Construction Activity

Construction spending surging

Spending rebounded quickly after the pandemic-induced slump of 2020.

By late summer 2020, spending volume began rising as developers resumed projects that had been on hold and tentatively started new ones. Growth in total construction spending accelerated in 2021 as COVID-19 restrictions were gradually lifted and developers boosted activity in response to both a backlog of delayed projects and new demand from households and firms that had accrued extra capital during the pandemic.

Commercial construction activity has grown at a slower rate than residential construction, as lingering economic uncertainty has slowed the recovery, particularly for office. As of March 2022, commercial construction spending had not yet reached the pre-pandemic peak.

The increase in total spending is, in part, driven by inflating input prices (i.e., materials, labor) but, even when adjusted for inflation, spending is up 4.4% since January 2020.

Figure 4: U.S. historical construction spending by sector

Note: Latest data as of March 2022, seasonally adjusted. Residential includes multifamily. Other non-residential includes primarily education, civic and infrastructure-related spending.
Source: U.S. Census Bureau, CBRE Strategic Investment Consulting, April 2022.

Figure 5: U.S. total construction spending since pandemic onset

Note: Latest data as of March 2022, seasonally adjusted. Residential includes multifamily. Other non-residential includes primarily education, civic and infrastructure-related spending.
Source: U.S. Census Bureau, CBRE Strategic Investment Consulting, April 2022.

Residential projects driving construction volume

Significant upticks in housing starts and residential permits should lead to more construction demand in 2022 and 2023.

Completions of new residential units, both single-family and multifamily, trended downward from Q1 2021 to Q1 2022 due to a slowdown in starts during the depths of the pandemic. However, the marked rise in starts over the past three quarters will translate into a boost in completions by late 2022 and into 2023.

The increase in residential construction will continue to push demand for materials and labor, intensifying competition and cost pressures across the construction industry in the near term. However, rising mortgage rates may take some of the heat out of single-family residential demand, potentially causing new home starts to slow in 2023.

Figure 6: U.S. historical residential construction by phase

Note: Latest data as of March 2022, seasonally adjusted. Residential includes multifamily.
Source: U.S. Census Bureau, CBRE Strategic Investment Consulting, April 2022.

Figure 7: U.S. residential construction by phase since pandemic onset

Note: Latest data as of March 2022, seasonally adjusted. Residential includes multifamily.
Source: U.S. Census Bureau, CBRE Strategic Investment Consulting, April 2022.

Commercial construction expected to strengthen in 2022 before easing

In square footage terms, total commercial completions across the four major property types slowed modestly in 2021, but will likely reach new highs in 2022.

Trends vary across the property types, however. Industrial construction activity is expected to remain elevated for the next three years, which may place continued pressure on demand for materials like concrete and steel.

Multifamily construction will also remain a major driver of construction demand, pressuring lumber prices. Though completions will likely be somewhat more frontloaded in 2022, they are expected to exceed 2021 levels in each of the next three years.

Though office completions picked up in 2021 and should rise further in 2022 as projects underway come online, activity is expected to cool significantly thereafter as developers wait for more clarity on how corporate hybrid work plans impact demand.

Figure 8: Commercial construction completions by property type

Source: CBRE Econometric Advisors, CBRE Strategic Investment Consulting, April 2022.

Strong commercial spending growth projected through 2023

Construction spending is expected to accelerate significantly in the next two years amid increased construction volumes and input prices.

While projected completions in square footage terms measures construction momentum by the approximate number and size of projects, projected spending reflects expectations for the cost of those projects.

The latest projections from the American Institute of Architects (AIA) Consensus Construction Forecast panel (survey conducted in January 2022), which aggregates views from eight leading economic and industry forecasters, indicate significant growth for most nonresidential construction categories through 2023.

AIA expects spending growth in 2023 will generally outpace 2022’s level—in contrast to the opposite trend forecasted for sq. ft. construction completions—largely due to higher costs, as more spending is required to complete the same amount of space.

Figure 9: AIA Consensus Construction Forecast, annual spending growth by sector

Source: American Institute of Architects, CBRE Strategic Investment Consulting, April 2022.

Building activity not increasing evenly across regions

AIA’s work-on-the-boards data through March 2022 indicates that architectural billings are increasing in the South and Midwest but decreasing in the West and Northeast.

In recent months, growth has been strongest in the South, a change from 2021 when the Midwest led growth for all but one month of the year. As of March, the two regions moved back within one month of each other, as billings have softened year-to-date for the South and ramped up in the Midwest.

In the West and Northeast, growth had been trending slower since mid-year 2021, but both regions saw billings jump in March. In the West, billings returned to positive territory, but for the Northeast, the improvement meant only a smaller pace of decrease, with March marking the sixth consecutive month of fewer billings.

Figure 10: AIA Architectural Billings Index by region since pandemic onset

Note: Data is a three-month moving average.
Source: American Institute of Architects, CBRE Cost Consultancy, April 2022.

Stable backlogs indicate healthy construction demand despite rising costs

Associated Builders and Contractors (ABC) reported that its Construction Backlog Indicator for the U.S. was up slightly at 8.3 months in March 2022, up 0.5 months from March 2021.

Because the backlog identifies the amount of construction activity currently in the pipeline, higher backlogs generally indicate greater construction demand.

However, only in the South was the backlog up notably from March 2021 (1.4 months). Backlogs for the West were down 1.1 months, while the Northeast and Midwest were up modestly (0.5 and 0.2, respectively).

Nationwide, the current backlog is down slightly from pre-pandemic levels, largely due to lack of available labor and materials, but has been largely stable over the past year.

Survey respondents also expect growth in profit margins in the coming months, indicating that contractors feel construction demand is strong enough to offset rising costs.

Figure 11: ABC Construction Backlog by region since pandemic onset

Note: Data is three-month moving average.
Source: American Institute of Architects, CBRE Cost Consultancy, April 2022.

Leading indices indicate construction market growth

Key industry sentiment indicators show construction conditions have significantly improved from 2020 lows and are up by an average of 12% from pre-pandemic norms.

Engineering News-Record’s Construction Confidence Index, which tracks the sentiment of executives at major construction companies on market conditions through the next 18 months, fell in both Q3 and Q4 2021, but ticked up one point in Q1 2022.

The Dodge Momentum Index measures the initial report for nonresidential projects in planning and is a leading indicator of construction spending. As of March 2022, the index was down slightly from highs in 2021 but well above pre-pandemic averages.

The AIA’s Architecture Billings Index is an economic indicator for nonresidential construction activity, with a lead time of approximately 9-12 months. As of March, the index had returned to roughly match the rapid growth pace in mid-2021 with most architectural firms reporting steady growth in both billed projects and new contracts.

Figure 12: Summary of major industry leading indicators

Source: Engineering News Record, Dodge Data and Analytics, American Institute of Architects, CBRE Cost Consultancy, CBRE Strategic Investment Consulting, April 2022.