December, 2018 Dan Palmer Dodge Data & Analytics

December, 2018 • Dan Palmer • Dodge Data & Analytics

Agenda • U.S. Construction Market Indicators and Sectors • The Environment – Macroeconomic Picture • Single Family Housing and Multifamily Housing • Commercial Buildings • Institutional Buildings, plus Manufacturing Buildings • Public Works and Electric Utilities/Gas Plants • Total Construction • Cycle Charts

U.S. Construction Market Indicators Both Construction Starts and Construction Spending show that the expansion is continuing, although there’s been some deceleration. Construction starts – the full value of a project is entered into the month in which work begins. Comes from actual project report. Construction put in place or spending – work as it occurs, estimated for a given month from a sample of projects. In effect, the impact of a project is spread out from the project’s start to its completion.

U.S. Construction Market Sectors (Starts) The pattern has varied by major sector. 2018 Q3 showed residential building basically flat after Q2 pullback, more discernible declines for commercial building, institutional building, and public works.

U.S. Construction Market Sectors (Starts) Two categories – manufacturing plants and electric utilities/gas plants – continue to be highly volatile. Manufacturing no longer exerting a downward pull, while electric utilities/gas plants continues to decline.

U.S. Macroeconomic Outlook • Current Economic Environment – Tailwinds and Headwinds • Tailwinds • U.S. economy relatively strong in 2018. GDP growth for full year 2018 expected to be 3%. • Bank lending standards have eased slightly. • Some Dodd-Frank restrictions on banks rolled back – particularly mid-size banks. • Omnibus federal appropriations bill for fiscal 2018 passed in March – support for public works. • Numerous state and local bond measures passed in recent years. • Mixed - Tax Cut and Jobs Act of 2017 – near term positives, • some negatives • Headwinds • Interest rates rising • Material prices rising, tariffs • Construction labor markets tight. • Some deceleration in market fundamentals (rents and occupancies) for commercial, multifamily.

U.S. Macroeconomic Outlook U.S. economy in 2018 Q3 grew 3.5%, following 4.2% in 2018 Q2. Consumer spending in 2018 Q3 grew 4.0%, although nonresidential fixed investment retreated 7.9% after 14.5% hike in 2018 Q2. • GDP Pattern: • History Forecast • 2015 2016 2017 2018 2019 • +2.9% +1.6% +2.2% +3.0% +2.5% • Shape of Recovery: • Recent positives – • Corporate profits up 3.2% in 2017 • Profits up 3.0% in 2018 Q2, after up 1.2 in Q1 • GDP growth in 2018 Q4 expected at 2.5% to 3.0% • Areas of concern - • Will investment by U.S. firms rise with tax reform?. • Impact of tariffs? • How high will interest rates rise?

U.S. Macroeconomic Outlook Employment growth has shown stronger growth in 2018, averaging 213,000 jobs per month until November. Unemployment rate at 3.7%. • Job creation so far in 2010-2018: • 19.8 million. Unemployment rate at 3.7% • Job growth in 2015: 226,000 /mo. • in 2016: 195,000 /mo. • in 2017: 182,000 /mo. • in Jan.-Oct. 2018: 213,000 /mo • 155k in November (less than expected?).

U.S. Macroeconomic Outlook Lending standards for commercial and industrial loans have recently eased. (Reading below zero denotes easing.) For commercial real estate loans, standards for nonres. bldg. eased in first half 2018, then some tightening in 2018 Q3. • Lending standards for commercial and industrial loans • eased for 7 straight quarters through 2018 Q3.. • In 2018 Q3, 3% of respondents tightened standards • for nonresidential building project loans, after easing for • 2 quarters. Lending standards for multifamily loans • have continued to tighten. • Lending standards for residential mortgage • loans began to ease in 2014 Q2, has generally • continued through 2018 Q3. • Mortgage Bankers Survey results – • commercial and multifamily mortgage originations • in 2015, up 24%; 2016; down 1%; 2017, up 15%. • For 2018 YTD, down 1%. • Congress passed Dodd-Frank rollback bill. • Raises threshold for tight regulatory oversight on banks, • Banks with assets in range from • $50 billion to $250 billion • not subject to “stress tests.”

