January 15, 2024

Hi everyone. Welcome to this edition of TrendsTalk by ITR Economics. I’m your host Taylor St. Germain and we at ITR Economics are your source of apolitical and unbiased economic intelligence.

Today, we’re going to discuss the commercial construction markets. The last time that we talked about the commercial construction markets was back in September, and as we’re planning for 2024, we expect that 2024 will look very different in commercial construction than what it did in 2023. I thought it was important that we brought this topic back up and discussed what’s ahead in 2024 for commercial construction.

It’s really important to first highlight where we are, and when I look at our data series, which is US private non-residential construction, it’s really our benchmark for the commercial construction industry. We see that we’re approaching the cyclical peak. We’re essentially at the cyclical peak as we sit here today in early January.

What does that mean? Well, that means when I’m looking at the annual growth rate for private non-residential construction, we expect that that annual growth rate will peak and will slow down throughout 2024, even see some contraction in some of the vertical markets in 2024. It’s really important as we’re preparing for 2024 that we’re avoiding that straight line thinking.

Now for those of you that are familiar with ITR Economics, you are very well aware of our constant reminder to avoid that linear budgeting or straight line thinking because of the cyclicality of the economy in most of the data sets within our economy. That’s really important as we sit here today because if you’re assuming that you’ll see the same level of growth in 2024 in the commercial construction markets that you saw in 2023, then unfortunately you’re going to be misled.

Our forecast is that we continue to see that cyclical decline in private non-residential construction as we continue to progress throughout 2024. Of course, we have leading indicators that are telling us that that is likely the case. I wanted to call out a couple of leading indicators here.

The first comparison that I make is private non-residential construction to the US commercial real estate occupancy rate. If we look at the commercial real estate occupancy rate on a three-month moving average and compare that to the annual growth rate for non-residential construction, we get a 14-month lead time from that occupancy rate. As we sit here today, that occupancy rate is below zero. It had been slowing throughout the last few quarters and has recently crossed below the zero line.

What does that mean? Well, that means softer non-residential construction activity as we continue to progress throughout this year. Again, that 14-month lead time gives us a look into the entire year, which is why we love these leading indicators. But unfortunately with that occupancy rate below zero on a three-month moving average, that means softer activity for non-residential construction this year. Now we of course look at more than one indicator. I’m just calling out two of my favorites here.

The other indicator that’s important to understand as it relates to non-residential construction is the Green Street commercial property price index. That too is in the negative territory as we sit here today. When we compare the annual growth rate of that Green Street property price index to the non-residential construction series, we get a 13-month lead time. Similar lead time to the previous indicator that I just mentioned, and that indicator too had been declining in terms of its rate of change and recently crossed below the zero line. It’s sitting at minus 12.4% year over year as we’re talking here today.

We have two very highly correlated indicators with long lead times that suggest we’re going to see softer commercial construction activity as we progress deeper into this year.

Now, by no means am I saying every single commercial construction vertical is going to be in the negative territory in 2024, and that’s why it’s really important that you subscribe to our Trends Report and take a look at that construction module because that construction module will highlight all of the various commercial construction verticals from office to education to hospital to warehouse. We forecast all of these verticals out three years. Again, many of these construction verticals are at peaks or have just passed through cyclical peaks, but are still very positive as we sit here today.

However, based on some of the leading indicators I just mentioned, along with a plethora of others, we see 2024 being a much more challenging year for many of these verticals. For example, if you look at private office construction as we sit here today, it’s up 7.5% year over year. But as we look to our forecast for 2024, we have office construction down 5.1% when comparing 2024 to 2023, so very different position in the economic business cycle in just a 12-month period of time. We also have multi-tenant retail construction down double digits for 2024 compared to 2023 at about 11%.

Now, again, it’s not all negative numbers for these construction verticals. We have education construction finishing mildly positive in 2024 at 2.4%. Same thing with manufacturing construction, mildly positive. It’s important to understand which one of these verticals is going to be more prosperous than others, so you can target some projects within those verticals that will remain positive in 2024. But all that being said, a much softer year in terms of growth rates and even seeing some decline in some of these construction verticals.

Now the good news is if you have both a residential construction and a commercial construction footprint, residential’s in the recovery right now, and we have positive growth rates forecasted for 2024 and 2025, so maybe a chance to offset some of the decline in the commercial space if you’re diversified into both commercial and residential construction.

What are the key takeaways here? Avoid linear budgeting, avoid straight line thinking when you think about 2024 compared to 2023. It’ll be really important to acknowledge these softer growth rates or even these verticals that will be declining. If you have the footprint or the diversity in your business to be shifting to focus more on the residential side, especially in the second half of this year as rates are projected to come down, that can likely mitigate some of the decline in some of the commercial verticals.

Then again, look to the Trends Report and look at some of these verticals that will experience less severe decline or even some mild positivity in 2024 and try to allocate some additional resources or focus on projects in some of those areas.

I do hope you found this information helpful. As a reminder, please like and subscribe to TrendsTalk wherever you listen to your podcast. I am really looking forward to some of the guests that we’ll be having on here in the coming months. A lot of new and exciting things coming your way. My name’s Taylor St. Germain with ITR Economics, and this is TrendsTalk. I’ll see you on the next one.