After potential record growth in 2023, construction forecasters see weaker gains in 2024

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["a",["href","http:\/\/info.aia.org\/aiarchitect\/2023\/charts\/Jul%202023\/ccf_072523.html"]],["i"],["b"],["u"],["a",["href","https:\/\/www.constructconnect.com\/hubfs\/Industry%20Snaphot%20Packages%20(PDF)\/Construction_Industry_Snapshot_Package-June_2023.pdf"]],["sup"],["a",["href","https:\/\/aiau.aia.org\/courses\/2023-economic-update-3"]],["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 has been growing at a torrid pace so far this year.\nEven with the expected moderation during the second half of the year, the AIA\nConsensus Construction Forecast Panel"],[0,[1],1," "],[0,[],0,"is projecting that spending will\nincrease by just under 20% for the year. That pace of growth hasn\u2019t been seen\nsince the construction boom years leading up to the Great Recession. Leading\nthe charge is the manufacturing sector, where spending"],[0,[1],1," "],[0,[],0,"is projected to\nincrease more than 50% this year on top of an exceptional performance last\nyear. And while industrial construction spending is expected to be the bright\nlight, healthy gains are expected across the board, with both the commercial\nand institutional construction categories projected to increase at a\ndouble-digit pace. "]]],[1,"p",[[0,[],0,"However, after\nthe surge this year, market spending growth is expected to come back to earth\nin 2024. Forecast panelists are calling for a modest 2% increase in overall\nbuilding spending next year, with a projected modest decline in the commercial\nsector, a 4% increase in spending on institutional facilities and even just a\n5% increase in the currently red-hot industrial sector. "]]],[1,"p",[[0,[2],1,"The\ninflation fight continues"]]],[1,"p",[[0,[],0,"Though\nspending on nonresidential buildings increased by more than 10% last year, once\ninflation in the inputs to construction are factored in, the real increase in\nconstruction activity was much lower. Inflation in construction costs continues\nto be an issue, though it has moderated significantly in recent months. Overall\ninflation in the economy has dropped dramatically over the past year, from over\n9% compared to year-ago levels in mid-2022 to around 4% at present. However,\nthe Federal Reserve Board\u2019s battle on the inflation front is far from over as\nfurther declines will be much more difficult to realize. "]]],[1,"p",[[0,[],0,"The same is\ntrue for construction costs. Though following a similar pattern to overall\nconsumer price inflation, they have been even more extreme. While the annual\nincrease in the CPI never hit double digits this cycle, the increase in producer\nprices for construction inputs was in excess of 20% from mid-2021 through the\nspring of 2022. Recently, year-over-year changes in prices of key construction\ninputs have turned negative, due to the volatility of some construction\ncommodities and the elevated comparisons from a year ago. Prices for lumber and\nplywood as well as steel mill products are below where they were a year ago.\nBoth had seen dramatic spikes in prices earlier in the pandemic. While construction\ncommodity prices are likely to remain volatile moving forward, some will fall\nwhile others rise, keeping overall commodity input costs to construction in a\nmuch narrower range. "]]],[1,"p",[[0,[],0,"Salaries and\nservices costs are a different story. While commodity pricing has been\nvolatile, construction wages have been slowly creeping up, and are now about 6%\nabove year-ago level. The same is true for architecture and engineering\nservices provided to the construction sector, but to a lesser degree. The\nprices of all of these inputs will be harder to reverse since compensation and\nother costs of service providers tend to change only very slowly. "]]],[1,"p",[[0,[2],1,"Manufacturing\nsets the pace for the commercial\/industrial sector"]]],[1,"p",[[0,[],0,"Within the\nexpected strong performance in building activity in 2023 lies an unusual amount\nof projected variability by construction sector. Stronger future commercial\/industrial\ncategories are expected to include manufacturing, distribution, and hotels. On\nthe institutional side, healthcare and education are expected to perform well."]]],[1,"p",[[0,[],0,"The strong\ngrowth in spending on manufacturing facilities is largely attributed to the\nreshoring of production resulting from supply chain nightmares during the\npandemic. Indeed, the pandemic did encourage many producers to shift some of\ntheir activity to domestic sources, but much of the growth was due to other\nmotivations. Last year, a third of industrial construction was related to\ncomputer, electrical and electronic equipment, while over a quarter was for\nchemical facilities. "]]],[1,"p",[[0,[],0,"There are\nemerging concerns that outsourcing the manufacturing of high-tech products\nleaves our economy and national defense more vulnerable. The $280 billion in\nfunding provided by the 2022 federal CHIPS and Science Act is designed to advance\ndomestic research and manufacturing of semiconductors in the United States. These\nfunds will boost spending for these facilities for much of the coming decade."]]],[1,"p",[[0,[],0,"The growth\nin chemical manufacturing facilities likewise is only marginally related to\nreshoring activities. Pharmaceuticals account for a sizeable share of\nproduction in this