Construction forecasters remain cautiously optimistic about this year, with growing concerns about 2024

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["a",["href","http:\/\/info.aia.org\/aiarchitect\/2023\/charts\/Jan%202023\/ccf_011723.html"]],["b"],["i"],["a",["href","https:\/\/aiau.aia.org\/courses\/2023-economic-update-1"]]],"sections":[[1,"blockquote",[[0,[0],1,"View the interactive Consensus Construction Forecast \u003E"]]],[1,"p",[[0,[],0,"Spending on\nnonresidential buildings picked up momentum toward the end of 2022, with gains\napproaching 10% on an annual basis. Much of the increase was the result of\nmaterials and labor costs, but still, the results were encouraging given macroeconomic\nheadwinds such as inflation, rising interest rates, and weak consumer sentiment\nscores."]]],[1,"p",[[0,[],0,"This year is\nexpected to produce further growth in construction spending, but at a more\nmoderate pace. Overall gains in spending are projected at just under 6%, with\nalmost 3% for the commercial sector, 15% for industrial facilities, and 4% for\ninstitutional buildings. Next year, growth in spending is forecast to slow to\nunder 1%, with a decline of 1.4% for commercial, a modest 0.4% increase for industrial,\nand a 3.8% increase for institutional facilities. "]]],[1,"h3",[[0,[1],1,"An\nunbalanced year for construction in 2022"]]],[1,"p",[[0,[],0,"While the\nspending gains this past year were impressive, they also were uneven by sector.\nThe commercial\/industrial sector increased by over 15%, as did retail and other\nfacilities (which includes distribution), spurred on by strong gains in\nmanufacturing, Manufacturing gains have resulted in large part due to reshoring\nefforts by U.S. companies. The Reshoring Institute estimates that reshoring and\nother foreign direct investment in the U.S. produced 350,000 manufacturing\npositions in 2022, almost three times the average of the prior decade. "]]],[1,"p",[[0,[],0,"The\ndistribution component of the retail category has seen the strongest growth of\nany major building sector over the past decade. Due to explosive growth in\ne-commerce, the construction of distribution facilities has increased by nine-fold\nover this period, compared to just over 50% in overall gains in spending on\nbuildings. "]]],[1,"p",[[0,[],0,"The other\ntwo major commercial building categories \u2013 offices and lodging \u2013 essentially\nsaw no gains last year as both sectors were still adjusting to the reduction in\ndemand during the pandemic. The institutional categories saw only very modest\nspending growth last year, with healthcare and amusement\/recreation being the\nonly major sectors with increases of 5% or more. "]]],[1,"p",[[0,[],0,"Even though\nthe pace of growth is slowing, there continues to be dramatic increases in input\ncosts for construction projects. The most recent figures from the US Department\nof Labor estimate that input costs increased almost 10% over the past year.\nWhile very high by historical standards, this growth rate is only about half of\nits growth pace in late 2021. "]]],[1,"p",[[0,[],0,"It is\ndifficult to separate real gains in construction activity"],[0,[2],1," "],[0,[],0,"from mere\ninflation in labor and material prices. However, one method for disentangling\nthe two is to look at construction employment levels, since increases in\nemployment would strongly suggest an increase in output. Over the past year,\nnonresidential construction employment increased almost 4%, suggesting that a\nsignificant share of the increased spending resulted in increased construction\noutput."]]],[1,"h3",[[0,[1],1,"The\nslowdown unfolds\u2026"]]],[1,"p",[[0,[],0,"Entering\n2023, the construction industry will be confronted with mounting challenges. In\naddition to high levels of inflation, rising interest rates, and continued\nsupply change issues, many economic forecasters expect a recession this year,\nlikely in the first half. While that will certainly impact the construction\noutlook, it will do so with a considerable lag. Most projects already underway\nas the slowdown hits are likely to continue to completion, and the Associated\nBuilders and Contractors reported that backlogs at contractors were averaging\nnine months in late 2022."]]],[1,"p",[[0,[],0,"Still, signs\nof a construction slowdown are emerging. The American Institute of Architects\u2019\nArchitecture Billings Index fell below the significant 50 threshold in the\nfourth quarter of last year, indicating a decline in billings nationally. Research\nconducted by the AIA determined that the lead time between design activity and\nconstruction activity runs in the 9\u201312-month range, suggesting a slowdown in\nconstruction spending some time around the third or fourth quarter next year. "]]],[1,"p",[[0,[],0,"Like\nconstruction companies, architecture firms are sitting on elevated backlogs of\naround seven months. However, unlike construction companies, architecture firms\nhave seen that backlogs can evaporate when business conditions weaken as\nclients may decide to delay or even cancel projects if they no longer make\neconomic sense. "]]],[1,"p",[[0,[],0,"Despite\nstrong revenue growth last year, architecture firms have modest expectations as\nto how much revenue will increase this coming year. After reporting average\nrevenue growth of almost 7% last year, projections for this year were lowered\nto below 1%, with 30% of firms expecting a revenue decline of 5% or more.