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AIA: Nonresidential Construction Spending to Increase Through 2023

The American Institute of Architects (AIA) mid-year Consensus Construction Forecast released in July projects that construction spending on nonresidential construction will increase 9.1 percent this year and another 6 percent in 2023.

The outlook is somewhat tempered by the fact that supply chain issues, a historically tight labor market, and persistent inflation continue to push up construction prices.

“The construction industry is not without its own set of challenges,” writes AIA chief economist Kermit Baker. “Supply chain disruptions coupled with general inflation has pushed up inputs to construction by 15 percent over the past year. Most contractors are facing labor shortages which pushes out construction schedules, and rising interest rates are lowering commercial property values, thereby making new construction projects less profitable.

The bottom line, says Baker, is that “however, challenges to the economy and the construction industry notwithstanding, the outlook for the nonresidential building market appears promising for this year and next.”

Industrial Market to Pace Building Construction Uptick

The AIA Consensus Construction Forecast says that the industrial market is expected to pace the building construction upturn this year and next.

“This outlook is somewhat more optimistic than what was projected at the beginning of the year, largely due to the extremely strong gains in the manufacturing category, as well as surprising strength in retail facilities,” wrote Baker. “Both categories likely benefited from the gains in consumer spending on goods during the pandemic as spending on services faded.”

Factors spurring the industrial construction sector include:

  • Manufacturers reshoring (moving operations back to the U.S.) because of worldwide supply chain problems

  • Manufacturers increasing storage capacity domestically to cope with these supply chain disruptions

  • Growth of e-commerce during the pandemic has spurred the need for new distribution facilities

Other Sectors Also to See Construction Project Gains

The industrial market is not the only nonresidential sector projected to see construction project gains this year and next. Other sectors also have healthy forecasts, including:

  • Commercial construction market is projected to see mid-single-digit percentage gains both in 2022 and 2023

  • The office sector is slated for modest gains this year but expected to accelerate construction pace in 2023

  • The hard-hit hotel sector is projected to recover next year

  • The healthcare sector, which did not decline during the pandemic, is projected for 5 to 6 percent growth this year and next

  • The education sector, hit hard during the early days of the pandemic, is coming back with in-class instruction, new space needs, and green lighting of delayed projects for a 2 percent growth this year and 5 percent next year

  • Pent-up demand for amusement and recreation facilities will spur near double digit growth in the category in both 2022 and 2023

Architecture Firms Workloads Promise New Construction

When it comes to future construction projects, the canary in the coal mine is architecture firms’ workloads which typically point towards construction spending 9 to 12 months down the road.

New project work coming into architecture firms, says the mid-year report, as well as new inquiries, has been very strong with backlogs now averaging seven months – near their highest level since before the Great Recession.

“Construction spending has picked up through the first half of the year, particularly for retail and manufacturing facilities,” writes Baker. “The AIA’s Architecture Billing Index (ABI) points to further growth in the coming quarters. The ABI has been positive every month since February 2021, and for over half of these months the ABI score was at least 55, considered to reflect very healthy growth in revenue at architecture firms.”

Mid-Year Report: Broader Economic Outlook Dims

Despite the promising nonresidential construction news, the American Institute of Architects (AIA) mid-year Consensus Construction Forecast showed that the broader economic outlook in the U.S. was dimmer.

“A growing set of economic indicators have turned negative, and many economists feel that the prospects of an economy-wide recession have increased,” wrote Baker.

Among the economic indicators sounding recession alarms, according to the AIA:

  • Stock Market Turns Bearish: A bear market is defined as a 20 percent decline in stock prices from their most recent peak. This threshold has been crossed in recent weeks.

  • Persistent Inflation: Consumer prices have seen steady gains so far this year, with the June figure showing a 9.1 percent increase over the past year. Producer prices have been just as volatile, with the price of inputs to construction increasing in the 15 percent range in recent months.
  • Rising Interest Rates: The Federal Reserve Board has been aggressively raising short-term interest rates since the beginning of the year to combat inflation. Three-month treasury bills increased 1.5 percentage points between January and July, with future rate hikes all but assured. The rate for 30-year fixed rate mortgages increased well over two percentage points over the same period and recently surpassed 6 percent for the first time since 2008.

  • Consumer Sentiment Dampens: Consumer sentiment scores fell with the onset of the pandemic in early 2020, but then began to recover. However, as supply chain disruptions caused inflation to accelerate beginning in early 2021, consumer sentiment began to plummet. Currently, consumer sentiment scores are about as low as they have ever been since the University of Michigan began collecting them in the early 1950s.

  • Business Confidence Turns Negative: While business confidence scores, as measured by the Conference Board’s CEO Business Confidence Index, have only turned negative in recent months, they are coming off their highest recorded levels of several decades.

  • Housing Starts Slow: Homes prices that have soared in many markets, coupled with the increasing mortgage rates, have dampened would-be homebuyers’ willingness to purchase homes. This comes after housing starts nationally increased 7 percent in 2020 and soared 16 percent in 2021 on the back of low interest rates and consumer demand for more space during the pandemic.

Behind the AIA Mid-Year Forecast Numbers

The AIA Consensus Construction Forecast July 2022 numbers include:

  • Nonresidential Total: 9.1 percent growth 2022; 6.0 percent in 2023

  • Commercial Total: 6.7 percent 2022; 4.5 percent 2023

  • Office: 2.6 percent 2022; 3.5 percent 2023

  • Retail & Other Commercial: 11.5 percent 2022; 3.2 percent 2023

  • Hotel: -5.4 percent 2022; 13.8 percent 2023

  • Industrial Total: 31 percent 2022; 9.9 percent 2023

  • Institutional Total: 2.6 percent 2022; 5.5 percent 2023

  • Health: 5.0 percent 2022; 5.7 percent 2023

  • Education: 2.0 percent 2022; 5.23 percent 2023

  • Religious: -8.7 percent 2022; -1.1 percent 2023

  • Public Safety: -10.0 percent 2022; 5.5 percent 2023

  • Amusement & Recreation: 7.5 percent 2022; 5.8 percent 2023

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