Optimistic outlook for construction in coming months

Warehouse and office construction are driving growth in the nonresidential construction sector, according to Dodge Construction Network. Photo: P&Q Staff

Because of these boosts from residential construction, retail is expected to be up 21 percent this year for a total of $17.5 billion.

“All that growth from the urban centers out to the suburbs and exurbs and rural areas is pulling retail activity with it,” Branch says. “The retail sector is also getting an extra bonus from stronger growth in the multifamily space through mixed-use construction.”

Over the last three years, warehouse construction has boomed, with companies like Amazon and Walmart building new facilities across the U.S.

In 2018, warehouse starts totaled $24.2 billion. Last year, they totaled $47.5 billion – up 36 percent from 2020 – and are expected to hit $54.4 billion this year for a 15 percent increase.

While warehouse construction continues to thrive, it has taken somewhat of a back seat to office construction. On a list of the top 10 commercial projects to break ground in the last 12 months, the top five were office buildings – with a total combined cost of nearly $4.5 billion.

Warehouse projects held positions No. 6, 7, 8 and 10 on the list, totaling nearly $1.8 billion. Amazon accounted for three of those four projects.

“Warehousing [has been] breaking records every year since 2018 and [is] quite literally staggering the imagination in terms of the size of the projects,” Branch says. “In 2021, we did start to see warehouse projects … flatten out ever so slightly. But even with that, it was another record year for [warehouse] construction, up 36 percent, [nearly] $48 billion. Warehousing construction accounted for about 40 percent of commercial activity last year.”

There are several indicators pointing to 2022 as the peak year for warehouse construction, Branch says. Dodge anticipates a flattening of warehouse starts for its Dodge Momentum Index. Branch also says Amazon indicated it is going to start pulling back on warehouse construction in favor of other business aspects.

“When you put those elements together, it points to another year of growth, albeit at a fairly modest pace this year, but another record level,” he says. “We’ve been saying for about a year now that we thought this was the penultimate year for growth in the warehouse sector and that we would start to see the market turn south in 2023.”

Total commercial starts this year are projected to hit $144 billion, according to Dodge. That would be a 14 percent increase from 2021 ($126 billion) and surpass 2019’s five-year high of $140 billion.

Because warehouses aren’t driving this year’s commercial growth as much as last year, Branch says 2022’s growth should be more broadly based throughout commercial construction as a whole.

“If we take warehousing out of 2021, that 13 percent [increase] would become just a plus-2 [percent],” Branch says. “If we take out warehousing from 2022, that plus-14 [percent] becomes a plus-14 [percent]. Another sign in our minds that the models are suggesting that growth here will be much more equally based.”

Other nonresidential subsets are anticipated to show mixed results.

Hotel starts have been weak, Branch says, while office construction has a mixed outlook, despite its success so far this year.

Manufacturing construction is expected to be up 26 percent this year, he adds. Still, this subset faces intense hiring challenges.

“Much like the construction sector, the manufacturing sector – particularly in the high-tech space – is critically low on skilled workers,” Branch says. “There comes a point here where we’ll see aggressive growth in construction starts, but, at some point, that will moderate over the next couple of years, just as that worker shortage becomes much more acute in the manufacturing sector.”

Institutional construction has been slow to recover from the pandemic and lags the overall business cycle, Branch says. After falling 10 percent in 2020, the sector gained 7 percent last year and is expected to be up 11 percent this year to $154 billion – $10 billion above 2019 levels.

Education projects, which account for about half of all institutional construction activity, according to Branch, is projected to be up 13 percent this year after lacking in 2020 and 2021.

Along with manufacturing, Branch looks to health care as a sector with large opportunities for growth. After 7 percent growth in 2021, health care is forecasted to grow 11 percent in 2022 to $33.2 billion.

Branch anticipates nonresidential construction to see a baseline square-footage growth of 6 percent this year. That number could, however, be impacted by inflation and other external factors. He says growth could be as high as 8 percent or as low as 2 percent.

“The best-case scenario [is] if the war ends sooner, inflation is less impactful and the Fed doesn’t need to be as aggressive,” Branch says. “That downside scenario is where the Fed falls off the tightrope and potentially pushes interest rates so high to get inflation down that they force the U.S. economy into a recession in late 2022.”

Branch says education, transportation and health care construction are the subsets that have the lowest risk this year, while office, warehouse and hotel construction are at the highest risk this year.

Nonbuilding construction

More than seven months after the Infrastructure Investment & Jobs Act passed, committing $550 billion in new money to the nation’s infrastructure, Branch says highway and bridge starts are expected to jump 14 percent in 2022.

The increase amounts to more than $90 billion in growth between the two areas. Bridge construction is expected to grow 23 percent (up $21.6 billion) this year, and street and highway construction is poised to be up 11 percent (up $68.5 billion).

“The real meat of those infrastructure dollars in our analysis will hit the market in 2023 and 2024,” Branch says. “Stronger growth [is] yet to come for the infrastructure markets. Not just streets and bridges but [also] in the environmental category.”

Large projects drove 2021 activity in the environmental public works sector, leading to 22 percent growth last year. Growth this year is expected to be flat at just 1.9 percent, totaling $52.9 billion.

“That’s mostly because there were several very, very large projects that broke ground in 2021, essentially inflating those numbers,” Branch says. “We don’t seem to have, in our database, the same scope or magnitude of projects. If you took those projects out of 2021, this growth in 2022 would look much stronger than it currently looks. The trajectory for growth is much stronger in 2023 and 2024.”

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