with Taylor St. Germain

UPDATE ON COMMERCIAL CONSTRUCTION TRENDS FOR 2025

This week on TrendsTalk, ITR Economist Taylor St. Germain provides an update on commercial construction trends, focusing primarily on the multi-family and nonresidential sectors. What is attributing to the weakness we are expecting in 2025? Tune in to find out!

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Taylor St. Germain

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Taylor St. Germain

As an experienced economist, Taylor St. Germain provides consulting services for small businesses, trade associations, and Fortune 500 companies across a spectrum of industries. His dynamic personality and extensive knowledge of economic trends and their business relevance are highly valued by clients and colleagues alike.

“Join me on the TrendsTalk podcast to explore the world of economics. Episodes offer insightful discussion and expert interviews. We cover relevant economic concepts in an accessible way. Whether you are a curious layperson or an industry professional, TrendsTalk is your go-to source for thought-provoking analysis and a deeper understanding of the economic forces shaping our world.”

Key Episode Takeaways

  • 0:24 – Commercial construction with a focus on multi-family trends
  • 2:49 – Apartment vacancy rates and multi-family growth
  • 3:53 – Slowdown expected for Nonresidential Construction
  • 6:24 – Reasons for the expected weakness in Nonresidential Construction
  • 6:57 – Architecture billings data as a leading indicator for Nonresidential Construction
  • 8:47 – Preparing for the Nonresidential Construction softness ahead
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The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Taylor St. Germain:
Hi everyone, my name is Taylor St. Germain with ITR Economics and welcome to this edition of TrendsTalk. We at ITR are your apolitical and unbiased source of economic intelligence and today I wanted to provide an update on commercial construction.

It’s been a while since we talked about the commercial construction industry and there’s been some notable changes. So I wanted to approach this conversation today by discussing first the multifamily side and then we’ll talk about some broader commercial construction trends and really where we see the industry going as we progress late into this year, but especially as we look out into 2025.

So like I mentioned, I wanted to start off with the multifamily space and a lot of this data that I’ll be referencing today is available in the construction module of our Trends Report. So please go and check that out. But I wanted to start off with multifamily because multifamily has gone through quite a bit of pain as we look at 2024. As we’re sitting here at the time of this recording, I’m looking at multifamily starts in permits data. And if we look at the multifamily starts data in terms of year over year growth rates, the industry is down overall by about 27.8%. And again, that’s looking at the most recent 12 months compared to the same 12 months one year ago.

Now we are starting to see signs of improvement though, both the multifamily starts and permits data have transitioned to the recovery phase of the business cycle. So yes, starts still down 27.8%, permits still down 18.8%, but that paid of decline is easing. Those growth rates are working their way back up towards the zero line. So we still have some recovery and some negative growth rates coming our way. However, as we look forward to 2025, when we look at 2025 expectations, we are expecting starts to be up 19.5%.

So really what I’m suggesting here is if you’re in the multifamily space and you’ve been through some pain and it’s been challenging over the last year, there’s light at the end of the tunnel. And we are expecting to see growth in 2025. So now is the time to really start preparing for this growth so that you’re ready to take on that growth in 2025.

One of the encouraging trends as it relates to the multifamily space is the fact that when we look at vacancy rates, Vacancy rates for apartments over the last 10 years have averaged at about 4.6%. As we sit here today, the most recent monthly reading for that vacancy rate is 4 .2% for apartments. So the good news that we have here is that vacancy rates are starting to come down. And that is really encouraging in terms of seeing an uptick in multifamily growth as we look into the future. Again, the 10-year apartment vacancy rate average is 4.6%, and with the most recent month, we’re at 4.2%. And in this case, lower numbers, of course, are good. So we’re starting to see some positive signs in the multifamily space, and it’s really time to start preparing for the growth that’s coming our way in 2025.

Now, when we look at overall Non-Residential Construction in the US, we are seeing some signs of weakness. So let’s put the multifamily space to the side for a second. Let’s think about that independently of what I’m about to say for the rest of the Non-Residential Construction industry overall. If we look at the year-over-year growth rate for private Non-Residential Construction, we reached a peak back in that second, third quarter timeframe of 2023. And back during that time, the annual growth rate for Non-Residential Construction was at about 24%. But fast forward a little more than a year, and we’ve seen that growth rate slow down from that 24% to about 8.7% as we sit here today. So it’s very clear to us that the rest of this Non-Residential industry, excluding that multifamily space, data is continuing to slow down.

So the question then becomes, does this slow down continue into 2025 for Non-Residential Construction? And from our perspective, that is the case. We do expect Non-Residential Construction to continue to slow down in its pace of growth through the remainder of this year and actually fall below the zero line in 2025. We do expect some contraction in 2025 in some of these Non-Residential verticals.

Let me highlight a few points for you. We do expect office construction to be down 3.6% in 2025. Education construction to be down 2% in 2025. And again, that’s comparing to 2024. And manufacturing construction is another in 2025 that we would expect to be down 2.8% in 2025 compared to 2024. So we’re talking about mild, low single digit contraction for a lot of these Non-Residential Construction verticals in 2025. This certainly isn’t the bottom falling out of Non-Residential Construction, but it is a period where we would expect more weakness. And this is at odds with our expectation for the overall economy, which we do expect GDP growth in 2025.

So you might be saying, well, Taylor, if GDP is growing in 2025, why is Non-Residential Construction down? And that’s because Non-Residential Construction lags behind the economy and lags behind the Residential Construction industry. So some of the weakness the economy went through over the course of the last year, and some of the weakness that the residential markets went through over the last two years is going to start impacting Non-Residential Construction as we move forward.

There’s some other data points that are suggesting some weakness in Non-Residential Constructions coming our way. I would point you to the architecture billings data. This comes from the AIA. And when we look at architecture billings data, it’s what we call a diffusion index. So anytime the data is giving us a reading of above 50, it’s expansion. Anytime the data is below 50 in terms of its monthly reading, that’s telling us contraction. And at this point in time, whether we’re looking at the architecture billings data, on a regional basis or on an industry basis, almost every single reading is below 50. So that tells us that the architects are seeing some decline in their billing’s activity, which is a pretty good leading indicator in terms of giving us insight into the fact that this commercial construction, Non-Residential Construction weakness is coming our way.

So while many industries in ’25 will be improving, there is going to be some softness and even some contraction when we look at the Non-Residential Construction data. So now it’s time to prepare for some of that contraction. Make sure you’re not straight lining some of the growth that you felt in Non-Residential Construction over the past few years, because that would be a big mistake moving forward. Now, again, there’s going to be plenty of opportunity in 2025 still. We’re talking about mild, single digit contraction, but the opportunity isn’t going to be as plentiful as what we’ve seen over the course of the past few years in the Non-Residential space.

So at this point in time, it’s really important that we’re thinking of those management objectives that we would focus on when markets are softening. It’s really looking at countercyclical markets. It’s taking apart the data overall and looking at regions of opportunity and industries of opportunity. Because again, there will be some. We’re just going to have to look a little harder to find those opportunities when we look at non -residential construction moving forward.

We’ll continue to update you as this industry progresses. But for now, I hope you found this information helpful. Please remember to like and subscribe to TrendsTalk wherever you listen to your podcasts, and I look forward to seeing you all in the next one. Take care for now. Thank you.