On this episode of “Drilling Deeper,” P&Q managing editor Jack Kopanski discusses what is ahead for each construction sector for the rest of 2024 and into 2025.
Jack is joined by Ken Simonson, chief economist at the Associated General Contractors of America; Richard Branch, chief economist at Dodge Construction Network; and Zack Fritz, COO of Sage Policy Group and economist at the Associated Builders & Contractors. The trio of economists break down factors affecting nonresidential, residential and nonbuilding construction, as well as how they expect each sector to perform in the coming months.
Listen to part one of this conversation!
Transcription
Jack Kopanski: Hello, everyone. Welcome into this latest episode of Drilling Deeper. I am Jack Kopanski, managing editor of Pit & Quarry, once again flying solo here. No Kevin Yanik this time, he’ll be back next episode. We miss him dearly, but he’ll be back next time. You’re stuck with me for today, so buckle up. It’s going to be a good episode. We are revisiting a conversation we started a couple of weeks ago with a few industry economists discussing what’s been going on in the economy within the industry over the first three quarters of the year, what their look ahead into 2025 is like. Last time we talked about interest rates, inflation, workforce, some of the underlying factors that are affecting the industry. Today, we’re gonna dive in and sort of look specifically at some of the different sectors within the construction industry, specific non residential, residential and non building. Once again, it is going to be Ken Simonson, chief economist at the Associated General Contractors of America, Richard Branch, chief economist with Dodge Construction Network, and Zack Fritz, economist at the Associated Builders and Contractors. So they’ve got a lot of great insight. We’ve we’ve worked with them a lot here at Pit & Quarry. They’re always great to work with. They always make me feel pretty smart after I’m done talking to them. So without further ado, let’s dive into our first topic.
It’s going to be non residential construction. We’re going to hear from Ken Simonson, then Richard Branch, then Zach Fritz. Just to kind of give you a quick rundown before we get into it, sort of the general consensus among the economists is that data centers remain strong as well as manufacturing. You’ll hear a little bit from Ken Simonson and Richard Branch about what’s going on with EV and battery plants, and how that may not necessarily be looking as strong as it was at one point. But also, you know, just hearing about how other sectors – or I guess I should say sub sectors – are doing within non residential such as hotels, retail, warehousing and food services. So without further ado, let’s go to Ken Simonson, Richard Branch and Zach Fritz.
[Interview Starts] You mentioned those sectors that are kind of lagging; office and warehouse, hotels a little bit. In looking over your report, you know, sort of par for the course, at least for the last several quarters. Data centers and manufacturing driving non residential construction. What does the rest of the year hold for non residential? You know, are there any segments that could see sort of surprise increases, surprise decreases, larger gains, larger decreases?
Ken Simonson: The the data center market is certainly the champion these days. We get announcements every month of ever-bigger data centers, denser, more expensive projects. So, the latest year over year increase from July of 2023 to this July, according to Census Bureau, 59 percent increase on what they call value put in place, spending on projects underway. And so, that doesn’t even capture the tens of billions of dollars of announcements that the big cloud companies and co-location companies have announced they’ll be spending in the next few years. So, data center growth will continue very strong. I don’t think it can compound at a 50-60 percent rate, but if you go up 60 percent one year and add 20 percent the next year, that’s a damn big growth rate.
Manufacturing has also been growing at a very high double digit rates. It’s come down to a 20 percent growth rate with the pullback by the auto makers on how many or rapidly they’re going to be building EV and battery plants. That’s also going to cool somewhat, but I do expect other manufacturers to start announcing plants that they’ll be locating in the US, either to qualify under the Build America Buy America Act, to hedge against further tariff increases that seem like either Harris or Trump might put in place, or to get away from actual or potential conflict areas around the world. So, I still think manufacturing growth will be in the plus column.
And then renewable energy, huge amount happening with solar, with utility scale battery storage, and where they can line up all the permits and rights of way and court challenges, transmission lines. So I think all of those will continue to grow. And then fourth, infrastructure of many types. While the Infrastructure Investment and Jobs Act was signed three years ago, and there have been thousands of announcements, most of those, or many of those have not yet turned into construction spending, and I think that is still in the works and will be happening increasingly in 2025. So put all that together against the declines in office and warehouse and multi family, I think it’s still going to be a positive year for contractors.
