October 13, 2023

Hi everyone. My name’s Taylor St. Germain with ITR Economics and welcome to this edition of Trends Talk.

Today I wanted to discuss a bright light in the economy, at least for now, which is nonresidential construction or commercial construction. Now, currently at the time of this recording, private non-residential construction is up 18.6% year over year. That’s approaching a peak according to our forecast. So, it’s important to note that the commercial construction sector is at a much different point in the economic business cycle compared to the overall economy in terms of GDP or industrial production or in terms of the housing market. And that’s because commercial construction activity lags behind the housing market and the economy.

Now, one way we understand this timing relationship is of course by running trend analysis, by correlating the commercial construction market with, for example, the single family housing market and finding that highest point of correlation. When we take the annual growth rate or the 12/12 rate of change for single family housing starts, which is our residential indicator, and we correlate that to the annual growth rate or 12/12 rate of change for private nonresidential construction, we find that at the highest point of correlation, the housing market has a two-year lead time. And so that’s really important to know because first of all, we have a great long-term leading indicator to be able to forecast commercial construction activity, but also we have that understanding that we should see commercial construction pass through the peak and really start to slow down and for some sectors contract in 2024 and again for some sectors even into 2025.

So we look at that relationship to housing starts, and as we all know, housing starts has gone through quite a challenging time over the last year and a half. And because it leads the commercial construction market by a full two years or 24 months, we know there’s some pain coming our way in the commercial markets. Now, I’m not saying that pain is imminent, it’s more likely to really manifest itself in the second half of ’24 and into the first half of ’25, but again, it depends on which sector that you’re looking at.

And in our ITR Trends report, we have a construction section. If you look in our At a Glance page, it’s a dashboard that highlights some of the most important sectors of commercial construction. And for most all commercial construction sectors in 2023, we do see a slowdown coming, but it’s still growth other than multi-tenant retail construction, which will be likely the one negative sector for 2023 when you look year over year. However, as I just mentioned, there’s more pain coming in 2024 when you look at the annual growth rates for some of these commercial construction sectors. And I’m sure it comes as no surprise that in terms of the magnitude of decline in 2024, we see private office construction and multi-tenant retail construction experiencing the most severe decline in terms of an annual rate of change with private office construction, expected to finish 2024, down about 5.1% compared to 2023. And multi-tenant retail construction finishing down about 11.2% compared to 2023. So those are the two sectors that will really be leading this decline in 2024.

Manufacturing, construction and education construction are actually bright lights for 2024 being that we expect them to finish 2024 mildly positive, still certainly slowing down from where they’re at here today, but manufacturing construction, which is benefiting from all this reshoring, onshoring activity, we do expect to finish up 2.4% in 2024 compared to 2023. And education construction, a very mild 0.5% up in 2024 and 2023. So it’s important to understand which sector, whatever sector is important for you, because there’s a little bit of a difference in the outlook as it pertains to next year.

I also wanted to highlight that when you look at a map of the US and all the commercial construction growth rates, it’s not even across the board. There’s places in the central that are down significantly right now. If you look at Kansas, Nebraska, both down in the upper teens, 18.4% and 19.7% year over year. And so there’s already some areas of the country that are experiencing some negativity. But then when you look at places like Texas, it’s still up 41.5% year over year in terms of the commercial construction annual growth rate. In Florida, being up 22.3% year over year. So we’re at some of these inflection points where you get mixed readings. So it’s really important to hone in on your individual markets and understand how on a regional basis or a sector by sector basis, your markets are performing.

So again, just to recap, 2023, we see a lot of the commercial construction growth rates slowing down for certain regions and certain sectors, that slow down is more pronounced than others. It’s important to always be thinking of business cycle ahead, even for some of those sectors that will be down year over year. If you prepare well, if you take advantage of thinking a business cycle ahead, recessions or periods of contraction can still be quite profitable.

I hope you found this information helpful. Thanks so much for joining me on this episode of Trends Stock. I’m Taylor St. Germain with ITR Economics and I’ll see you on the next one.