When it comes to new construction, housing continues to captivate investor’s attention. After all, the sector was one of the main reasons why the economy “popped” and the Great Recession happened in the first place. The sector was hit hard and prices for homebuilder-focused funds- like the SPDR S&P Homebuilders ETF (NYSE:XHB) -fell into the single digits.

The subsequent rebound in homebuilding has been quite swift and has made investors a pretty penny.  

The often ignored commercial construction sector is also starting to recover. For investors, the sector could offer a chance to play a housing-like rebound from the ground floor. And if history is any guide, it should provide plenty of similar gains.

Architecture Billings Rising

While housing sector construction has taken off, construction of strip malls, office parks and the like hasn’t been so spectacular. But things could finally be turning around for the commercial construction sector. Key index data is starting to move in a positive direction.

First, more projects have begun to be planned. The American Institute of Architects' (AIA) latest Architecture Billings Index (ABI) continued to rise in February. The measurement reflects the demand for design and contractor services. Last month, the ABI increased to 50.7- up from a 50.4 reading in January, just as January’s reading was an improvement on December's. A measure above 50 indicates an increase in billings. 

Secondly, banks have recently begun reporting an increase in the number of commercial mortgages and loans. As they’ve eased credit requirements since the bust, banks and insurance firms have issued more commercial mortgages to property owners. A prime example is New York-based insurer MetLife (NYSE:MET). MET upped lending for commercial properties by 19% last year. 

With these two factors- along with continued low interest rates courtesy of the Federal Reserve- the AIA estimates that overall commercial and industrial facilities construction will increase by 10% this year and see slightly higher growth in 2015. Yet many of the stocks associated with the sector haven’t experienced the same sort of hare price gains as their homebuilding twins. That makes them ripe for a portfolio.

Building A Commercial Construction Portfolio

Given the bullish tailwinds propelling the construction sector, investors may want to switch out of homebuilding stocks like Miami's Lennar (NYSE:LEN) and into the providers of commercial construction products and services. A great place to start is the PowerShares Dynamic Building & Construction ETF (NYSE:PKB).

PKB tracks 30 different firms that provide construction and related engineering services for building and remodeling residential, commercial or industrial properties. It also includes some of the major infrastructure related firms. Top holdings include Calhoun, Georgia-based flooring company Mohawk Industries (NYSE:MHK) and North Carolina's home improvement giant Lowe's (NYSE:LOW). Overall, PKB makes a great broad choice to play the entire spectrum of rising construction in the U.S. The fund’s mid- and small-cap tilt helped it produce a 29% return in 2013 and expenses run a small 0.63%. 

Atlanta-based home improvement store Home Depot (NYSE:HD) has swelled on the recent bullishness in the housing sector. Yet, its recent Atlanta spin-off HD Supply (NYSE:HDS) maybe the better bet. The firm distributes various supplies needed to build and maintain commercial buildings. The sheer breadth of their product line makes them an ideal play on construction and industrial markets. More importantly, HDS has recently had several quarters of triple-digit earnings growth gains. That could make the firm a better buy than its former parent as well as competitors like Illinois-based industrial supplier W.W. Grainger (NYSE:GWW).

Finally, the material producers could be seeing a boost to their bottom lines as construction activity increases. Beaten down cement plays such as Ireland’s CRH (NYSE:CRH) and Mexico’s CEMEX (NYSE:CX) have recently began reporting better numbers, while North Carolina's aggregate firm Martin Marietta Materials (NYSE:MLM) and Idaho timber company Boise Cascade (NYSE:BCC) have seen expanded industrial demand for their products. All in all, the firms that produce needed construction products should start to see rising profits as ABI’s billings actually turn into breaking ground. 

The Bottom Line

While housing construction has taken off, commercial construction is just beginning to see the light of day. That means investors still have time to bet on the sector for long term gains. The previous picks make ideal selections in playing the growth in rising commercial construction.

Related Articles
  1. Home & Auto

    New Construction's Hidden Costs Can Burn Buyers

    Before you buy that brand-new home, read this first. There are some things you should know about.
  2. Professionals

    Top 5 States For Construction Workers

    If you work in construction, these states may offer the best working conditions for you.
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Investing News

    The UAE: An Emerging Economy for Investors

    The learning from UAE on how it succeeded with timely diversification when the BRICS nations and the neighboring oil-rich economies faced challenges.
  5. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  6. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  7. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  8. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  9. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  10. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center