Starting in 2012, the construction sector generally has turned in stronger growth than the overall economy. However, that growth has not been evenly distributed within the industry. Residential construction has had the strongest rebound, with notable differences. Multifamily construction has fully recovered, while single-family construction, although improving, struggles with starts still well below the nation’s long-term needs. The outlook is for multifamily construction to continue roughly around its current level and for single- family construction to slowly grow. The South and West will be the main beneficiaries of the improvement in single-family construction. 

Repair and rebuilding—both residential and nonresidential—along the Gulf Coast and nearby areas (including U.S. territories in the Caribbean) that suffered from flooding from various storms will absorb both labor and materials during the next several years. 

Meanwhile, nonresidential building construction has done fairly well. For-lease properties (lodging, office and retail) generally have shown solid growth. Going forward, for-lease construction will grow, but at a much slower pace. Lodging and office construction already have slowed, and are likely to slow further in 2018. Similarly, retail construction, which has been surprisingly strong, will slow noticeably in 2018. 

Institutional construction faltered, only showing some minimal growth in 2016 and slowing to a crawl in 2017. Institutional construction activity will, at best, grow slowly. Health care construction activity will perform the best among a weak group. It is also the area most likely to surprise on the upside.

With reductions in production due to lower energy prices, construction in energy-related investment slowed considerably in late 2015 and into 2016 and 2017. The decline in manufacturing construction is likely to extend into 2018. The investment in manufacturing that occurs will be concentrated in the parts of the South that suffered most from Hurricane Harvey and, to a lesser extent, the Midwest. The Northeast and West will be the primary beneficiaries of any investment in high-tech manufacturing.

As politicians continue to extol the virtues of investment in infrastructure while doing little to provide additional money, several states have stepped into the breach, many experimenting with alternative sources of funding. Look for public-private partnerships to continue to play a major role in infrastructure projects going forward, especially projects where it is easiest to charge users (e.g., tolls on highways).

However, in many projects it is difficult to charge the end user, or to charge fees sufficient to cover the investment. For example, to fund maintenance and improvement of city streets or building modern facilities for public education, government must lead the way. Government funding has lagged significantly in these areas, and it is unlikely that this trend will change significantly during the next year. Most construction activity for local infrastructure will be focused on repair (e.g., broken water mains) and required upgrades to systems due to regulation (e.g., improvements to a sewer system to meet clean water standards). 

Energy Boom States
The boom in the energy sector gave a boost to states such as Montana, North Dakota, Pennsylvania, Texas and Wyoming. This, in turn, spilled over to the construction sector in those states. The turnaround in the energy sector has been a drag on construction, putting downward pressure on construction employment in North Dakota and Wyoming. Producers in North Dakota appear to have adapted to the new reality, and construction employment in that state is once more on the rise. Wyoming, on the other hand, continues to see a decline in its construction sector. 

Other states that have a significant energy sector, such as Pennsylvania and Texas, have enough other industries that the impact from the downturn in energy exploration and production on construction has been more than offset by other positive developments. As of August 2017, year-over-year employment in the construction industry in Pennsylvania and Texas was up 3.1 percent and 2 percent, respectively. Texas will experience respectable construction activity both due to its diverse economy and the Houston recovery process, which will stretch out over many years. Dallas will continue to turn in healthy growth. Pennsylvania will experience moderate growth in construction activity in 2018.

With its dependence on coal, West Virginia has been hard hit both due to lower natural gas prices (a direct competitor to coal for use in power plants) and environmental regulations. Administration support of the coal industry may slow or even halt the process, but is unlikely to revive the coal industry in the state. Temporary stabilization of the coal industry is the best that can be hoped for. The best prospects for future growth in the state lie in its tourism and (non-energy) manufacturing sectors. 

Residential and Manufacturing-focused States
Construction activity in the Gulf Coast states of Alabama, Louisiana and Mississippi will largely be concentrated in manufacturing and residential construction. Much of these states’ construction resources will be devoted to rebuilding following the region’s devastating floods and hurricane damage.

The same will be true for many southern Atlantic coastal areas. Overall, the southern states will experience healthy residential construction activity. Manufacturing construction will be important to much of the area as well. 

Florida will be engaged in repair and rebuilding following the damage from Hurricane Irma. Given that it is a wealthier state, it has drawn in (and will continue to draw in) construction workers from other states, the bulk of whom come from nearby southern states. This exacerbates the skilled construction worker shortage in the South and in some northern states as well.

Lower energy prices have helped, and will continue to help, states as diverse as Indiana, Kansas, Michigan, New Hampshire, New York and Tennessee. They benefit from manufacturing and health care construction.

Investment in lodging and related establishments has been and will continue in locations that thrive from both pleasure and business travel, but at a slower pace than in past years. These include large cities such as Atlanta, Chicago, Las Vegas, Los Angeles, Miami, San Francisco and Seattle. More lodging construction activity will focus on smaller resort areas, including locales as large as Denver.

Most areas of the country will see further increases in residential construction as employment continues to rise, spurring household formation and increasing demand for both single-family and multifamily units. Major metro areas such as Boston, Los Angeles, Miami, New York City, Philadelphia, San Francisco and Washington, D.C., will see construction of multifamily buildings at a much slower pace than in recent years. More multifamily construction will be in urban areas in the next smaller tier—mainly in the South and West, although some Midwest cities will benefit as well. 

Bernard M. Markstein is president and chief economist of Markstein Advisors, and a contributing economist for Associated Builders an Contractors. For more information, email bmarkstein@verizon.net.