June 24, 2024

Taylor St Germain:
Hi, everyone. My name is Taylor St. Germain with ITR Economics, and welcome to this edition of TrendsTalk. We at ITR Economics are your apolitical and unbiased source of economic intelligence. And today I want to discuss construction.

Let’s start off with some good news, and that’s the single family housing market. When we look at U.S. Single-Unit Housing Starts, this is data from the U .S. Census Bureau. We see accelerating growth in the annual growth rate, which is great news. As I sit here today, speaking to you all, we see that the annual growth rate, year over year growth rate, I should say, is up 13.5 percent, with the quarter over quarter growth rate or 3/12 rate of change up 26.9 percent. So we are seeing robust growth, regardless of what metric you’re looking at, when we’re looking at this residential housing market.

Now, I will say if you’re looking at the multifamily side, we are still down year over year, though we would expect to make some significant improvements as we look out to 2025. And that’s also true of the single family side of things. We do expect growth to slow down a bit compared to the acceleration we’re seeing today. However, it’s still growth as we look at the residential market, especially for 2025 and 2026.

So a lot of our home builders are enjoying an increase in activity, and you should continue to prepare for more activity coming your way. Let’s set growth rates aside. And if we really look at the unit numbers in terms of a 12 month moving total, we’ve passed back above that one million mark. We were down below a million units, really, as we looked at the majority of 2023. But we’re at 1.016 million units as we sit here today, again, with further rise in our forecast. Now, we’re not expecting that unit number, even though we have growth in 2025 and 2026 for the single-family market. We aren’t expecting that unit number to pass above that post-pandemic peak. But again, it is still growth, not just this year for single-family, but also in 2025 and in 2026.

You know, I’m watching the construction markets very closely, especially as it relates to the labor situation. As this demand really heats up for the residential housing market, there is still a lot of open jobs. And I think it’s safe to say a labor constraint for some of this construction work. So we’ll be keeping a close eye on how much growth we can achieve given this labor situation.

But our forecast suggests nothing but increased demand for the homebuilders, especially in that single-family market. So the news is good, especially as we’re waiting for interest rates and mortgage rates to soften a bit, which they likely will in 2024, late this year, I would say, but certainly in 2025, as the Federal Reserve has signaled, those interest rate cuts are coming. So a lot of good news there.

On the commercial side, the data is still holding up quite well. When we look at our data series, that is U .S. private non-residential construction, the growth rate, annual growth rate, 12/12 rate of change just surpassed an inflection point, but is still up 20.3 percent at the time of this recording.

Now, unfortunately, my news isn’t as upbeat for commercial construction as we progress forward, especially as we move late into this year and into the first half of 2025. We would expect to see overall decline in commercial construction, again, really beginning in some of the construction verticals late this year, but primarily focused on some contraction in the first half of 2025. So while we expect residential to really be nothing but grow for the next three years, commercial construction is in for some weakness, especially as we look late this year and first half of 2025.

Now, there’s been some developments since the last time we discussed commercial construction that I wanted to share with you. The first set of indicators, I’ll say, that I’m spending a lot of time focusing on is the architecture billings data. So again, we’re evaluating the architecture billings data in terms of a diffusion index. So what I mean by that is anytime the values for these architecture billings indices come in below 50, that would signal contraction. Anytime these values are above 50, it would signal growth. If we look at commercial and industrial architecture billings, if we look at mixed practice, residential, institutional architecture billings, all of those data sets are showing values below 50 and have been below 50 for a number of months now. This is a leading indicator to commercial construction activity. And with those values all below 50 and trending below 50, that suggests there’s some weakness coming our way. That’s also true if you look at this architecture data on a regional basis. So we can look at the Midwest, the South, the Northeast, the Northeast, excuse me, and the West. All of those regions are also showing values below 50. So it’s safe to say whether you’re looking at the architect data by sector or by region, we’re getting these readings below 50. And that tells us there’s weakness coming in the commercial construction sector.

The other two indicators that I still watch very closely as they correlate to the commercial construction industry is the US commercial real estate occupancy rate, which is down year over year. If you actually, if you look at the most recent number, it’s down about 55%. And sorry, that’s a change in the three month moving average. So seeing occupancy down is another sign that we’ll see the commercial markets weakening. I also continue to look at prices and I reference here the Green Street all commercial property price index, which is down 9.9% year over year, which is also a leading indicator by about a year that suggests there’s commercial weakness coming.

So one of the biggest concerns I have, and I just had this conversation earlier this week with one of our clients is you might be feeling great right now in the commercial construction sector as commercial construction activities up 20%. But the biggest mistake you can make in your planning is assuming that that growth that you’ve experienced throughout the last year will simply continue as we move late into this year and into 2025. We use the term avoid straight line budgeting. And that’s very important as commercial construction has passed through that inflection point. Again, we will still see some slowing growth, but those waters get murkier as we approach the end of this year in the first half of 25 to where we would forecast most of these commercial construction segments being down in 2025 year over year compared to 2024.

Please check out the ITR Trends Report for that sector by sector breakdown. We share forecast values over the course of the next three years as it relates to data series like private office construction, education, healthcare, and several more all included in our Trends Report. So please check that out. But again, life is relatively good in the residential space. I say relatively because we still have labor challenges but demand’s certainly picking up. And while demand’s still strong in the commercial sector, again, keep your eye on the ball as we progress deeper in 24 and in 25. And don’t assume the growth you’ve experienced lately. We’ll simply repeat itself. We’ll continue to talk construction as we progress further this year, especially as it relates to that commercial sector.

I hope you found this information helpful. Thanks for joining me on this episode of Trends Talk. As a reminder, please like and subscribe to Trends Talk wherever you listen to your podcast. And I’m looking forward to seeing you all in the next one. Take care for now.