A national forecast projected a steady environment despite higher interest rates, rising prices and shortages of key labor. The Outlook event hosted by Dodge Construction Network, Chief Economist Richard Branch, gave insight into the current and future trends in construction.
Home affordability is at its worst in over 10 years with prices for both single-family starts and mortgage rates rising. Total home sales are down 7% on a year-to-date basis, and single-family starts are down 5%. Construction has certainly been hampered by rising material prices, shortages of key materials, and labor.
By contrast, the multifamily market has been rapidly increasing each quarter bumping forecast numbers to 753,000 units. This is the best year for multifamily construction since 1986. However, Branch added that over the last two months mortgage rates have flattened out, so we should see affordability follow.
In the commercial sector, there exists a more broad-based recovery in construction activity. This sector showed 17% growth including warehouses, office space, hotels, retail and parking garage activity, up 16% excluding warehouses. The absence of specific projects is also paramount. Last year the warehouse sector was filled with Amazon warehouse projects. This year there is only one, and it is unrelated to Amazon. Branch added that 2022 will be the peak year for the warehouse market and predicts this is a good indication heading into 2023.
Despite a 28% increase in nominal dollars, Branch predicts the retail sector will not surpass its 2017 peak of $21 billion. Construction through the first six months was up 69%, however, 99% of that increase is renovation activity. Renovation replacement activity makes up about 30% of the total market with significant geographical differences.
As for the hotel sector, it brings unexpected growth of 24% and $9.6 billion, with $2 billion in actual activity. Office occupancy remains flat, with a vacancy rate of 16.9% in the second quarter. Branch adds that “the outlook for offices over the next six months and into 2023 hinges on what we believe will happen in terms of people returning to work.” Of all non-residential building sectors, manufacturing and healthcare are predicted to have the most upside potential even through a possible recession.
Despite fears of an incoming recession, Branch refers back to the National Bureau of Economic Research’s definition and assures that it is forecasted to not have a severe impact under two key assumptions: (1) The pandemic continues its trajectory to be endemic, which currently seems the case, and (2) the Federal Reserve is able to engineer a soft economic landing by 2023.
“We are considering alternate scenarios for our start production model. As we were building a scenario, we used a little bit of what happened in 2000 and 2001 as inspiration for what construction markets might endure if we went through a short recession,” said Branch.