special report: q1 2014 construction industry

Special Report: ConstructionQ1 2014

Executive summary America’s construction industry got off to a slow start in 2014, mostly due to the brutal winter experienced by cities east of the Rockies. From New England to the Deep South, the infamous Polar Vortex sent super-frigid Canadian air careening toward the Gulf for weeks at a time, putting the deep freeze on real-estate sales and all associated construction activity. Fortunately, activity west of the Rockies helped balance this deficit to a degree, and late 2014 warming trends, both meteorological and economic, lead us to look optimistically toward the rest of 2014.

So far, all the signs point to a healthy second quarter for construction. The U.S. economy added 288,000 jobs in April, the most since January 2012. Moody’s Analytics suspects monthly job growth will remain north of 200,000, on average, for the rest of 2014, which will keep the consumer recovery humming. As more young workers get jobs, they will want to move out of their parents’ homes and get places of their own. This will trigger more building of houses and apartments. Commercial building also will respond positively to new household and business formation.

Business credit highlightsNot unexpectedly, construction in Q1 2014 followed the pace of real-estate activity and general business trends in the country’s major markets. For several years, the upper Midwest — the Great Lakes region in particular — has been a study in stability. Classic Rust Belt cities like Pittsburgh, Pa., and Rochester, N.Y., have diversified their economies over the past decade and thus have remained fairly immune from post-Great Recession fluctuations. In contrast, Florida has experienced rough terrain economically, and current numbers only reinforce the Sunshine State’s inability to recover from 2008’s financial hurricane.

Nationally, the delinquency rate decreased slightly in the year’s first quarter, dropping to 22.25 percent from 22.80 percent when the year began. Regionally, the West remained the healthiest market with a delinquency rate of 18.95 percent, although it rose slightly from 17.88 percent the previous quarter. Not unexpectedly, the South remains the area with the highest delinquency rate, 24.80 percent, although this is down slightly from 26.62 percent on Jan. 1. Likewise, the Midwest improved slightly, with its delinquency rate falling to 20.09 percent from 21.89 percent the previous quarter. The Northeast held fairly steady, rising to 23.65 percent from 23.41 percent at the end of 2013.

Delinquency Trend30.00%

25.00%

20.00%

15.00%

Q1 2013 Q2 2013 Q3 2013 Q4 2013

SouthWest Midwest Northeast Total

Special Report: Construction Q1 2014

The industry by numbersCredit risk scoreThe following table shows the top five and bottom five metro areas in terms of credit risk. The higher the number, the lower the chance there is of 90-day delinquencies in the next 12 months.

Top performing Metropolitan Statistical Areas (MSAs) Bottom performing MSAs

Springfield, MA 64.49 Miami, FL 43.81

Providence-Fall River-Warwick, RI-MA 63.92 Fort Lauderdale, FL 45.42

Worcester, MA-CT 63.28 Orlando, FL 47.58

Hartford, CT 62.01 Fort Myers-Cape Coral, FL 48.18

Pittsburgh, PA 61.98 Las Vegas, NV-AZ 48.00

Source: Experian Business Information Map

When it came to construction, New England weathered the winter of 2014 with typical Yankee stoicism and resolve. Markets throughout the region were paragons of conservative reserve, and their high credit scores reflect their steadfast refusal to bow to changing economic winds.

Conversely, Florida and Nevada, both traditionally wild boom-or-bust markets , continue to reap what they sowed during the speculation-fueled overbuilding rush of the mid-2000s. Demand is still lagging, and credit risks reflect these areas’ inability to soak up existing inventories.

Bankruptcy rateThe following table shows the top five and bottom five metro areas in terms of bankruptcies reported in the first quarter of 2014.

Top performing MSAs Bottom performing MSAs

Nassau-Suffolk, NY 0.68% Sacramento, CA 6.56%

New York, NY 0.80% Bakersfield, CA 6.30%

Miami, FL 0.94% Vallejo-Fairfield-Napa, CA 6.11%

Bridgeport, CT 1.15% Riverside/San Bernardino, CA 5.03%

Wilmington-Newark, DE-MD 1.18% Santa Rosa, CA 4.81%


As one might suspect based on credit risk patterns, bankruptcy rates in New England and the upper Mid-Atlantic States were quite low in Q1 2014. So, how do you explain overbuilt Miami’s position in the number three spot? The answer: The construction industry’s situation there is so dire that banks simply can’t afford to foreclose. They have no one to sell to, so they do what they can to work with distressed companies to keep them alive.

Conversely, lenders in California see no need for such sympathy. The Golden State was red hot in Q1 2014 — perhaps too hot. (A lot of analysts started getting flashbacks to 2007.) As a result, banks had no patience for bad performance and were quick to shut down their late payers. When borrowers are lining up for loans, failure is not an option.