U.S. Macroeconomic Outlook • Omnibus Spending Bill for Fiscal 2018 – signed into law March 23, 2018 • $1.3 trillion bill, involved raising the prior spending caps. • Nondefense discretionary spending cap raised by $63 billion. • Defense spending cap raised by $80 billion. • Provides an estimated $21.2 billion for infrastructure • (According to House Committee on Appropriations summary sheet.) • Transportation-reIated construction was big winner • Federal highway spending up by $3.5 billion from 2017 levels. • Federal aviation airport grants raised by $1 billion. • Rail infrastructure gets an additional $3.1 billion. • More modest gains for other programs: • Clean water and drinking water SRF’s receive an additional $500 million • Corps of Engineers and Bureau of Reclamation receive an additional $918 million • Veterans Affairs healthcare facilities account raised by $2 billion • GSA new construction account gets $486 million • $1.6 billion set aside for barriers along U.S.-Mexico border, but • no specific funds directed at Trump’s border wall.

U.S. Macroeconomic Outlook Federal appropriations for fiscal 2019 partially set at the end of September. Federal budget deficit getting larger. • Fiscal 2019 Fiscal Appropriations • Congress passed a “minibus” appropriations bill covering the Departments of Defense, Labor, HHS, Education.. • Provides increase for Veterans Affairs facilities, • Army Corps of Engineers. • Other programs are functioning under a continuing resolution until December 7. • Includes the federal-aid highway program, • The 2% funding increase under FAST Act won’t take • place until transportation appropriations bill approved. • EPA funding for state revolving funds will also be • “status quo” until appropriations bill approved. • Other Legislation - WaterResources Development Act • FAA reauthorization • House now under Democratic control • Positive statements about two parties working together for • infrastructure funding in 2019. Can it happen? Shutdown? • Federal Budget Deficit. • For fiscal 2018, reported at $779 billion. • CBO estimate deficit for fiscal 2019 at • $973 billion.

U.S. Macroeconomic Outlook At the state and local government level, construction bond measures continue to achieve passage. • November 2016 Election Cycle • California - $9 billion bond measure (Proposition 51) for school construction • November 2017 Election Cycle • $21.1 billion in bond measures approved in 26 states, while $3.6 billion in bond measures voted down in 22 states. • Proposal to build a new Kansas City airport as a public-private partnership approved, • with project estimated to cost $1 billion. Since revised up to $1.4 billion • School construction bond measures approved in metro Houston area ($2.7 billion), Austin TX ($1.1 billion), Ft. Worth TX ($750 million). Charlotte NC area voters approved a $922 million school construction measure. • November 2018 Election Cycle • California voters defeated Proposition 6, that would have repealed a 2017 gas tax • increase earmarked to fund $5 billion a year for road and transit projects. • School construction – California voters approved about 90% of local school bond proposals totaling $17 billion. Texas voters approved school construction measures In Fort Bend ($993 million), Frisco ($695 million), Round Rock ($508 million). • Wake County NC voters approved a $548 million school construction measure. • Transportation bond measures mixed. Colorado voters turned down two measures that combined would have totaled over $9 billion for transportation projects. • Local transportation measures passed in Florida and California.

U.S. Macroeconomic Outlook Fed began to tighten monetary policy in Dec. 2015, followed by 7 additional rate hikes through Sept. 2018. Long term interest rates moved up, stabilized over summer, followed uptick to 3.2% in October. • Federal Reserve at Sept. 2018 policy meeting • set federal funds rate target at 2.00% to 2.25%. • Another rate hike expected in Dec. 2018.. • Number of rate hikes expected for 2019 – 4. • Long term interest rates now rising, hesitantly. • 10 yr. T-Bill moved up to 2.9% in February, with further • increase to 3.1% in May, before easing to 2.9% in June. • Subdued global economy had helped to keep long-term • interest rates low, but now signs of improving global growth. • Also, Fed will allow some of its portfolio to mature • without reinvestment.

U.S. Macroeconomic Outlook Consumer price index year-over-year change has picked up in early 2018. Price of oil and gasoline now showing some leveling off after earlier upward movement. • The year-over-year change in the CPI • jumped 2.9% in July, core rate at 2.4%. • Receded by Oct. - CPI up 2.5%, core up 2.1%. • Price of has moved up above $70 per barrel, but • has since receded to about $60.. • Price of regular unleaded gas has receded from • $2.90/ gallon in October to $2.60 in November • (national average).

U.S. Macroeconomic Outlook

U.S. Single Family Housing In 2015, single family housing showed improvement after stalling in 2014. Moderate growth took place in 2016-2018. Sales have receded in 2018 after earlier gains. Home prices continue to rise, but increase has slowed from 6% to 5%.

