the second half ofnext year.
One reason for this uptick is that a lot of new project activity is coming into firms, so this past spring when we released our new analysis, we also released the new indicator as part of our architecture billings index, and this is an indicator that looks at new projects coming into firms, new design contracts.
And anytime that new design contracts are growing faster than billings activity, means that new work is outpacing work that is being completed at architecture firms. So, we've recently seen a design work consistently outpacing billings indicating that architectural firms are building up backlogs indicating that they have a lot of work coming in and a lot of future design activity and future project activity.
And another reason that billings have been picking up recently is that many of the firms that are reporting the projects that were put on hold during the last downturn are finally starting to resurface. So we recently, just a couple of months ago, asked architectural firms about the status of projects that were stalled during this past construction downturn, and turns out that three quarters of architecture firms reported to us that they had worked on projects that had been put on hold during the downturn, either due to financing problems or other economic reasons.
And of those over three quarters of firms that reported having stalled projects, almost half of them reported that one or more of these stalled projects had resurfaced over the past year. And then we wrapped up by asking them to estimate what share of these stalled projects are ultimately going to make it through the design phase and continue through to construction, and the average response was about 20%, about one in five of these projects that were stalled were eventually going to come back and be constructed, so nice little bump, I think, for the industry from projects that many thought were really not going to happen.
And then finally we put our billings index, we divide that into the major construction sectors to see how the various components are performing, the blue line there are billings at residential firms, they continue to report healthy business conditions as they have really for the past several years.
Billing scores that we're seeing at commercial and industrial firms, the yellow line on this chart's been quite volatile, generally trending up for the past few years but as you can see several bumps along the way towards that recovery, but I think the greatest source of optimism recently is what we're seeing at institutional firms which by in large have still not recovered from the downturn, certainly institutional construction has not.
But for the past several months, last three or four months, we've seen a very, very healthy scores at institutional firms, and hopefully, this momentum will be contained in build time and we'll see a broader upturn in the institutional sector, that will be critical for the construction outlook. So let me end up with our outlook for 2015 and this is the results of a consensus focus panel coordinated by the American Institute Of Architects, where we go out to the leading construction forecasters across the country and ask them to report their forecast to us.
We do this twice a year, these are the result from a survey that we conducted this past June. The bars on the left are spending levels for 2013 to give you a sense of the size, relative size of the market we're talking about here, and then the middle bar and the right bar are projected growth rates for 2014 and 2015.
So overall in terms of non-residential building activity our forecast panel's projecting mid single-digit growth this year. High single-digit growth next year, in the commercial sector, industrial sector basically double digit growth this year and next, those two sectors well on their way to recovery.
The key being the institutional market and from a construction perspective, not yet underway, a flat growth this year, essentially no growth this year, but our forecast panel is seeing the same things that our institutional architecture firms are seeing with some momentum in the second half of this year, so they're calling for a recovery in institutional construction spending next year in the mid single digit range, so looking a lot better, I think, in 2015 shaping up to be a pretty healthy year.
Let me wrap up there Wendy and turn it back over to you.
OK, thank you so much, Kermit. It's really nice to hear such encouraging news from the Architecture Building Index, thanks for that. And last but certainly not least, we turn to Ken Simonson, Chief Economist of the Associated General Contractors of America. Ken has 40 years of experience analyzing, advocating and communicating about economic and tax issues.
He's interviewed and quoted almost daily by local and national media, including the Wall Street Journal, USA Today, Business Week and CNBC, and he came from several radio interviews just this morning, in fact. Currently Ken serves as an appointed member of the Census Scientific Advisory Committee and the Bureau of Labor Statistics Data Users Advisory Committee.
He has a BA in Economics from the University of Chicago and an MA in Economics from North Western University. Ken will provide a perspective on construction activity as well as the trends affecting 2015 construction spending, materials cost and employment. Your turn Ken.
Great, well thank you, Wendy.
