July 19, 2024
Nine Construction Economists Predict Varied Growth for 2024-25
Commercial property values drop 13.5% since mid-2022, with office and apartment sectors hardest hit
Construction spending is expected to show robust growth in 2024 but slow considerably in 2025, according to the latest midyear update from the American Institute of Architects (AIA) Consensus Construction Forecast. The update projects an over 7% increase in spending on nonresidential buildings this year, slowing to a mere 2% growth next year.
These projections stem from the analysis of a panel of leading construction forecasters across the country. The figures are nominal, not adjusted for inflation, and reflect the current economic environment and sector-specific conditions.
Diverging Sector Conditions
The nonresidential building market's performance varies significantly across different sectors. Commercial facilities are anticipated to remain flat, while manufacturing construction is set for nearly 14% growth this year, followed by stabilization in 2025. Institutional construction will likely see more than a 10% gain in 2024, slowing to 4% next year.
Key commercial and industrial sectors are experiencing mixed fortunes. Manufacturing construction, which now accounts for over a quarter of all nonresidential building spending, has doubled its share since 2019. Warehouse construction has grown from just over 6% to over 9% of the market, while data center spending has increased significantly, now making up over 3% of the market. Combined, these three sectors represent over 40% of the nonresidential building market, up from less than 23% in 2019.
Source: American Institute of Architects
Wild Swings Among Economists
The AIA Consensus Construction Forecast revealed significant disparities among the nine economists, particularly in the following 2025 forecasts:
- Hotel: Consensus at 6.6%, with a low of -8.5% from Brian Strawberry at FMI and a high of 23.1% from Scott Hazelton at S&P Global.
- Industrial Total: Consensus at 0.1%, with a low of -11.4% from Scott Hazelton at S&P Global and a high of 13.0% from Anirban Basu at Associated Builders and Contractors.
- Religious: Consensus at 0.8%, with a low of -14.0% from Scott Hazelton at S&P Global and a high of 12.3% from Anirban Basu at Associated Builders and Contractors.
- Retail & Other Commercial: Consensus at 0.3%, with a low of -8.7% from Scott Hazelton at S&P Global and a high of 7.1% from Michael Guckes at ConstructConnect.
Market Challenges
Despite the overall increase in construction spending, growth has slowed and is expected to continue decelerating through 2025. Several factors contribute to this slowdown:
Challenging Lending Market: Higher yields on 10-year treasury bills, a proxy for construction financing costs, have increased significantly from 0.5% in 2020 to between 4.25% and 4.5% currently. This rise has tightened lending standards and reduced demand for construction loans.
Commercial Property Values: A tighter financing environment and weaker demand for commercial properties have led to a 13.5% decline in values since mid-2022. Office values have dropped by over 26%, while apartment values have decreased by 21%. Industrial properties, however, have seen a 5% increase in value.
Architecture Firm Billings: As a leading indicator of construction activity, architecture firm billings have been declining since late 2022. The AIA/Deltek Architecture Billings Index shows a continued decrease, particularly in the multifamily residential and commercial/industrial sectors. Institutional sector billings have remained stable but show emerging weakness.
Institutional Sectors: A Bright Spot
The institutional sectors present a more optimistic outlook, with an 11% increase projected for 2024 and a further 4% in 2025. Health care construction is expected to grow by 7% this year and 4% next year. Amusement and recreation sectors are set for a double-digit rebound in 2024, with a 4% increase in 2025.
Education, the largest institutional component, is poised to drive much of this growth. Spending on educational facilities is influenced by demographic trends, with the under-25 population expected to increase by nearly two million by 2030. Additionally, pent-up demand from postponed projects during the pandemic will boost activity.
Reconstruction's Growing Role
Reconstruction is becoming a significant part of overall construction spending. Surveys indicate that about 50% of architecture firm billings come from work on existing buildings. Given the current economic conditions and high costs of new construction, the trend towards reconstruction is expected to continue growing.
The AIA Consensus Construction Forecast anticipates a strong 2024 for construction spending, driven by manufacturing and institutional sectors, followed by a slowdown in 2025. While commercial construction faces challenges, the growth in manufacturing, data centers, and institutional sectors, particularly education, will help offset weaknesses in other areas.