Richard Branch: Sure. Great question. And you’re spot on, right? Ditto on the data centers. It’s copy, paste there, right? Data centers continue to be strong. I mentioned those gains in the in the Dodge Momentum Index, a lot of that is driven by data center activity. So that will continue, I think, to be a real engine of growth within the non residential sector. We’re actually seeing hotel starts pick up pretty strongly. Hotel fundamentals are doing very well. Occupancy rates are up, business travels returning, leisure travel remains strong. So hotels are starting to initiate their upgrade cycle, and once that hotel market starts upgrades, it’s really difficult to stop it.
Elsewhere, I think retail construction is actually doing quite well. It’s a smaller sector, but it’s doing quite well, and that feeds right off the return in single family activity that we’re seeing. Education is also a steady performer along with healthcare within the non residential space. So where are we seeing weakness, though? Traditional offices, right? If I were to look at our data right now in terms of square footage, office square footage, we’re down about maybe 30-40 percent in terms of starts from where we were prior to the pandemic. I don’t think we’re going to get that back over this cycle, if at all, right? Warehousing also remains weak relative to last year, not surprising, but I think the trough there is probably early 2025 in the warehouse market. So, certainly good news there. That’s the largest non residential sector we track by square footage.
And you mentioned manufacturing. Maybe close with that, because that’s been somewhat disappointing. The level of activity remains very robust, but it’s underperforming our expectations. And a lot of that has to do with just growing cancellations and delays on the manufacturing side, and a lot of that centered around the EV sector, right? I think a lot of folks went all in on EV strategy, and it’s turning out the EV sales, while positive, are much slower than people expected. So it seems like there’s a rolling back of EV expansion plans, whether that’s on the traditional manufacturing of the vehicles or on the battery side. So manufacturing, high from a level perspective, but underperforming our expectations.
Zack Fritz: You hit the nail on the head with data centers, and that’s just going to keep being a driver of activity for a long time. The demand for data centers simply cannot be met right now. So we’re going to keep seeing that it’s up over 180 percent over the past three years. It’s not slowing down anytime soon. I think we’ll keep seeing, you know, 50-60 percent year over year increases going forward.
Yeah manufacturing, the rise has been so meteoric that it’s actually difficult to even forecast. Over half of the segment right now is computer, electronic and electrical projects. That category is up, I think, over 1,000 percent over the past couple of years. And that’s where all the momentum is, and that’s where the federal incentives are. We’re going to keep seeing strength there. These projects aren’t finished. They’re going to keep going. You’re going to see some ancillary effects with other electrical industrial facilities being constructed around these. So, it may not keep rising, but it’s at such an incredibly elevated level that, you know, I think if it stays where it is, that’s strength, in my opinion. And certainly through the end of the year, we’ll see those dynamics hold whether or not it, you know, comes down a little bit or goes up a little bit. It’s just so massive, you know, like, $1 out of every $5 of non residential construction right now is on manufacturing facilities. So those dynamics are, you know, going to stay in play.
Looking at other segments, I don’t see any huge fluctuations over the rest of the year. Commercial has been weak, but a lot of that is the warehouse segment cooling down. It’s not over-built, there was just a lot of demand. You know, with the e-commerce boom and distribution facilities. I do think it’s important to note that warehouse is over half of the commercial category right now. Food services, you know, dining establishments, that’s been a good category, I think we’ll keep seeing that. General retail has just been so-so, that’ll also probably hold. You’ll keep seeing weakness in general office construction. I don’t think that’ll surprise anyone to hear that. That’s another category where, you know, if you look at the Census Bureau data, data centers are included in the office category. That’s made it appear at the headline level that it’s not as bad as it maybe seems, but general office has been very bad. I think it’s down about 15 percent year over year right now. You know, I think healthcare I’ve been a little surprised. Healthcare related spending has slowed down just a little bit recently. I think that’ll be a good sector going forward. You’re not going to see any wild swings, but I think demographic factors will keep pushing up medical spending, specifically in the outpatient facility categories.
To go a little bit beyond construction, I think everyone’s in a little bit of a holding pattern right now. It’s a very bizarre labor market where we’re not seeing much hiring at all, but we’re also not seeing many separations. Layoffs are low, quits are low. So you know, the hiring would signal that there’s not that much demand for labor, yet employers seem to just kind of be holding steady. And I think with an election coming up and the Fed’s about to start cutting rates, there’s just a lot of uncertainty. And I think most decision makers are waiting for the dust to settle.