And thank you Alec and Kermit for covering so much of the material that I have on my slide, let me focus on just a few areas. So I am going to skip through these more rapidly than usual so we can get to questions. You've already seen how construction has behaved over a long period. This busy slide at the graph at the top left shows the total construction spending peaked way back in 2006 and fell for five years until the beginning of 2011, and has been climbing pretty steadily since but at a very gradual rate, so that we're still only back to 2009 level.
And then the tangle of lines in the bottom left shows the three major segments, the blue being private residential, the red, private non-residential and the green, public construction, have each behaved very differently at most periods, but right now there's almost a convergence. Private non-residential construction spending increased 6% from September of 2013 to September of 2014.
Private residential was up 1%, public construction, after dropping on a year over year basis for several years, it's currently up 2%, but to jump to the end of my story, I think that over the next year we're going to see slight rebound in residential from current rates, private non-residential staying in a +6 to +10% range.
Public construction may flip back a little bit to negative or flat, but let me get into some of the details behind those summary figures. First, I see three big trends helping construction, the shale gale as it's been nicknamed, the Panama Canal Expansion and the residential revival, I think I have somewhat different point of view on what's going to happen on residential from Alec or Kermit, but on the negatives, I think these have been pretty well covered.
Federal government is in the midst of what maybe a 10 year or even longer period of just the holding so called discretionary spending flat. Local and governments and school districts that were really hammered by the drop in property tax received tide of a fall and how prices and the lack of new property thing, added to their tax pays.
That's starting to come back up, this month, quite a few bond issues passed for school districts particularly in Texas, so we may finally see a little resumption in case route 12 construction, but other kinds of public spending on buildings and certainly on infrastructure, look as if there's still very constrained.
As Alec mentioned, a big drop in consumers buying in stores and this has been reflected in a huge decline in retail construction spending or I've said just a little bit by remodeling of older stores to accommodate new tenants or breaking up the monolithic look of giant malls so that people can have direct access to parts of them, and then also some retail going into the first floor of multi-use buildings, but none of that makes up for the construction that was so rampant before the recession of big box stores and strip shopping centers and even malls. There is also a little offset in terms of warehouse construction that is still growing and I'm more optimistic I think than Alec that it will climb at double digits rates again next year, but again, nowhere near as bigger market as retail, and then the decline in office space is also very evident in office vacancy rates, which have remained very high in suburban office parks.
I live in Washington DC and in the big Northern Virginia suburban market it was reported last month by the Washington Post, there were 40 totally vacant office buildings including a brand new one towering over the bridge that connects Harlington to George town, and while there has been some growth in office construction in center cities, and in a few metro areas notably, Houston, San Jose, the Bates, San Francisco, and Seattle and to some degree in New York, most cities while they may have one or two projects, once those finish, it maybe another year before another one starts.
So nothing like the continuous work that was happening before the recession. Well, on the positive side, you have all of the areas shown on this map that represent the counties overlying shell basins. They're actually a lot more of them, and they are not all being exploited right now but it does seem more and more hard.
I know there's been a lot of speculation in the media that the huge drop in oil prices lately will cause a cutback in this drilling, but many of this contain natural gas or natural gas liquids that remain quite valuable even if oil prices dropped, and the technology on drilling this areas is continually improving, so I think even some of the oil place will continue to be exploited in the next year.
Well, the drilling itself counts as mining not construction, but all of these are leading the construction activity in many parts of the country, in fact, right now I'm sitting in a hotel at the Detroit Airport, I'm going to be testifying this evening about a proposed pipeline that will run from that green area of the Marcellas, and Eudicas Shells, in Eastern Ohio and Western Pennsylvania, Northern West Virginia carrying natural gas through North Central Ohio and through much of lower Peninsula Michigan even delivering into Canada, this will help millions of customers heating there homes rather than having to relying on heating oil or gas propane, and also help utilities and manufactures that rely on natural gas as the feed source.
So all of those are examples of ways in which construction will be benefiting from this new abundance of natural gas and oil within these fields that you'll get a pipeline's manufacturing plants, utility plants, as well as the plants that are supplying the pipe, the rail, the tanks, machinery that is used to drill store, pump and process the oil and gas, and then you have the prospect of huge new export facilities at various locations around the country.