U.S. Single Family Housing Mortgage rates rising, while inventory of new homes for sale is edging upward. • The 30-year fixed mortgage had stabilized around 4.5% • in mid-2018, but has since climbed to 4.9%. • Lending standards for home mortgages have shown • gradual easing now for several quarters. • The 20% down payment requirement is still restraining • first-time homebuyer demand, along with • high student debt of the millennial generation. • Inventory of new homes for sale was at a manageable • 5 months during 2016 and early 2017. Has since • moved up to 7 months due to slowing sales. • Can housing developers get funding for development? • Demographic demand: 1 to 1.2 million units per year. • However, will older Millennials stay with urban apartments, • or start moving to the suburbs?

U.S. Multifamily Housing Construction showed steady gains 2010-2015. Lost some momentum in 2016-2017 due to NYC pullback. Year 2016 showed broader growth geographically, but most top ten markets retreated in 2017. • Helped by push for downtown redevelopment. • Demographics supportive, from both empty-nesters • and now young adults. • Rental vacancy rates had retreated, rents increased, • although fundamentals now shifting. • Vacancy rates in professionally managed buildings • at 5.0% in 2018 Q1, the eighth straight quarter of slight • year-over-year increases (CBRE). No change in 2018 Q2. • New York City multifamily construction has • been lifted by foreign investment • Federal regulators are now directing more • attention at multifamily lending by banks. • But – Dodd-Frank regulations have just been eased • for smaller regional banks.

U.S. Multifamily Housing Recent Large Projects

U.S. Multifamily Housing Top 10 Metropolitan Areas - 10 months year-to-date, 2018 vs. 2017. Based on dollars.

U.S. Nonresidential Building Activity had trended up in 2011/2012 through 2014. Deceleration took place in 2015, more growth in 2016-2017.

U.S. Commercial – Office Buildings Construction increased steadily 2011-2014, before easing back in 2015. Renewed growth in 2016 and 2017. • Market fundamentals -- • Vacancies peaked in 2010, • retreated through ‘15 Q4, • Recent downtown and suburban vacancy • rates have been stable. • CB Richard Ellis for 2018 Q3 – • Downtown office vacancy rate at 10.5% • Suburban office vacancy rate at 14.1% • Much of recent activity -- • Data Centers • Government office buildings • Corporate buildings, including headquarters. • Numerous corporate headquarters • projects started recently.

U.S. Commercial – Office Buildings Office vacancy rates experienced gradual retreat from 2010 through 2015, now basically stable. Much of new office area coming from high-rises, office alterations have strengthened considerably.

U.S. Commercial – Office Buildings Recent Large Projects – data centers, government-related office buildings.

U.S. Commercial – Office Buildings Recent Large Projects – corporate office buildings and private development.

U.S. Commercial – Office Buildings Top 10 Metropolitan Areas - 10 months year-to-date, 2018 vs. 2017. Based on dollars. (Excluding data center projects valued at $50 million and above.) .

U.S. Commercial – Warehouses Warehouse construction has shown healthy percentage growth. • Vacancy rates continue to settle back. • Reached 14.5% in 2010 Q2, and then fell to • 7.9% in 2016 Q4. Down to 7.1% in 2018 Q3. • Some larger regional facilities being built by • major retailers. In 2011-2014, several large facilities • built for Amazon.com, more in 2017. • Trade slowdown could have some negative • impact on demand for warehouse space. • Continued need for updated facilities to handle • improved inventory management practices.

U.S. Commercial – Warehouses Recent Large Projects

U.S. Commercial – Hotels Hotel construction climbed sharply in 2011-2016, followed by slight slowdown in 2017. Back up in 2018. • Industry financials stronger, yet decelerating • Casino building more active • Major projects reaching groundbreaking. • Occupancies in 2014 at 64.4%; 2015 at 65.6%; • 2016 at 65.5%; 2017 at 65.9% • Revpar in 2014 up 8.3%; in 2015 up 5.9%. • in 2016 up 3.2%; in 2017 up 3.0%

U.S. Commercial – Hotels Recent Large Projects

U.S. Commercial – Stores Store construction showed moderate growth in 2011-2013, before stalling in 2014-2016. Further drop in 2017. • Derived demand from housing market – • definitely true on the downside of the cycle; Has not been present on the upside (given negative impact of on-line sales)? • Several large retailers continue to close stores – • Staples, Barnes & Noble, • Sports Authority • Macy’s, J.C. Penney, Sears bankruptcy • Wal-Mart construction starts, as measured by • Dodge, down 18% in dollars for 2018 so far. • Follows declines 18% in 2017 and 17% in 2016. • Large mixed-use projects are providing support • to retail construction. • Store renovations have held up much better • than new construction.