sector, but plastics have recently come to dominate this\ncategory. Growth in manufacturing facilities here has more to do with the\nrecent growth in domestic gas and oil production in the U.S., and the\ncompetitive advantage of producing plastics from these inputs domestically rather\nthan shipping the oil and gas to foreign markets for the production of these\nproducts."],[0,[3],1," "]]],[1,"p",[[0,[],0,"Distribution\nfacilities have helped generate growth in an otherwise weak retail sector. Last\nyear, warehouses accounted for 58% of construction spending in the broader\nretail and other commercial category. Retail facilities accounted for only 12%,\nwhile food and beverage facilities accounted for 9%. Spending on warehouses\nincreased 26% last year, pulling up the broader sector."]]],[1,"p",[[0,[],0,"However, moving\nforward, growth in spending on distribution facilities is expected to moderate.\nThe growth in e-commerce activity has slowed since the pandemic, and spending\nwill increasingly be focused on automating existing facilities rather than\nbuilding new ones. "]]],[1,"p",[[0,[],0,"Due to a\ndramatic reduction in both business and leisure travel during the pandemic, the\nhotel construction market was one of the most decimated sectors. Construction\nspending on hotels declined 15% nationally in 2020, and another 33% in 2021\nbefore making a modest recovery of just under 4% in 2022. The Smith Travel\nGroup reports that key metrics for the hotel industry have steadied and are beginning\nto improve. The daily average occupancy rate has stabilized at just under 65%,"],[0,[1],1,"\n"],[0,[],0,"while the revenue per available room has increased almost 4% over the past\nyear. As a result, the AIA Consensus Forecast panel is projecting a 24%\nincrease in construction spending on hotels this year, and an additional 7% in\n2024. "]]],[1,"p",[[0,[2],1,"Institutional\nmarkets exhibit traditional stability"]]],[1,"p",[[0,[],0,"Institutional\nconstruction sectors tend to be more stable across the construction cycle, with\nsmaller losses during downturns and smaller gains during expansionary periods.\nWithin this broader pattern, however, the two largest institutional building\nsectors have seen surprisingly strong growth so far in 2023. Through May,\nspending on healthcare facilities has increased almost 14% from year-ago\nlevels, while spending on educational facilities is up over 6%. "]]],[1,"p",[[0,[],0,"Healthcare\nhas been one of the few building sectors that continued to see gains during the\npandemic. While utilization rates increased during the pandemic, more fundamentally,\nnational demographics point to continued gains in health care spending as the\naging baby boom generation will ensure a continued increase in spending on\nhealth care services. The AIA Consensus Forecast Panel is projecting spending\ngrowth in excess of 10% for healthcare facilities this year, and an additional\n3% in 2024."],[0,[1],1," "]]],[1,"p",[[0,[],0,"Unlike\nhealthcare, spending on education facilities declined during the pandemic as\nremote education reduced the need for the expected renovation and expansion of\neducational facilities"],[0,[1],1,". "],[0,[4],1,"ConstructConnect\nreports"],[0,[],0," that the value of construction starts for junior high and high\nschool facilities increased 20% through the first five months of this year,\ncollege and university facilities starts are up 14%, while preschool and\nelementary facilities have"],[0,[1],1," "],[0,[],0,"increased 9%. While the pace of growth in\nthis sector is expected to slow just a bit over the remainder of the year, the\nAIA Consensus Forecast panel expects spending in the educational construction\nsector to increase 10.5% for the year, and another 4.3% next year. "]]],[1,"p",[[0,[2],1," The impending slowdown"]]],[1,"p",[[0,[],0,"The first\nhalf of this year has seen gains in construction spending on nonresidential\nbuildings approaching 20%. However, this scorching growth rate is expected to\nmoderate a bit moving into the 3"],[0,[5],1,"rd"],[0,[],0," and 4"],[0,[5],1,"th"],[0,[],0," quarters. Even\nwith the easing in supply chain issues and the improved pricing of many construction\nmaterials and products, elevated interest rates, more restrictive lending on\nthe part of banks, nervousness over the direction of the economy, and\nconstruction labor constraints are expected to slow the pace of growth. "]]],[1,"p",[[0,[],0,"We have\nalready seen design work at architecture firms ease over the past year. In the\nfirst half of 2022, the AIA\/Deltek Architecture Billings Index averaged an\nimpressive 53.6, suggesting strong growth in design activity. By the third quarter\nthe average index score declined to 51.7, and for the fourth quarter it dropped\nto 48.1, pointing to a modest decline in design activity nationally. So far in 2023,\nmonthly scores have remained below 50 on average, pointing to continued\nsoftness in design activity. Given its normal 9\u201312-month lead over construction\nspending, that suggests that spending gains should begin to moderate around\nnow, and begin to decline on a monthly basis in the third or fourth quarter of\nthis year."],[0,[3],1," "]]],[1,"blockquote",[[0,[0],1,"View the interactive Consensus Construction Forecast \u003E"]]],[1,"p",[[0,[6],1,"For more detailed\ninformation on the forecast and economic conditions, join the Quarterly\nEconomic Update on AIAU"],[0,[7],1," on July 20, 2023 at 2pm ET. "]]]]}