That brings me to the second positive, the Panama Canal expansion. All of these black dots are ports that maybe affected when Panama Canal has new locks with their are deeper and wider and longer basins are completed, presumably in the first half of 2016, but to accommodate those giant post Panamax container ships and liquefied natural gas, tankers or carriers, they have to dread their harbors deeper, extend their peers and [xx], put in more storage and marshalling yards for the containers and chassis and in many cases such as Miami billboards a new tunnel, New Jersey in Long Beach, new bridges, they are making extensive improvements on the land side and and even as far inland as New Mexico where Union Pacific has spent $400 million dollars building up a rail yard to take those container trains that they'll be running directly off the port of Los Angeles, and then route them to Chicago, Houston or Kansas city.
The third positive is residential construction, and this shows that multifamily, the green layer and the green line tracking you over your change, has been goring the fastest. It's slowed down somewhat, but still in September was up 26% from a year before. Meanwhile, single family construction also growing at a respectable 10%, but it's slowed down, it's been just about continuous.
And now this series is a little different from construction starts your building permit, this is what contractors or home builders are actually spending to put up structures in any one month. And I think going forward, we will continue to see strong demand from multifamily, but no pick up from current rates, in fact, probably a further deceleration in single family construction.
That's because of both demographic and financial factors. You no longer have rising numbers of people on their early 20s, they're waiting longer to get married, longer to have a kid and those things had traditionally triggered some home building. You also have people preferring to live in cities, not an enormous difference but enough to tilt the balance much more toward multifamily than single family suburbs ever further out, and then financial considerations, with so many young people having huge student debt, they can't come up with the scratch for the higher down payments that are being required or they may not qualify for monthly mortgage payments on top of the student loan repayment, and also they've seen what happened to people about a decade ago, thinking they could sell whenever they wanted and instead they're stuck or in the home or they've lost it.
So for all these reasons I think multifamily will do great, single family maybe not. This shows my predictions for the various non-residential categories as defined by the Census Bureau, and they do have some quirky definitions. The largest now and one of the fastest growing at the moment is power construction, that includes power plants, some new gas fired plants as well as coal and nuclear, not much happening there, wind and solar at the moment going strong, but dependent on tax credit that may not be renewed, few transmission line projects, but importantly it also includes all the work in the oil and gas field, and the pipeline activity, which I think will be very active in the next few years.
Highway and street construction, I'm definitely more pessimistic than Alec. It's going to be very hard for Congress to agree next year on extending the highway aid bill, known now as MAP 21, its been passed through the end of May but there a lot of members of Congress in the republican majority who would like to see the federal program cut back, and hardly any willing to vote for wither general fund transfer as we've had the last several years or new taxes, and yet without those we won't be able to, the states won't be able to go ahead with nearly as much new construction as we've been seeing. And so, I think while there may be a few more public/private partnerships, we're not going to see as much highway construction in the latter half of 2015, certainly not in 2016 as we've had recently. Educational construction, you can see, shrank sharply last year, I think it's going to be down for another year. By 2015, we may start to see some of those bond issues kick in, but the level of public higher education spending, I think, it's going to remain depressed.
Legislatures really whack the budgets of their state universities, some have been able to improve their funding via alumni or go to public/private partnerships, or switch from building dormitories on campus to relying on private investment in the student housing off campus, but at any rate, I don't see new funding coming along.
Commercial, I've touched on manufacturing, I see a big rebound happening, some related to supplying the oil and gas industry and the downstream industries, but also for transportation construction. I'm sorry, for transportation equipment. Pretty much every category from on light vehicles to heavy trucks and trailers, to rail cars and locomotives, aircraft, even barges, order books are bulging and so I think we'll see more construction of parks and assembly plants in all of those sectors. And then finally, you're getting some reassuring, and some new manufacturing facilities, most famously, the so called Gigafactory that Tesla says it will spend $5 billion to build in Nevada.
