Thanks to an increasingly competitive global market and a stronger-than-anticipated U.S. economy, the outlook for manufacturing construction spending remains guardedly optimistic through 2008 and several years beyond. By 2010, FMI Corp., a management consulting and investment banking firm headquartered in Raleigh, N.C., forecasts that manufacturing construction put in place will grow to $51.7 billion — up from a projected $38.1 billion in 2007.
“The short-term outlook is fairly good for manufacturing construction,” agrees Dan Meckstroth, chief economist for the Arlington, Va.-based Manufacturers Alliance/MAPI. “The industry has been growing rapidly over the last three years. Although the pace of growth is definitely going to slow, it will remain positive over the next couple of years,” he says.
Data from the June 2007 Manufacturing ISM “Report on Business,” released by the Institute for Supply Management (ISM), Tempe, Ariz., corroborates this statement. According to the report, in June, manufacturing expanded at its fastest pace since April 2006.
Moreover, the National Association of Manufacturers (NAM), Washington, D.C., says that 14 of the 19 major manufacturing industries increased production in the second quarter of 2007.
Nonmetallic minerals and chemical/biotechnology are enjoying particularly strong growth. “There has been a boom in the construction of ethanol plants as a result of the U.S. government subsidizing ethanol production for use in gasoline,” says Meckstroth, referring to the Energy Policy Act of 2005, which mandates increasing the amount of biofuel — typically ethanol — that must be mixed with gasoline sold in the United States to triple the current requirement (7.5 billion gallons by 2012).
Meckstroth also notes a surge in nonmetallic mineral manufacturing plants. “My guess is that this is due to the increased use of cement products, such as pavers, and to more use of stone in kitchen counters and office buildings,” he says.
Building of large plants in the automotive sector is another manufacturing construction trend Meckstroth has observed, although he attributes much of this growth to foreign transplants such as Nissan, Toyota, and Honda, which have built facilities in Tennessee, Alabama, and Mississippi. For example, Honda recently announced plans to advance its “2010 Vision” for North American automobile operation, which includes construction of a new U.S. auto plant with an investment of approximately $400 million to begin construction in 2008, with employment of more than 1,500 associates at full capacity, along with the expansion of U.S. engine, transmission, and powertrain component production in Ohio and Georgia.
In addition to the South, the Plains states and New England are also experiencing an increase in plant construction. According to Industrial Info Resources, a provider of marketing and communications services headquartered in Sugar Land, Texas, New England will see 34 new industrial plants begin operation in 2007. This represents a 53% gain over 2006 and a total investment value (TIV) of $616 million. Once the factories are operational, as many as 2,600 new jobs could be created. Conversely, the Gulf of Mexico and Great Lakes states have seen the biggest decline in construction starts this year. Starts also fell by more than 80% in the Pacific and Rocky Mountain States.
Other factors influencing the construction of manufacturing facilities are offshoring and globalization. “Offshoring is having an impact,” confirms Meckstroth. “Firms right now have better opportunities abroad than in the United States for investment. The United States is a mature market. A superior rate of return is hard to achieve because there is so much competition — both domestic and foreign. Imports are surging, and that is keeping U.S. manufacturers from raising prices.”
In its “Manufacturing Barometer: Business Outlook 2Q 2007,” New York-based Price Waterhouse Coopers reports that 62% of U.S.-based industrial manufacturers reported being optimistic about the prospects for the U.S. economy during the next 12 months. With regard to expected barriers to business growth over the next 12 months, the impact of oil/energy prices and competition from foreign markets topped the list.
However, for industrial manufacturers who sell abroad, a substantial 90% of those surveyed say they view the world economy as growing. When asked how they felt about the outlook over the next 12 months, a further 78% of U.S.-based industrial manufacturers who market abroad say they are optimistic about the prospects for the world economy.