Dodge Data & Analytics’ 1st Quarter Outlook provided an overview of recent construction activity and expectations for performance in 2022 across all sectors of the industry. Overall, signs point to growth in all residential and non-residential markets, though with broad variations and some uncertainties. Most notably, of course, is the continued influence of the pandemic, as well as ongoing challenges from labor, supply, and material prices.
According to Dodge Chief Economist Richard Branch, the company’s “Back to Normal Index” shows economic activity on a steady uptick since May 2020, just after the start of the pandemic, with some dips along the way. One of those declines came with the Omicron variant, which slowed economic activity late last year.
The positive jobs report a few weeks ago is a sign that the economy is performing well despite Omicron, Branch said. “Regardless, though, we need to keep in mind that even as the Omicron wave crests, there will be another variant. From an economic standpoint, the [virus] does continue to drive the bus.”
Even so, Branch said they assume each wave will be less disruptive to healthcare and the economy than the previous one.
What this means overall, is that Dodge expects a sharp rebound in Q2 2022, thanks to strong consumer spending, low interest rates, and infrastructure spending.
Factors that could lessen the growth include rising material prices, the ongoing labor shortage, and slowing demographics. Interest rates also will play a role, with the first increase expected in March and likely followed by three to four more. Another potential influencer is disruptions from the government if budgets aren’t approved and shutdowns occur.
Construction Starts Volatile but Rising
When it comes to construction starts, 2021 was very volatile, Branch said, but overall rose 14% in terms of nominal dollars, 10% if inflation isn’t taken into account.
Unfortunately, starts were not evenly distributed, he explained, and growth was driven by just a handful of sectors—single-family, multifamily, warehouse, healthcare, environmental public works, and manufacturing. Not surprisingly, office and education construction struggled.
Branch said things are starting to even out a bit, and they’re seeing more diverse project types enter the planning stage. Projects in the planning cycle of the Dodge Momentum Index (DMI) are around a 14-year high.
“Signals provided by the Dodge Momentum Index and the projects piling up continue to suggest that construction activity will further make improvements in 2022,” Branch noted. “More importantly, the growth will be more even than what we saw in 2021.”
Of course, material supplies and labor constraints will play a major role in how everything eventually shakes out. Job openings in construction are at near-record levels. “It’s a systemic issue facing the industry and certainly will mute activity in 2022 and forward,” Branch said.
Residential Construction Activity
Branch provided an overview of the health and expectations for the core segments of construction.
• Single-family residential: Single-family activity in 2020 started weakly and then ramped up, while 2021 saw the exact opposite. Interest rates combined with rising home prices, supply constraints, labor challenges, etc. make things very challenging for home construction. Yet, even as interest rates rise, they’re still historically low. In addition, Millennials are their prime home-buying years. The net result is an expectation of a 3% rise in starts to 1.118 million this year.
• Multi-family residential: As normally happens, as single-family activity has dropped, multifamily activity is “on a tear,” Branch said, with 685,000 units breaking ground in 2021, the strongest year in Dodge’s data since 1986. Noteworthy is that growth in the type and location is shifting from high-rise/dense urban core projects to four- to six-story buildings farther out.
“Multifamily markets across the country are exceptionally tight,” Branch said, “so there’s a huge incentive to build, and build they will.”
Still, he notes that we are starting to plateau, so acceleration is slowing a little. In addition, some of the growth in 2021 was for projects originally scheduled for 2020.
Non-Residential Construction Activity
The overall picture of non-residential construction is one of “uneven recovery,” according to Dodge. After construction activity plummeted 20% from 2019 to 2020, it ticked back up 13% in 2021. Again, however, the growth was uneven, primarily driven by the warehouse sector.
Dodge expects another 15% growth, to $144 billion, in 2022 but anticipates it to be more broad-based.
• Retail: Retail starts were a little better than anticipated in 2021, growing 20% to $17.3 billion. Branch says they don’t expect retail to reach its 2016 peak in the next five years. One thing driving retail growth is the residential pull to the suburbs.
• Warehouse: Construction of warehouse facilities is breaking records to a point that it “staggers the imagination,” Branch said, driven by Amazon and other e-commerce distribution. Starts grew 34% in 2020 and 17% in 2021, reaching $54.4 billion. This amounts to 40% of commercial construction dollars and 60% of the square footage. Dodge expects 2022 to see more record activity but is anticipated to be the peak.
• Hospitality: Not surprisingly, the pandemic’s impact on travel was felt in the hotel sector, with starts dropping 52% in 2020 and another 6% in 2021. Branch saw an improvement in Q3 2021, and Dodge expects starts to grow 18% to $9.5 billion. Step-wise improvements are likely but, like retail, they don’t expect hotel activity to reach peak levels anytime soon.
• Offices: Also not shocking, offices “continue to underwhelm as demand for space remains fairly uncertain,” Branch said. Starts declined 20% in 2020 and another 7% in 2021. Dodge expected office occupancy to increase last year as kids returned to school, but the Delta and Omicron variants took their toll; occupancy stood at 33% last week. Still, Dodge anticipates 12% growth to $45.3 billion this year.
• Manufacturing: Though 2020 saw a sharp 53% drop in manufacturing project activity, it rebounded by 97% in 2021 and is expected to climb another 9% in 2022, to $33.5 billion. Motor vehicles, food, and computer chips led the way. The supply chain issues impacting other sectors actually may favor this one, as domestic producers seek onshore options.
• Institutional: Institutional construction starts have been slower to recover from a drop in 2020, with 6% growth in 2021, driven largely by transportation and healthcare. Dodge is anticipating 11% growth to $153 billion in 2022. Branch said state and local tax revenues are improving, but there are still decisions to be made on how to spend it. Labor shortages play a role here in that more investment is needed to raise wages to fill vacancies for roles like teachers.
Education makes up the biggest part of institutional projects, and it declined over the past few years. The pandemic drove strength in the laboratory/health sciences side of the spectrum. College enrollments are down, but stability for in-person K-12 schooling should present an opportunity to build out infrastructure. Branch said they expect a 10% growth in 2022.
Healthcare, particularly clinics and nursing homes, was one of the bright spots for institutional activity, declining just 1% in 2020 and increasing 6% in 2021. Dodge predicts 14% growth in starts to $33.8 billion.
Dodge expects recreation projects to see continued slow growth in 2022. Transportation in the form of airport terminals makes up three of the current top projects in the sector.
With all of these predictions, Dodge simulates upside and downside scenarios. Its baseline sees 8% growth in non-residential activity (excluding manufacturing) in 2022. The worst-case scenario, driven by something such as a more deadly strain of COVID, sees a 5% decrease. The best-case scenario predicts a 14% increase.
Infrastructure Construction Activity
Infrastructure activity has seen a see-saw pattern, Brach said, driven mostly by the presence or absence of large projects. With infrastructure program dollars hitting the market, he expects 80% to be spent within a five-year window.
The strongest impact has been on highways and streets, where funding mechanisms are already in place. Bridge starts are expected to grow 6% in 2022, and highway starts should climb 5%.
It’s not without risk, though, Branch noted, as access to dollars can get tied up in the appropriations process, leading to a softer 2022 if money gets pushed to 2023. In addition, high material prices will consume more of projects’ budgets, leading to fewer projects overall.
For more information from Dodge Data & Analytics, visit www.construction.com.