So manufacturing's strong right now, should remain strong for several more years. Office construction, the downward trend in space for employee is going to hold this flat or close to it, aside from renovation, to accommodate the new open floor plans that tenants want or to put in energy retrofits in older buildings.
Transportation covers things like private railroad investment, a little investment by trucking firms in terminals, and then more of it is on the public side, transit passenger rail, airport, ports. While there are a lot of projects going on on that public side right now, I don't see new money coming in.
Not only is the transit portion of the highway bill in jeopardy, but by September 30th, the airport airways trust fund will be up for renewal and there could be another lapse in funding as we had three years ago when projects were temporarily shut down. Healthcare has been a big disappointment, it was a strong sector before the recession, aided partly by federal spending on base realignment projects for military hospitals, VA hospitals, NIH funding for research medical centers.
All of that federal money has dried up and is hit by this discretionary funding cap. At the same time, the market for hospital utilization has changed, there are more standalone emergency rooms, outpatient surgical centers, and clinics that you can go to, and a drug store or strip shopping mall.
So that has cut into hospital utilization and then finally hospitals are rightly being cautious, waiting to see what the utilization and repayment rates are under the Affordable Care Act. So I think this market will remain subdued. One other worth mentioning here is lodging, up 25% last year, and as Alec said, staycations are over, business travel is back, this looks like a hot market for a while yet, but it is one that historically has also cooled of quite rapidly at times.
I have a bunch of slides that show each of the markets month by month back to 2008, I'll let you refer to these if you want in the question period, let me get on to the employment situation. Alec touched on aspects of these, here's a map that shows the change in construction employment from September of last year to September of next year, tomorrow we'll have October figures and AGC will rank all the states, put out a press release about how they're doing. Right now we have five states with double digit growth, Nevada, Utah, Florida, North Dakota and Delaware all had increases between 10-13% on a year over year basis.
Only three states had declines of worst than 5%, that was Arizona, West Virginia and New Jersey, they've consistently done poorly in the last several months on a year over year basis, and then most of the country is in between at the moment, 39 states in green meaning some level of increase and we've been hovering near that total for a while, but as this very busy looking heat map shows the colors have been dancing around, we went from deep red almost everywhere back in 2010 to green in about three-quarters of the state, the shades vary it from month to month and state to state, not a lot of consistency.
In fact, only two states are now at peak construction employment, and the country as a whole is still 21% below peak, whereas a total non-firm payroll employment has been setting records every month. The number of, let me skip this one and go on to what's happened to the number of unemployed construction workers, has dropped drastically in the last four years from the 17% unemployment rate to just over 6%, practically as low as the whole industry average.
That means over 900,000 pure construction workers are saying, I'm unemployed, I'm looking for work and I last worked in construction, but in that same four-year period the industry has hired fewer than 600,000, so more than 300,000 have either retired, gone back to school, gotten jobs in other industries or just left the work force.
They're not sitting at home waiting for contractors to call them back, and that's why so many contractors are having trouble finding workers now, even with slightly elevated unemployment rates. AGC of America did a survey two months ago that almost 1,100 companies answered. If you're from one of them, thank you very much.
What it doesn't show is, overall 83% of the firms with craft employees that they were having trouble filling one or another craft position and 62% of firms that they were having trouble filling one or another professional position. Firms hiring carpenters or roofers were having the greatest trouble but nearly every craft almost half of the firms that they were having trouble, and for professional positions, project managers and supervisors are the hardest to fill.
As a result, I think we're going to see a sharp up turn in the employment cost index, the ECI, the red line here. This shows that the cost of new buildings, what constructors charge for new non-residential buildings has climbed in kind of a stair step fashion over the last, almost four years, that's the black line and it just recently edged out the growth and materials cost, and so far as well ahead of the increase in labor cost but I think going forward that green line for materials cost is going to remain close to flat, while the red line moves up much more closely to where the output cost index is.