JK: Yeah, absolutely. And you brought up warehouses a little bit, and it’s just kind of funny, the the difference a year, a year and a half can make. Because I know, back in ’22, talking with economists about these same questions, and it waswarehouse is everything. Those are spiking, spiking, spiking. And to everyone’s credit, they kind of predicted this sort of trough here-
ZF: Yeah.
JK: … As the market kind of filled up. And now, obviously, data centers are leading the way. It’s just crazy to see how quickly these things could shift.
ZF: Yeah, and I think one thing with the warehouses is that we saw a huge increase in e-commerce’s market share in terms of total retail spending. It’s still actually increasing at a faster rate, but not the way it was. So I think we needed all this distribution space, and it’s kind of been built out. We’ve caught up. Warehouse construction – let me actually peek at the data. It’s still elevated. It’s still a lot higher than it was, and it’s come down from the peak in second quarter, 2023. But there’s still a lot of warehouse construction going on. Just because it’s declined doesn’t mean it’s necessarily gone away. [Interview ends]
JK: All right, always some good insight from them. Appreciate them taking a little time. Shifting gears here, we’re going to look a little bit at non building construction. As with non residential, they got into a lot of good stuff with on the non building sector, looking at a bunch of different areas. I think one of the things that sticks out most to me from the conversations I had with all of them is that, at least for myself, I think it’s very easy, at least for me, to kind of condense non building into or … When you talk infrastructure, it’s very easy to think highways, streets, roads, bridges. But Ken, Richard and Zack talk a lot about water and sewer projects, airport construction, Amtrak and sort of how that’s looking. It’s a bit more a positive outlook than I think we’ve heard in the last few years. When IIJA got signed in November of ’21 there was kind of the anticipation that the funds weren’t going to come out in 2022 but it was kind of thought 2023 and beyond is when those funds might really start getting doled out. What we kind of heard was that it was that it was maybe taken a little bit longer than anticipated for different companies or different levels to start seeing those funds, whether it’s state, local, federal, but it sounds like a lot of those funds are, you know, if not spent, are at least in the pipeline and coming along. So, let’s hear what Ken, Richard and Zack have to say about the non building sector.
[Interview Starts] Where do we currently stand with these infrastructure funds? Like you mentioned, it’s been three years, and I know when it was signed in ’21 there was a pretty large sentiment that said, “Alright, signed end of 2021 we’re not really going to see this in 2022 but rather 2023 and beyond.” And that was kind of widely accepted. 2023 has come and gone, we’re three quarters of the way through ’24, and like you said, a lot of those dollars haven’t necessarily translated into infrastructure projects. You know, obviously a lot going on state and local governments. But you know, where do we currently stand with that, and what’s maybe the outlook for the rest of the year and into next year for those IIJA funds?
KS: Well, I think water and sewer projects have really ramped up pretty quickly, and I think that’s because, unlike many of these other programs, a lot of that money went into existing state revolving funds and and other mechanisms that were well known. With the highway money, some of that has happened, but there are these new strings of Build America Buy America, apprenticeship programs and so forth. So, first federal highway and the state DOT’s, they had to learn and make up the new rules, and then contractors. So, not so much has come out to the bid stage yet, the bid letting. However, states have had a lot more money than they thought they would for highway projects coming from the initial federal relief for the pandemic relief that, while it may not have been directed the highways, that allowed states to avoid the big cutbacks that we’ve seen in past economic downturns. I do think that IIJA money will be showing up on the highway side.
Another category where we’ve already seen quite a bit: airport construction. And again, that’s partly federal, but it’s largely driven by local airport authorities and predictions of how much additional traffic will be landing, how much the airlines are willing to pay in landing fees and gate rentals and so forth. So, that’s been a strong market and will continue to be. We keep hearing about large announcements or fulfillment of those announcements, whether it’s San Diego or LAX or O’Hare. Kennedy, amazing amount of work happening. So while La Guardia, for instance, may have largely finished up, there’s lots more coming at other airports.
And then Amtrak and other rail, the high speed rail. Not the California High-Speed Rail, but the Bright Line from Las Vegas to somewhere in LA County, that looks like it’s going ahead. Amtrak with these huge tunnel projects, the Gateway from New Jersey to New York, and the Frederick Douglass tunnel and another one in Baltimore. Those are huge, and then lots of other track and station improvements. Some of that is IIJA, largely it is. So, more and more coming through in the next year or two.
