Dodge Construction Network recently hosted four broadcasts by Chief Economist Richard Branch, detailing the company’s national 2022 midyear forecast for four U.S. regions—Midwest, Northeast, South, and West.
As one of the largest construction reporting agencies in the country, Dodge follows the construction industry very closely, tracking analytics such as labor, number of residential and non-residential starts, material costs, economies foreign and domestic—basically any of the forces that can influence the construction industry.
The information in the report is important for those in the green industry, who also are impacted by what’s happening in construction, as well as world events.
For more information on the Dodge Construction Network and its forecasts, visit the company’s website.
3 Qualifiers that Could Change the National Forecast
According to Dodge, there are three qualifiers to this midyear outlook:
- The COVID-19 pandemic shifts to endemic.
- The war in Ukraine remains within the borders of Ukraine.
- The Federal Reserve walks a tight rope between raising rates to battle inflation but not too much to trigger a recession.
If any one of these three qualifiers changes, that could have an impact on Dodge’s national forecast.
Recession Forecast Hinges on the Federal Reserve and Interest Rates
There is a 35% chance that the U.S. could enter a recession by the end of 2022, and a 45% chance that it could enter a recession by mid-2023. This all hinges on whether the Fed moves the interest rate too high too quickly.
The Dodge Momentum Index (dollar amount of non-residential projects entering the planning stages to completion) is good at 6.4%, a 13- to 14-year high. The cost of construction materials should flatten by 2023 and supply should improve, according to the report.
However, labor costs will continue to rise. Currently, there are 400,000 construction job openings in the construction sector, a negative impact on the growth trajectory of non-residential construction. One example of that impact—concept to groundbreaking for the office sector now takes nine months longer.
Residential single-family construction is at significant risk for the remainder of 2022 and 2023. Rising interest rates and material costs are having the biggest negative impact. The residential growth rate dropped from 14% in 2021 to 4% in 2022, according to the report.
The opposite is true for multifamily starts, which rose from 680,000 in 2021 to 707,000 in 2022, and will continue to grow in 2023. Despite this being the peak age for Millennials (born 1981 to 1996) to purchase homes, the challenges plaguing the residential sector previously mentioned are forcing many Millennials into rentals and multifamily housing. Furthermore, there is a trend of population migrating from dense urban areas to low-rise suburban multifamily and mixed-use projects.
In the non-residential sector, office projects are up, and these include data centers. Amazon is driving the growth in warehousing. However, Amazon officials have stated that the company has over-built and will slow the construction of new projects. This isn’t expected to terribly impact current growth, just perhaps slow it a bit, but office projects are still a very strong segment.
Commercial starts are up 14% from 2021, with warehousing accounting for a significant chunk of the growth. Inflation is playing a role in that growth, and when inflation is removed, real growth for 2022 is more like 6% to 7%.
2023 will see much more broad-based commercial construction with retail being the only segment not showing significant growth, according to the report. Retail is going to take a hit and will not see the growth from prior years for the foreseeable future.
Warehousing has been breaking records every year since 2018. It was up 36% in 2021 and 15% in 2022 and is expected to see continued growth through 2026.
Hotel starts are weak and will remain weak with significant reduction in business travel. The trend of growth through 2026 is moderate and nothing compared to 2017. The travel and resort sides are expected to help this segment, according to the report.
Office occupancy is at 45% and growing, except for large urban areas where many office leases are not being renewed. Office segment growth will follow the migration patterns out of large urban areas. Growth opportunities are in renovation and in data centers. The office segment was up 9% in 2021.
Manufacturing was up 26% in 2022, with motor vehicles, electric vehicles, food production, and chip manufacturing being the largest contributors.
Institutional growth has been slower in 2022 at 11%, the report stated. Institutional generally lags all other construction sectors. Labs associated with education accounted for half of the institutional growth in 2022. K-12 school construction will begin to recover in 2023. The pandemic virtually stopped most K-12 construction, and there are many projects in the planning stages.
Healthcare has the most opportunity for growth going forward. Clinics, “Doc in a Box,” and urgent care facilities are being built in more rural areas following multifamily growth.
Non-Residential Start Scenarios by Region
Like the national forecast, there are factors that could change Dodge’s midyear forecast for the four U.S. regions:
- Recession and conflict in Ukraine extend outside of Ukraine, then most likely around 2% growth.
- Baseline forecast is 6%.
- War in Ukraine is settled, and the Fed doesn’t push the interest rates too high, forcing the U.S. into a recession, then growth is projected at 8%.
Here’s what to expect in each region:
Midwest Region: Back to normal index—on average the Midwest is at 6%. Labor participation rate is playing a major factor here. The Midwest should see a 3.5% GDP growth for 2022. High price structure for the Midwest is not going to be as great as the West or Northeast. Minnesota, Wisconsin, and Ohio will see the strongest growth for 2022, though rising interest rates and material costs could have a negative impact. Midwest construction starts rose 10% in 2021. However, that made up for what was lost in 2020. Material costs in the Midwest are lower than the rest of the country and are trending that way for the remainder of 2022. Like the rest of the country, single-family starts are down, and multifamily starts are trending up at 19%. Commercial is up 17%, Industrial is up 34%, Institutional is down 4%, and overall non-residential is up 8%. Industrial is up largely due to an Intel chip manufacturing facility in Ohio and a GM electric vehicle battery manufacturing facility in Lansing, Michigan. To view the full broadcast, click here.
Northeast Region: Back to normal index for the Northeast on average is 9% and the U.S. is at 6%. Like the West, the Northeast is experiencing a massive population migration from major metropolitan areas to rural communities. GDP will decelerate in the Northeast for 2022. Construction starts had a strong recovery in 2021, with 18% growth. Single-family starts are declining, and multifamily starts are increasing. Commercial is up 8%, Industrial is up 47%, but that is due to a wind farm in Massachusetts. Institutional is up 39% and overall non-residential is up 24%. Worth noting is that the Allentown-Bethlehem-Easton, Pennsylvania, area is growing and expanding. To view the full broadcast, click here.
South Region: This is the largest region for construction starts. Back to normal index for most states in the South is trending about the national average, except for Baltimore/Washington at -16%, the worst in the country. This is mostly due to significant population migration. Northeast migration has benefited the Southeast, with seven out of 10 net migration states in the South. Construction costs are rising quickly for Atlanta and Dallas and are almost double the national average. Atlanta has the second-highest rate of inflation in the country, with Phoenix (West Region) at No. 1. Total construction starts have been very steady in the South. Commercial is up 14%, Industrial is up 3%, Institutional is up 13%, and total non-residential construction is up 12%. To view the full broadcast, click here.
West Region: Back to normal index introduced by Moody’s is below the national average. Most of the West, except for Arizona and the Mountain West, is slow to recover to pre-pandemic levels. Currently, there is a massive population migration from large metropolitan areas in West Coast states. The Mountain West and Texas are thriving because of these migrations. Wyoming and Arizona have outgrown the rest of the region. Multifamily housing will grow and single-family will decline. Significant numbers of projects in the planning stages for the West, such as warehouses and chip manufacturers, will help shore up the supply side. Data centers also are growing at a very fast rate in the West. Construction costs and labor shortages in the region are higher than the rest of the country. In 2022, Commercial is up 17% and Industrial is up 47%. However, these numbers are skewed by several large chip manufacturing facilities in Arizona and Nevada. Institutional is up 4% and overall non-residential is up 15%. To view the full broadcast, click here.
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