AIA Consensus Forecast Predicts Slower Growth

By KERMIT BAKER, FAIA, Chief Economist, American Institute of Architects

[Editor’s Note: this article first appeared on HPAC.com.]

WASHINGTON, DC — After growing by virtually 20% in 2023 and one other 6% final yr, building spending for nonresidential buildings—business, industrial, and institutional amenities—is projected to sluggish dramatically this yr and subsequent. Panelists taking part in The American Institute of Architects’ Consensus Development Forecast expect positive factors of solely 2.2% this yr and a pair of.6% in 2026.

Of those sectors, spending on institutional amenities is projected to see the strongest positive factors of 6.0% this yr and three.4% subsequent yr. Business building spending is anticipated to extend by only one.7% this yr earlier than climbing to 4.2% in 2026 whereas spending on the economic sector ought to develop 2.6% this yr earlier than contracting by an virtually equal quantity of two.5% subsequent yr. 

Forecast panelists: Dodge Development Community; S&P World Market Intelligence; Moody’s Analytics; FMI Corp.; ConstructConnect; Related Builders & Contractors; Wells Fargo Securities; Markstein Advisors; and Piedmont Crescent Capital. To view particular person forecasts, go to forecast.aia.org/2025/Charts/Jan%202025/ccf_012125.html.

The modest outlook for building spending is partly primarily based on a number of anticipated headwinds to constructing exercise, together with potential tariffs on imports from chosen nations, in addition to the enforcement of stricter immigration coverage. The specter of elevated tariffs is a serious supply of concern relating to reigniting inflation. The threatened 25% tariffs on items imported from Canada and Mexico and a further 10% tariffs on items imported from China can be inflationary to the general economic system since they’re our three largest buying and selling companions.

Additionally, these tariffs might restrict the supply of a number of supplies and merchandise utilized in building. Amongst different merchandise, the trade imports lumber and building gear from Canada, cement and gypsum from Mexico, and furnishings, plastics, and electronics from China.

Nevertheless, maybe the largest coverage concern for the development trade is how rising immigration coverage would possibly influence the development labor drive. There are roughly 12 million building employees nationally, of which about three million are foreign-born. It’s estimated that half of those immigrants are undocumented, so it’s possible that about one in eight building employees nationally is undocumented. The priority will not be solely the potential deportation of undocumented employees but in addition the chilling impact on potential new immigrants who would possibly in any other case fill building positions within the coming years.

Spending within the Midst of a Slowdown

A key query is the extent to which these potential headwinds will sluggish the momentum in what has been an exceedingly sturdy building sector. Whereas the efficiency of the trade over the previous three years has been extraordinarily spectacular, it additionally has been unusually unbalanced. Three area of interest sectors within the trade—manufacturing, warehouses, and knowledge facilities—accounted for a 3rd of all building spending within the business, industrial, and institutional sectors in 2022, and that share rose to virtually 40% each in 2023 and 2024.

Not solely are these sectors a big share of general exercise, however they’re additionally an excellent bigger share of spending progress in these sectors, in extra of 60% in recent times. Spending on manufacturing amenities, particularly, has seen a meteoric rise, accounting for effectively over 1 / 4 of all constructing spending final yr. Actually, ignoring the manufacturing sector, spending on nonresidential buildings elevated a extra modest 12% in 2022, 11% in 2023, and fewer than 2% final yr. 

A lot of the rise in manufacturing has been attributed to reshoring exercise. Worldwide provide chains have been overwhelmed through the pandemic, encouraging US producers to extend their home manufacturing. Whereas this little doubt was a consider boosting home manufacturing building exercise, it’s an incomplete rationalization. Reshoring as a motivation for elevated home manufacturing building would counsel that almost all sectors of the economic system can be concerned in growing their home capability.

What we see as an alternative is that a number of sectors have dominated manufacturing building. In 2023, of the just about $200 billion in manufacturing building spending, absolutely a 3rd of it was for pc and electronics manufacturing, whereas a further quarter was for the manufacturing of chemical substances and prescription drugs, however largely for the manufacturing of plastics. The surge in plastics manufacturing largely stems from elevated home manufacturing of oil and gasoline, key inputs to plastics manufacturing. 