RB: That negativity that we’ve seen by of high rates on on the resi and the non resi sector, and then you look at infrastructure. Infrastructure has really been the bulwark of the construction sector over the last couple of years. Public works starts were up 20 percent in 2022, another 12 percent gain in in 2023. As we look at the year to date in public works through July, we’re sitting … It’s been a weak start to the year, to be honest. I do think we’ll make up some of that as the year goes on, but as we start to think about where we are, I suppose in this game, not a game, but I think like a baseball game, right? I think we’re probably in the sixth inning, maybe getting into the seventh inning, and ready for that seventh inning stretch. So, I think a good chunk of that money has left DC. It’s already working its way into the system, and I think the question we need to think about, and we’re thinking about it at Dodge, is if you look over the next few years, how is that money going to be spent? And I think there’s a growing consensus in the data and the projects that we’re looking at that we’re unlikely to see sharp increases in public works over the next couple of years. It’ll be more of a slow burn, right? Because if you think about the issues of labor, you think about the issues of material prices, those are going to remain in the forefront, and that could show or it could lead to state and local communities saying to themselves, “Yeah, we have the money, but we need to spread this out over more time, because we just don’t have the workers, or we need to pay attention material prices.” So I think the infrastructure market for 2024-2025 and even into 2026 will remain solid. I think it’s unlikely, though, we’re going to see really robust growth rates. I think again, more of a slow burn, rather than a sharp increase.
ZF: I think we hit the halfway mark in May. So you know, we’re past halfway there, at least in terms of time, last I checked it, I think we’re a little over 40 percent of the funds have been announced and that we’ve seen it in the data. Highway and street spending is up 36 percent since the IIJA was signed. Water supply spending is up, I think, about 55 percent, same with sewage and waste disposal. So you know, it’s having a real impact, and we’re going to keep seeing that through the expiration in 2026, I think. The public sector is definitely outperformed the the private sector so far. [Interview ends]
JK: Alright, that was Ken Simonson, Richard Branch and Zack Fritz on non building. Let’s go ahead and shift gears to our final topic that we spoke with the economists with, which is residential construction. Having it being broken between single family and multi family, obviously a ton of dynamics at play. Ken, Richard and Zack hit on a lot of things, you know, including how apartments are hitting the market so fast that it’s kind of hard to keep up with it. Because that, rents are kind of coming down. Hearing things about, you know, multi family possibly picking back up in 2026, sort of getting back to a point where there can be more building of that.
You know, and Richard Branch talking a little bit about how he’s a bit more positive on multi family than than some others might be, despite it being down this year and last year, but also keeping that into the perspective of, you know, just crazy highs multi family saw in ’21 and ’22, kind of in the midst of and trailing off of COVID. Talking about as well that there’s a shortage of housing units and how it’s hard to build affordable single family housing, but anticipates moderate growth in both sectors in the coming years. So certainly, a lot of dynamics at play. And you know, just finally, one other thing you’ll hear from Zack Fritz is talking about the number of homes in multi family construction completed over the summer. It’s been a long time since we’ve seen the type of building completion in the residential sector that we’re currently seeing. So, while it may be down sort of in a vacuum, overall it sounds like residential still is in a very good spot. And even if there are some struggles going on right now, sounds like ’25-’26 and beyond may sort of be a righting the ship of sorts for residential and the sub sectors within it. So, one last time, Ken Simonson, Richard Branch, Zack Fritz, residential construction. Take us away.
[Interview starts] I’m obviously no economist, but in my time sort of following and learning a bit more about the construction sectors, it always seems like residential is kind of very cyclical. When single family is up, multi family’s down, vice versa. Is this just kind of the current point we’re at in the cycle? Is there anything driving the downturn in multi family? Do you expect sort of that reverse anytime soon? What’s what’s kind of the residential story right now?
KS: For the housing market, certainly depends more on the 30 year fixed mortgage rate, which in turn reflects what’s going on with the longer 10 year treasury note rate. And I see Freddie Mac said that the 30 year fixed mortgage rate was unchanged from last week at 6.35 percent. That’s a heck of a lot better than it was 9 or 12 months ago. 12 months ago, they said it averaged 7.12 percent. So it’s already come down by three quarters of a percentage point, and that will enable more people to qualify for a mortgage, and hopefully will pry some more people out of their current 3 percent mortgage and be willing to buy a home at 6.25 or 6.5, or do without a mortgage. It’ll make it easier for home builders to buy down the rate to which home buyers would qualify. So all of those things, I think, are positive for single family home construction.