Here are some examples of how dramatically material costs have varied over the last four years. We had record prices for steel mill products, copper and brass mill shapes the beginning of 2011, and they've cooled off since then. Whereas gypsum products have jumped from the beginning of each year, and the gypsum makers have threatened to repeat that for a fourth time this coming January, Lumber and Plywood has been moving up steadily, but if I'm right about single family home building slowing down, these things could level off soon.
Diesel fuel is actually plunging now, even though this shows data through September, we had a sharp drop in the October producer price index, and I think it will continue to go down through December, and probably next year. Concrete, plastic, aerosol prices, not a lot of movement, some reports of cement and aggregate makers trying to raise prices next year, but I'm not sure that that's going to be a national trend, so to reiterate, I see the best prospects being multifamily, manufacturing, anything related to oil and gas, and amongst smaller niches, warehouse, hotels, rail and the data centers.
The last is a bit ironic, because we don't actually have data on data centers but everywhere I go people say that's still a hot market. Going a little further out through 2017, I think we'll continue to see moderate growth in total construction spending but less of it showing up in single family housing than last decade, much less than retail, and still flatter decline in public spending, lots of niches driven by the shale gale of the Panama Canal widening, and those demographic shifts that Alec talked about.
In percentage terms, we went from 20% growth in residential to probably 6-10% this year and then staying in single digits for the next three years. Non-residential, bumped up for now to double digit growth from basically flat last year, should drop back into single digits next year, and then public construction, staying about where it's been, close to zero growth.
Materials prices, not a concern, employment cost definitely moving up more rapidly. So, that's my story, I'm sticking to it until I get new data, when I do, I'll put it in the data digest, which you're all welcome to sign up for at agc.org/datadigest. Wendy.
Thank you so much Ken, and thanks to all of our presenters for that generally positive news, we like hearing that.
So now it is time for your questions from the audience. Remember, you can submit questions via your screen council, we have many questions from our audience members so we'll answer as many as we can. Let's get started. So for the first question, I want to hand it over to Alec. We had a question from Marisa.
She says you talked about pent up demand and the single family housing market, do you see this continuing to gradually increase or do you predict the big jump some time in the next couple of years?
Well the single family market. One of the things, I guess, I would start with, is just general population growth in the United States. It's somewhere between 0.7% and 0.8% per year, and that alone is positive for the economy. The more people there are, the more spending there is, and so on. And you want to have population growth.
There's countries around the world, Russia, Germany, Japan, South Korea, where the populations are actually declining. So the population growth that alone, that has to be house somewhere because that translates into a figure that's a number of households and so on. And yes, there is reasons to think that the single family market maybe more muted than in the past and and I think that legacy effect from the experience of the very sharp decline is likely to hold back single family housing.
I just go back to fact that before the recession single family starts on average were about 1.2 million units per year, and they're currently only about 600,000 units per year, and that just says to me that over time there's got to be some pen up demand that's eventually going to kick in, and drive that market higher.
Let me jump in on that one too if I could, this is Kermit. I think the pinup demand's a little trickier to try to identify here in the sense that it's so far households not being formed, and I think, generally, millennial households, younger households that are being formed for reasons we've heard about, student debt levels that are very high, high unemployment rates among that group, folks that are unemployed having fairly low wages, and maybe not enough to afford home ownership and I think we're dealing with some institutional issues that are exacerbating that problem.
The fact that credit is generally tighter in terms of getting a mortgage, much more enforcement of higher down-payment for getting most mortgages and things like that. And so I think Alec is exactly right that those households are going to be formed at some point, and they're going to either rent, or buy a home.
It's just a little bit tricky to tell when that's going to occur. Certainly the demographic do support long term levels of home building well above where we're seeing now, it's just, the tricky part is trying to figure out when all these issues get resolved and when those households are actually going to get back into the housing market.
OK, thank you. This next question is actually for you Kermit. This is from Larry and he wants to know how does the average ABI pre-recession compared to the 2014 year to date?