Delinquency rateThe following table shows the top five and bottom five metro areas in terms of delinquencies reported in the first quarter of 2014.


Houston, TX 4.05% Fort Myers-Cape Coral, FL 43.97%

Salt Lake City, UT 4.54% Tacoma, WA 39.57%

Columbus, OH 7.7% Cincinnati, OH-KY-IN 38.36%

Denver, CO 7.76% Orlando, FL 37.72%

San Antonio, TX 8.76% Chicago, IL 37.33%


For several years now, Texas has emerged as one of the country’s most stable markets. Builders there managed to avoid overproduction in the last decade, and as a result, construction in the Lone Star state continues to move along at a slow, steady pace. Demand remains high, and delinquencies are rare. Again, we find Florida markets at the opposite end of the spectrum, along with Chicago, Ill., which has been struggling some time. The real curiosity here is Columbus, Ohio, which is near the top of nondelinquent cities, while nearby Cincinnati, Ohio, is just about at the bottom. The two big Ohio markets are an hour’s drive from each other yet their construction numbers couldn’t be less similar. We have no clear explanation for this phenomenon.

Days beyond termsThe following table shows the top five and bottom five metro areas in terms of the average days beyond term for delinquencies reported in their respective markets.


Omaha, NE 5.73 Ft. Myers-Cape Coral, FL 23.92

Grand Rapids-Muskegon-Holland, MI 6.34 Las Vegas, NV 21.29

Milwaukee-Waukesha, WI 6.55 Orlando, FL 20.99

Rochester, NY 6.83 Fort Lauderdale, FL 16.69

Pittsburgh, PA 6.84 Chicago, IL 16.67


There is no clear pattern among the leaders on this list, although it’s interesting to note that several top cities — Grand Rapids, Mich., and Milwaukee, Wis., in particular — are faring much better than larger cities close by (Detroit, Mich., and Chicago, respectively.) At the bottom of the list, we again find our “usual suspects”: major Florida cities along with Las Vegas, Nev., and Chicago. None of this is a surprise, with these markets being in bad shape across all economic sectors.

EmploymentThe following table shows employment statics for Q1 2014 as reported by the U.S. Bureau of Labor Statistics. It shows a slight uptick in labor force participation, with the unemployment rate itself holding steady


BLS household survey (seasonally adjusted) January 2014

February 2014

March 2014

Employment, all employees, millions of workers 145.22 145.27 145.74

Labor force participation rate 63.0% 63.0% 63.2%

Unemployment rate 6.6% 6.7% 6.7%

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

April 2014 Level: 6,000OTM Change: 32*

Bureau of Labor Statistics, Current Employment Statistics survey, May 02, 2014.Shaded area represents recession as denoted by the National Bureau of Economic Research. Most recent 2 months of data are preliminary.* denotes significance.

Seasonally adjusted, in thousands

Employment in constructionJanuary 2003 – April 2014

Employment in construction increased by 32,000 jobs in April, bringing the current six-month net change to 136,000 jobs. Since reaching an employment trough in January 2011, the industry has recovered 568,000 jobs, or 24.8 percent of the jobs lost during the recent employment downturn.

Industry outlookWe expect more households to form as 2014 unfolds. This will provide a large lift to the construction industry as inventories are depleted and the demand for new homes and apartments rises.

We believe personal income growth will strengthen as the labor market tightens this year and next. Indeed, much of the income-related malaise stems from a still-debilitating oversupply of workers, especially for lower-paying positions. As noted, Moody’s Analytics is forecasting monthly employment growth to average more than 200,000 new positions in 2014. This will help absorb many of the remaining short-term unemployed, clearing the way for applicants unemployed for more than 26 weeks to find work again. Longer term, the job market will be aided by a growing number of retirees, forcing employers to raise average wages to entice younger candidates as they replace those workers.

American’s overall state-of-mind is moving back into positive territory, according to the University of Michigan Consumer Confidence Index. With the housing and stock markets on the rise, we look forward to more job growth, household formation and overall business activity across most industries. This should put upward pressure on construction to meet the growing demands for space, both residential and commercial.


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04 05 06 07 08 09 10 11 12 13 14

Present conditionsExpectations

Chart 1: Consumers struggling to stay afloat

Sources: University of Michigan, Moody’s Analytics

Consumer confidence index, 1966=100, 3-months moving average

-25-20-15-10-505

101520

09 10 11 12 13 14

PrivatePublicTotal

Chart 2: Construction spending on the rise

Sources: Census Bureau, M oody’s Analytics

Construction spending, percentage change year ago, 3-months moving average

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special report: q1 2014 construction industry

Economy & Finance