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Construction Sector Trends

December 17, 2021

Trends are shifting in both residential and nonresidential construction markets - what does this mean for your business and the economy overall? Catch our newest TrendsTalk episode with ITR Director of Research and Development Eric Post to learn more.



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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi, my name is Eric Post, and I am the Director of Research and Development here at ITR Economics. And I wanted to talk to you about a really big trend that is beginning to shift here in one of the major sectors of the US economy and a really important sector for many of our clients here at ITR. And that is that we're starting to see the trends in single family housing shift from strong to a little bit weaker, and the trends in non-residential construction shift from weaker to really, really strong. Why is that taking place? Well, throughout the pandemic period until just very, very recently single family housing and remodeling have really been the stars of that sector. You've had people who have had a lot of money in their pockets through the stimulus or through a monetary policy that's contributed to this really low interest rate environment.

And so those folks have wanted to go out and remodel their homes, build new homes, buy new homes, what have you. And at the same time, you also have folks who are looking to relocate maybe out of a very urban area into a more suburban area or even a rural area, maybe because of COVID, maybe because now they work remotely. But we're starting to see that begin to normalize a little bit in our US single family housing starts forecast that we produce for the ITR trends report, is showing that it's now in a slowing growth trend. The growth rates are beginning to move a little bit lower and we're expect them to move lower in 2022 as well. Now, the flip of that is non residential construction. That sector has really been the laggard of the pandemic period up until just recently. And now it is starting to turn the corner and we think 2022 is going to be very strong year for non residential construction.

And why is that? Well, non residential construction is your classic lagging sector. It takes a long time to start a non residential project, not to mention plan it out even before you start it, until it really gets up and the momentum in that project really gets going. Those buildings take a long time to build, of course. And so the lead time between what's going on in the economy and what's going on in non residential construction is considerable. We know that that market is starting to creep up. As we look ahead, we know that 2021 is been a very strong year for the US economy and so that is going to be a very good sign for non-residential construction in 2022. We think 2023 is also going to be a nice year for non-residential construction as well. What does that mean for the US economy at large?

Well, like I said, the US economy leads non-residential construction, so what's going on in non residential construction doesn't really have a great bearing on what's going on in the US economy works the other way around, but single family housing starts, that's a different story. Single family housing starts tends to lead the US economy and so the fact that we're seeing those growth rates begin to move lower in US single family housing starts is a sign that we're going to see a slowing growth environment for the US economy in 2022. We've been forecasting that for some time and single family housing starts is by far, a far from the only indicator that is showing that we're going to have deceleration in 2022. There's a whole host of leading indicators that we track in the trends report and as well as our presentations that our speakers give on the road, and those indicators are powerfully showing really overwhelming of evidence that we're going to see those lower growth rates in the US economy come 2022.

So what are some other things you should know? Well, we've been talking here about national trends. All construction is local, there's always that saying, and when we look at the demographic data in the country where people are moving, where the population is really growing and accordingly, where there's a lot of demand for construction, there's really two regions of the country that I would highlight. One, if you imagine on a map going from Texas and basically going up to Idaho, most of the states in that Southwest, mountain west swath, you've got Texas, Arizona, Nevada, Utah, Colorado, Idaho, people are moving to those states in droves. Part of it is they tend to be a little bit lower tax states, part of it is the weather, part of it is they tend to have pretty good recreation opportunities, very state to state course, but definitely a really hot area of the country when it comes to construction and when it comes to the demographic underpinnings of those states.

The other area is the Southeast part of the country. I'm thinking of Florida, the Carolinas, Georgia, Tennessee as well, and people really, for the same reasons, very attractive place to live in terms of warm, cost of living isn't outrageous compared to certainly some areas of the country, more affordable, lower tax environments too. And so those two sectors of the country, or regions of the country if you will, are places where you can expect to have a little bit better opportunities relative to the national data. Now, the flip of that is where are places struggling a little bit more and there's two commonalities there. One is, people are tending to flee areas that have very high tax rates or cold weather, especially both, I'm thinking of places like Connecticut, New York state, Illinois, places like that.

People are leaving and going a little bit elsewhere in the country. The other trend that we notice where people are tending to leave, is places that don't have very diversified economies. Maybe they have one particular thing or two, a few particular things that they do heavily. And so those places would be places like Wyoming, Mississippi, Alabama, West Virginia, those parts of the country are also seeing population loss and the construction activity in those places is not as robust as certainly in the Southwest to mountain west or in the Southeast. So please keep that in mind, depending on where your business is and where you're operating. Last thing I want to note is that non residential construction, I said it was going to have a very nice 2022 to 2023, non residential construction is a huge market, of course, and there's many different sectors.

So what are a few of those stars? Well, two of the stars in particular, I think are going to be warehouse construction and also I think, anything related to the infrastructure bill in that public construction category of things like water wastewater or roads, that that is going to be a good area as well. So for warehouses, why is that going to be strong? Well, when you look at the country's logistical problems with moving goods about the country, how slow the supply chain has become, getting more warehouse space is going to really build out the capacity needed to move those goods around the country. And so that's going to be definitely an area of growth, we think over the next few years. Another, the water wastewater or public construction areas like that road construction that are tied into the infrastructure bill. I don't want you to get the idea that there's just going to be this giant rush of in 2022, that's not likely to happen.

But as we see the infrastructure bill, dollars begin to trickle into those markets, it's going to help. And those infrastructure dollars will help have those markets doing a little bit better than say non-residential construction as a whole over the next several years. So it'll take time, but that those dollars will be there in the end, over three, five years as you look out. In terms of some that I'd be a little more cautious about too, that I would really highlight would be multi retail and public education. Multi retail, vacancy rates are still high and so we're going to see some relative growth over the really, really, really low level of construction spending in multi retail construction. But it's only going to be a relative recovery. It's certainly not going to be a complete recovery. We have too much online shopping for that, to high of vacancy rates as I said.

Public education, we've had this period of uncertainty in regards to enrollments. We have a lot of people keeping their kids at home and homeschooling them. We have a lot of people sending their kids to private school. And so public school enrollments are down. And that uncertainty is going to very likely hinder that market from having quite a snappy of recovery as overall non residential construction. The other part of it is that's a very long process. When you think of the process it takes to build a school, you have to have the school board or whatever entity controls the purse strings for that project want to do the construction. They have to come up with a plan typically of how they're going to do it, hire a architectural firm to spec it out. Oftentimes they'll have to get approval from voters.

That's a long process before they even break ground to say nothing of when they're really spending the bulk of dollars on that project. And so I am concerned that that sector is going to take some time to recover. Few stars and a few laggards there in the overall non residential construction, but really from a large level, the two things you need to know are you're seeing that deceleration in single family and upward momentum taking hold in non residential construction. And the deceleration in single family is an important signal that we are going to see slowing growth in the macro economy in 2022. Thanks so much.


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