Sure, well the architecture billings index is a measure of month over months change, so it's really looking at the pace of growth, so it's no that levels are routinely higher or lower during one period, it's really and what the trajectory is now. So prior to the downturn steady state, we were seeing numbers in low to mid 50s, 53, 54, I don't thing in the 20 years we've been running this index, we've actually seen a number, a national number above 60, and something above 55 would be considered very strong monthly growth, so I think the numbers that we're seeing now in the 53+, 54, 55 range, do indicate an awful lot of momentum, an awful lot of acceleration in terms of design activity at architecture firm, so it does certainly point to an acceleration of activity in the building sector, currently in design but certainly one would think that by next year translating over to construction.
OK. Great. Our next question is for Ken. Will the supply of skilled labor be adequate to meet increased demand in the industrial and commercial sectors?
That's certainly an important question for contractors and owners, and I think I'll give a classic economist's answer. It depends. For some niches where you have a very specialised or complex project, there's close to an a little shortage of skilled labour available to do things like petro-chemical plants or the proposed liquefied natural gas terminals, we haven't build those in the past in the U. S, and we haven't done much in the petro-chemical area for decades, so what worker knew how to do, many of those workers have now retired, and it will very hard to complete all of those projects on time and on budget.
For other things, I think we will see workers come back into construction, either from other industries or from having dropped out of the workforce if wage rates go up enough in construction. And there is growing evidence that contractors are starting to raise either base pay, signing bonuses, completion bonuses for staying with the job, or per diems for travelling workers.
OK, thank you. We actually have quite a few questions around the keystone XL pipeline, so I'm going to put this out to the group, what are your thoughts concerning the pluses and minuses of the keystone XL pipeline and how long will the construction job for that expansion last?
Well, this is Ken. I'll jump in. As I mentioned I'm going to be testifying about another pipeline project going through Ohio and Michigan that they hope to start next year, I think they expect that would take four years, the keystone and they believe would have pick employment of 10,000 construction workers in addition generate a lot of jobs in supplying industries and local communites from the workers spending time there, but most important from creating a lower cost secure supply of energy and the feed stocks.
So I think that's the real value of pipeline construction. The Keystone XL, it's a special case because it would mainly be bringing oil from Alberta that is relatively high priced, so it remains to be seen if that will be competitive with the oil that they're finding in the US. The construction process itself will depend a bit on the final routing, and I think, with Nebraska that may still yet to be worked out.
But it would be several thousand jobs over several years.
Yeah, I just love to comment Keystone. It's certainly one of my favorite topics. If you think back over the last 50 years, how many occassions, on how many occassions, because of conflict in the Middle East and other places around the world,
how many times have we wondered in North America or wished almost at any cost, that we could have energy self sufficiency. And the answer is there's just been multiple times, and this is a measure that would move towards energy self-sufficiency. There's something like 150,000 miles of pipelines in the United States.
This would add another 1,200 miles, it's really not as if this is some huge project that changes things. President Obama talked about this pipeline, this being an expat pipeline. Its ending point is in Steele city, Nebraska, so it's not really going directly to the Gulf. Now, I know that there's further extensions that might take the oil to The Gulf, but even at The Gulf, it will be refined into product that can be sold throughout the rest of the country.
Europe is facing a situation now where it's dependent on supplies of energy from Russia. They've got to be pretty envious of the situation that we're in. So, proceeding with Keystone, as some people have said, is really, it's almost a no-brainer, but anyway when you get into politics. Now having said that, let me say something about Alberta oil sands because, obviously, this is what it all ties back to.
And I have to say that the extra emission from producing oil from the oil sand as opposed to conventional sources and even fracking sources, they do present a very big target for environmentalist to aim at. So the industry and the Canadian government, the Alberta government should be taking some steps to reduce the size of that target.
OK, thank you both for that. I'm going to have, I think there are one more question should before we have to wrap it up. I'm going to throw this to the group as well. Well, it's clear that non-residential building has been [xx] to rebound, what has happened with the vacancy rate for unoccupied new construction over that same time period? Are we just now beginning to see some of those properties being utilized?