U.S. Commercial – Stores Recent Large Projects

U.S. Commercial – Stores Construction starts by major retailers in first nine months of 2018. Jan.-Sept. 2018 Ranking in Dollar Value of Starts with percent change from same period of 2017 Millions of Dollars

U.S. Commercial – Stores Other Store Characteristics - Average Project Size and Alterations.

U.S. Institutional – Educational Buildings Educational building starts turned up in 2014, paused in 2015, modest growth resumed in 2016-2018. • Numerous school construction bond measures • passed in Texas in November 2014 elections, • also in November 2015, November 2016 elections. • In 2016 elections – California voters passed Prop. 51 • – a $9 billion school construction bond measure. • Other measures passed in CA, TX, CO, WA. • College endowment investment returns had slowed – • FY 2014: +16% But, FY 2017 up 12% • FY 2015: +2% • FY 2016: -2%

U.S. Institutional – Educational Buildings • K-12 school construction larger and more volatile than colleges/universities. • In 2015-2016 much of the upturn came from K-12 projects; in 2017 colleges strengthened. In 2017, dollars for K-12 school construction were 2.3 times the size of Colleges/Universities/ Community Colleges. In 2017, sq. ft. for K-12 school construction was 4.0 times the size of Colleges/Universities/ Community Colleges.

U.S. Institutional – Educational Buildings Recent Large Projects – K-12 School Buildings

U.S. Institutional – Educational Buildings • Top 10 States K-12 School Construction – 10 months year-to-date, 2018 vs. 2017. Based on dollars.

U.S. Institutional – Educational Buildings Recent Large Projects – Colleges/Universities

U.S. Institutional – Healthcare Facilities • The healthcare facilities category had hovered around 68 to 78 million square feet in recent years, • with 2017 finally moving beyond that lackluster range. • Debate over healthcare reform - Affordable Care Act • or Obamacare - created near-term uncertainty. • In addition – uncertainty over • reduced Medicare reimbursements, • More healthcare mergers. • Three attempts to repeal Affordable Care Act brought • renewed uncertainty, but push to get deferred • projects going supported growth in 2017. • Will repeal of individual mandate dampen revenues? • Store-front clinics growing – a plus for renovation work? • Sector still supported by – • Need to replace aging facilities • Growth of elderly population. • Move toward “hub-and-spoke” system.

U.S. Institutional – Healthcare Facilities • Both healthcare segments – hospitals and clinics/nursing homes have retreated from 2008 peak. In 2017, sq. ft. for hospital construction was 51% size of clinics/nursing homes. In 2017, dollars for hospital construction were 1.3 times the size of clinics/nursing homes.

U.S. Institutional – Healthcare Facilities Recent Large Projects

U.S. Institutional – Healthcare Facilities • Top 10 States Healthcare Facilities – 10 Months year-to-date, 2018 vs. 2017. Based on dollars.

U.S. Institutional – Transportation Terminals • Transportation terminal work has surged in 2017, including large projects at NYC’s LaGuardia Airport ($7.6 billion).

U.S. Institutional – Transportation Terminals Recent Large Projects

U.S. Institutional – Transportation Terminals Current Proposed Chicago’s O’Hare International Airport set for $8.5 billion expansion over ten years.

U.S. Institutional – Amusement & Recreational Amusement and recreational has turned the corner, now heading up. • This category affected by both public and private • funding support. • The 2014 jump due to several large amusement • projects, including 948 million Atlanta Falcons stadium • Casino projects continue to reach start stage • Largest project in 2016 – • LA Rams Arena in Inglewood CA • Largest projects in 2017 – • Javits Convention Center expansion in New York NY • Texas Rangers Ballpark in Arlington TX • Golden State Warriors Arena in San Fran. CA

U.S. Institutional – Amusement & Recreational Recent Large Projects

U.S. Institutional – Public Buildings Public buildings has experienced a lengthy decline. Activity appeared to level off in 2015-2016, now moving up. • Received benefits of 2009 federal stimulus • act for courthouses, federal buildings, • land ports of entry. • More recently affected by limited federal • spending for GSA projects, military-related • construction. GSA funding has not • provided much support for construction • in recent years. • .

U.S. Institutional – Public Buildings Recent Large Projects

December, 2018 Dan Palmer Dodge Data & Analytics