Now, we’ve had periods where people left rental housing, went into buying a single family home, but right now we’re so far behind the curve in the amount of housing needed that I think we will see, first, more single family, later, more multi family. Right now we’re at a point where so many apartments are hitting the market that even hot markets like Austin are suddenly finding they can’t fill up the buildings fast enough, and rents are coming down. And I think that’s likely to hold back new multi family construction for at least another year. So, I think it’ll be 2026 before multi family picks up, but I think single family we will see at least gradual improvement from here on out.
RB: It’s a good question, something we’ve been putting a lot of thought into. I know we probably stand outside of what other folks are thinking. We’re a lot more positive on the multi family sector than others in terms of thinking about the future. Multi family construction is certainly down this year, it was down last year as well, but coming off ridiculously high amounts in ’21 and ’22, right? So kind of just recalibrating off that sugar high. And just to emphasize that point, the level of starts we saw last year and the level of starts we’re expecting this year, in terms of units, you need to go back to the 80s to see these kinds of levels. So this is a very robust market, and it goes, I think, a lot to saying just how short we are of housing units in the country, and how hard it is to build affordable single family housing right now, pushing more people into the multi family space. So, I think that recovery in multi family is probably a lot sooner, and in our data where we’re expecting the market to return to growth in 2025 just because the demand for housing units is so strong and that ability to build affordable single family homes is going to hinder strong growth in the single family market. So therefore, in our mind, that demand is going to be met by, you know, condos, two fam and and rental. So, you talked about this diverging cycle. What’s good for single family, bad for multi. I think this cycle might break that a little, and over the next couple of years we might actually see modest to moderate growth in both of those sectors. Again, just with how short we are of units in the country.
ZF: A lot of very interesting dynamics going on here. First, you know, there was a lot of homes completed this summer, specifically in June. So, I think you have to go back to 2007, the last time we finished this many homes in a month. But you have to go back to 1974 the last time we completed that many multi family units in a month. So there’s been just a massive amount of multi family construction. It’s turned over, no doubt about it. And there’s two factors you can look at there. High interest rates are obviously not great. When high interest rates were low, a lot of these projects were green lit earlier in the pandemic, so that’s caused a slowdown. And then we’ve seen rents turn over in certain markets. That’s also probably affected things.
It’s important to note, there’s still a lot of multi family units under construction. I think you you have to go back to the 1970s, I think it was 1973 the last time this many multi family units were under construction at the same time. And that’s lower than it was. We peaked, you know, several months ago, but we’re still building a lot of units. I think you’ll see a lull for a little while. We finished a lot of units, it’ll be a while before rent growth resumes. As rates come down, there’s still a structural shortage of housing units, and we’re going to see it, if not pick back up to the levels of 2023, I think it’ll remain relatively elevated to the pre-pandemic period over the next several years.
The same goes for single family. There’s a structural housing shortage, home builders will eventually address it. They’re just probably not going to do it while rates are at their current level. And again, we’re still building a relatively high number of single family homes right now. The single family home market was maybe not as – or single family home construction – not as affected by high interest rates just because there was such a dearth of existing housing supply. You know, market share really increased for new construction. Permitting data suggests that we are going to see a slowdown. It could be weaker through the end of the year, but I think as rates come down in middle, latter parts of 2025, 2026 we’re going to keep seeing strong residential construction. [Interview ends]
JK: Alright, thank you again to Ken Simonson with AGC, Richard Branch with Dodge Construction Network and Zack Fritz with ABC. Like I said, always enjoy talking to these guys. Definitely be sure to follow them for all your economic needs, they certainly know what they’re talking about. And you can also, you can find part one of my conversation with Ken, Richard and Zack actually kind of flip flopped here. We have the conversation that we just now broke down out currently in our October edition of Pit & Quarry. Coming in the November edition, you will sort of see a more in depth write up of the conversation we had that aired about a month ago, looking at inflation, interest rates and the workforce. So be sure to stay up to date with Pit & Quarry with your print edition, pitandquarry.com as well.
Kevin, I think, would be remiss if I didn’t give a quick plug for our roundtable coming up in January. Producers are encouraged to apply. Manufacturers, we’re always looking for partners. And you know, obviously your insights are very valuable and welcome as well. You can learn more about that at pitandquarryroundtable.com. You can apply there, you can learn more at that website. If there is anything that you want to hear more of or hear less of or hear different of, shoot me or Kevin an email. I am at jkopanski@northcoastmedia.net and Kevin is at kyanik@northcoastmedia.net. So, for Jack Kopanski – that’s me – thanks so much for listening to this episode of Drilling Deeper and we’ll see you next time.