\nMultifamily residential firms are expecting the steepest revenue declines,\nwhile institutional firms are anticipating growth about twice the overall\naverage for the profession. "]]],[1,"p",[[0,[],0,"The members\nof the AIA Consensus Construction Forecast panel have a similar outlook in\nterms of the performance of key sectors this year. While overall growth is\nexpected to be almost 6%, the commercial"],[0,[2],1," "],[0,[],0,"sector is expected to see the\nweakest gains at 2.6%. Spending on institutional structures is projected to\nincrease over 4%, and a whopping 15% for industrial facilities. "]]],[1,"h3",[[0,[1],1,"\u2026 as the\nmarket softens in 2024"]]],[1,"p",[[0,[],0,"The\nconstruction slowdown that is expected to begin in the latter half of this year\nis projected to continue into 2024. With overall growth of less than 1% next year,\nspending on commercial facilities is projected to decline by over 1%, and\nindustrial construction"],[0,[2],1," "],[0,[],0,"should eke out a very modest gain of less than\none-half of 1%."]]],[1,"p",[[0,[],0,"However, the\ninstitutional sector is projected to keep the overall nonresidential building\nmarket in the growth category. The 4% expected growth for 2023 is projected to\nfall only modestly to just below 4% for 2024. The two key pillars of the\ninstitutional market \u2013 health care and education \u2013 are both projected to have\nrelatively healthy years with growth in health care spending slowing modestly\nto 3.2%, and education accelerating to 4.6%."]]],[1,"h3",[[0,[1],1,"Reconstruction\nwork on the rise"]]],[1,"p",[[0,[],0,"Over the\npast few decades, there has been a steady increase in the share of revenue at\narchitecture firms coming from reconstruction projects \u2013 renovations,\nretrofits, building additions, and historic preservation. Part of this derives\nfrom an expanding interest in sustainability \u2013 fixing up an older building is\nmore environmentally sensitive than tearing that building down and constructing\na new one. However, fundamental economics and demographics likely play an equal\nor greater role. Slower population growth in recent years and the resulting\nslower growth in the economy means that we don\u2019t need to expand our building\nstock at the pace we did a decade or two ago."]]],[1,"p",[[0,[],0,"We\u2019re seeing\nthis increased growth in the reconstruction share across all major building\ncategories. Architecture firms reported that in 2021, 62% of their revenue from\ncommercial and industrial facilities came from reconstruction projects, up from\n38% 15 years ago. Institutional work has seen a similar trend, with revenue\nfrom reconstruction projects rising to 61% from 38% 15 years ago. The residential\nsector is starting from a lower base, with remodeling work accounting for 40% of\nbillings in 2021 from a level of 26% 15 years ago. This does not imply that\nthat homes are not remodeled as much as buildings, but rather that much of the redesign\nwork in this sector doesn\u2019t occur at architecture firms. "]]],[1,"p",[[0,[],0,"It\u2019s likely\nthat the pandemic has provided a boost to reconstruction activity. Many\nbuilding uses have changed substantially\nwith the pandemic as consumer spending behavior has evolved. An AIA survey last\nspring found that adaptive reuse and conversion was the single most important\ngoal of reconstruction projects at that time, accounting for over a quarter of\nall reconstruction work. Basic interior modernization and tenant fit outs were\nthe next most popular goals, accounting for just under 25% and just under 18%\nrespectively. If a soft economy, high inflation, and high interest rates make\nmore construction projects less feasible in the coming quarters, we can expect\ncontinued growth in the share of work coming from reconstruction projects, and\na buffer against a more serious setback for the profession."]]],[1,"blockquote",[[0,[0],1,"View the interactive Consensus Construction Forecast \u003E"]]],[1,"p",[[0,[3],1,"For more detailed\ninformation on the forecast and economic conditions, join the Quarterly\nEconomic Update on AIAU on February 2, 2023 at 2pm ET. "]]]]}