Silence here, and this is Kermit, Wendy, I'll try it first but I'm sure that Ken and Alec want to chime in. I think that answer is very much dependent on market conditions, and I think it's hard to generalise in terms of what's happening to new constructions coming online, ken gave an answer, gave an example of Northern Virginia or suburban Maryland, forgot what it was, coming online that was empty.
I think, in other markets you're seeing just the opposite, you're seeing vacancy rates in the single digit range that are really, vacancies insufficient to really accommodate a major new lease or new tenant coming into the market. But as I say, I'm not sure that it is fair to generalize in terms of what's happening to new construction coming on.
Yes. This is Ken. I do think that, as I said, the office market remains very weak in most suburban areas and even in a lot of center cities driven by relatively slow pick up in employment, in office employment but also by firms squeezing down the amount of square footage they give to employees, either by moving them into smaller offices, common space, assigning offices only on the days that they're not teleworking, and also getting rid of things like law libraries and file storage areas or computer rooms, as all of that goes to the cloud.
I agree with what both Kermit and Ken have been saying, and what you do, is you watch the employment numbers and just see how they're progressing, and again, if you're talking about sort of pen up demand or the gap, this is actually excess space that's become available. It's the difference between capacity and where you were so it's the excess capacity that's out there.
The lot I talked about how total employment was back to where it was again prior to the peak that it reached its previous level in May, that sounds great and it is, it's a take off point from here, but obviously the gap between when there was peak employment and where we are now, that period of time, if everything had been going right, there would have been ongoing employment increases, the economy would have been continuing to grow, so that's still got to be made up, there's still huge increases in employment that have to take place, so you just got to keep watching that and see how that progresses all the time and then make the space will gradually be picked up again but it's going to take a considerable period of time.
So, this was seven lost years. I mean let's face it, seven lost years.
OK, well thank you all so much for your insight, thank you for allowing us to tap into that knowledge. We're going to conclude the question and answer session now. On behalf of CMD, the AGC of America and AIA, I'd like to thank our sponsor InfoTech international, as well as presenters Alec Carrick, Kermit Baker and Ken Simonson for their insights and presentations today. Our next economic webcast will be in April 2015, so plan to join us again next Spring.
Remember, you may print a certificate of completion of this webcast by selecting the widget at the bottom of your screen. Thanks to all of you listening and watching today. We hope you enjoyed the webcast. Don't forget to go to cmdgroup.com to download the archive of today's webcast or the presentation slides.
You should also receive an email that gives you a link to that. Until next time, this is Wendy McBay wishing you prosperity and success. Thank you, and goodbye.
Recently named CMD’s North American Chief Economist, Alex Carrick has served since 1985 as Chief Economist for CanaData and Reed. An awarded author of thousands of articles, Alex is regularly quoted by major news outlets and his online analyses are a popular feature of the Daily Commercial News and Journal of Commerce. Alex has a BA in Economics from the University of Western Ontario and an MA in Economics from the University of Toronto.
Ken Simonson has been the chief economist of the Associated General Contractors of America since 2001. His weekly summary of economic news relevant to construction, The Data DIGest, goes to 42,000 subscribers. Ken was the 2012-2013 president of the National Association for Business Economics. Currently, he serves as an appointed member of the Census Scientific Advisory Committee and the Bureau of Labor Statistics’ Data Users Advisory Committee. Ken has 40 years of experience analyzing, advocating and communicating about economic and tax issues. Ken has a BA in economics from the University of Chicago and an MA in economics from Northwestern University.
Kermit Baker is the Chief Economist for the American Institute of Architects. Kermit originated the AIA’s “Work on the Boards” Survey, a monthly assessment of business conditions at architecture firms and the source of the Architecture Billings Index. He also coordinates the AIA Consensus Construction Forecast Panel, and writes regular economics columns for AIArchitect. Kermit also is the Project Director of the Remodeling Futures Program at the Joint Center for Housing Studies at Harvard University. Kermit received his Master’s degree in Urban Planning from Harvard University and holds a Ph.D. from Massachusetts Institute of Technology in the same field. In 2002, Kermit was made an honorary member of the American Institute of Architects.