Housing starts are expected to rise 9% in 2022, prompting Richard Branch, chief economist at Dodge Construction Network, to say he’s “reasonably positive” about the trajectory of the industry. But with many projects just entering backlogs, some sectors may have to wait years for a solid recovery.
According to Dodge Construction Network’s 2022 mid-year outlook provided via webinar on May 26, commercial sector growth is expected to be greater than it was in 2021. For example, the 13% increase in commercial construction starts in 2021 drops to just 2% if warehouse starts are removed from the equation. For 2022, the elimination of storage does not have the same effect.
Branch says warehouse construction starts will begin to decline in coming years after posting $55 billion in the Dodge Momentum Index over the past 12 months. Activity slowed towards the second half of 2021, however. Amazon, which owns 6% of early-stage projects, also announced its intention to start pulling out.
“So I think both of these signs show that the warehouse construction industry will slow down over the next few years,” Branch says. “But even though we go through 2026 in our forecast, we’re still looking at building warehouses in the $30 billion range, so we’re still looking at historically high levels of activity as we move forward.”
The retail sector continues to experience 21% growth. However, a “genuine resurgence” is not expected in the next five years.
“Over the next five years, retail housing starts are unlikely to return to the peak we experienced in 2017, although we consider inflation already factored into these numbers,” Branch says. “Even with the growth rates we expect, activity levels will remain quite restrained here in the years to come.”
Driving this growth is the shift of the residential sector from major centers to rural and suburban areas. Branch says stores already located in these areas are being renovated to accommodate increased customers.
Branch says the hospitality sector has a limited path to recovery, but there has been improvement with each subsequent quarter throughout 2021. Projects entering the pre-planning stages for 2022 are on the rise, but it can take up to two years for the inauguration to occur. The office sector’s 9% growth for 2022 comes from renovations, which account for 52% of office activity for the first three months of this year. Data centers are also on the rise and are supporting the growth in office construction.
While institutional construction starts have been slow to recover, healthcare starts are poised to grow. The uncertainty surrounding the start of education in the wake of the pandemic may begin to ease with a return to normalcy as children return to school.
Overall, Branch says the markets with the smallest risk for 2022 are education, transportation and healthcare. The most risky markets are offices, warehouses and hotels.
Prices and people are the main factors affecting housing starts, according to Branch. Offer prices have continued to rise over the past 12 months and Branch expects this trend to continue through the end of 2022. But these prices are expected to decline towards the end of 2022 and the beginning of 2023 There is also the continuing problem of labor shortages, which currently sits at around 400,000 vacancies in the industry. Branch says the shortage will stifle activity for years to come.
“These pricing issues and labor issues combine to delay project start-ups,” Branch says. “Office projects take nine months longer to move from early planning to groundbreaking than they did before the pandemic.”
The mid-year outlook is based on three important assumptions. The first hypothesis is that the COVID-19 pandemic continues to become endemic and that each subsequent wave of the virus has less impact than the previous wave. The next assumption is that the war in Ukraine remains within Ukraine’s borders and that much of the violence will have ceased by this time next year. The final assumption is that the Federal Reserve will raise interest rates enough to fight inflation without forcing a recession.
“This last assumption in particular, I think, is tenuous,” Branch says. “I would say the probability of a recession hitting the United States in the next 12 months is probably around 30-35%. I would say the probability of a recession in the next 24 months is probably 45%. These numbers are increasing day by day. »