Apart from the surges in building for manufacturing, warehouse, and knowledge middle amenities, most different sectors have seen rather more modest ranges of exercise in recent times. Final yr, building spending declined for the retail and different business sector, in addition to for lodging. Spending on places of work noticed a really modest improve solely as a result of the US Census Bureau classifies knowledge facilities within the workplace class. The main institutional sectors fared a bit higher, with spending on well being care and schooling each growing within the 5% to 10% vary. 

Development begins, the place your entire projected worth of a venture is assigned to the month when building begins and is, subsequently, a number one indicator of building spending, pointing to a continued slowdown in building spending over the approaching 12 to 18 months. Complete nonresidential constructing begins declined in 2024, in keeping with ConstructConnect, a agency monitoring building venture leads. Business sector begins have been up at a low single-digit tempo percentage-wise over 2023 ranges, whereas institutional begins have been up at a excessive single-digit tempo. Nevertheless, the large change was that begins for manufacturing amenities fell precipitously. 

Modest Progress This 12 months & Subsequent

The AIA Consensus Development Forecast panel initiatives solely very modest positive factors in building spending this yr and subsequent. These projected positive factors of simply over 2% in 2025 and below 3% in 20226 possible gained’t even offset will increase in materials and labor prices, so the expectation is that the amount of building will not be anticipated to extend over the approaching two years.

Throughout the business sector, spending on places of work is anticipated to extend modestly this yr and subsequent. Spending on retail and different business amenities will see no positive factors this yr earlier than a modest uptick in 2026. Lodges are anticipated to see mid-single-digit progress this yr and excessive single-digit progress subsequent yr. 

The projected improve in spending on places of work might sound stunning given the excessive ranges of distant work nationally, which has produced excessive vacancies, rising stress on rents, and general weak point in that market. Nevertheless, all of the projected improve is coming from knowledge facilities (which the Census Bureau consists of within the workplace class). Spending on knowledge facilities is projected to proceed to see very sturdy progress, so spending within the core workplace class is anticipated to say no each this yr and subsequent. 

The expansion in e-commerce has damage retail and different business amenities. The Census Bureau consists of warehouses on this class, which has pushed general class progress in recent times. Nevertheless, warehouse building has develop into overbuilt in lots of areas of the nation in recent times, and subsequently, building spending on this sector has slowed. 

Institutional constructing tends to be much less cyclical than business or industrial exercise and is, subsequently, much less susceptible to a increase/bust sample. The main institutional sectors—well being care and schooling—are each poised for wholesome however unspectacular positive factors this yr and subsequent. Well being care building has benefited from an ageing inhabitants. Consolidation amongst well being care suppliers has modified the development focus away from massive institutional campuses and towards neighborhood well being facilities. 

Schooling is the most important institutional class, accounting for effectively over a 3rd of the spending on institutional amenities. Along with some upgrading of amenities that was deferred through the pandemic, demographics are the principle driver of instructional building wants. As such, transferring ahead, building spending for schooling amenities is more likely to be below stress. The Census Bureau initiatives our general inhabitants to extend by 2.1% in whole over the subsequent 5 years. Nevertheless, the preschool inhabitants is projected to extend by solely 0.7%. In the meantime, the elementary college inhabitants is projected to say no by 4%, excessive schoolers by simply over 3%, and college-aged college students by virtually 2%. These developments are anticipated to restrict the necessity for brand new instructional amenities. 

Architects additionally Mission Restricted Enchancment

From a enterprise perspective, most US structure corporations confronted a difficult yr in 2024. Persevering with the weak point that emerged mid-year 2023, structure corporations reported the softest interval of billings for the reason that onset of the pandemic in early 2020.

Circumstances started to look a bit extra optimistic starting within the fourth quarter of final yr as business property values stabilized, rates of interest started to edge down, and structure corporations started to report a resurgence in curiosity for brand new design initiatives.

Nevertheless, this optimism will not be uniform; many corporations nonetheless really feel that extra corrections within the economic system are wanted earlier than their workloads will rebound. When surveyed this previous October about income forecasts for 2025, simply over 4 in ten corporations have been projecting positive factors of 5% or extra, 1 / 4 have been projecting losses of that magnitude, whereas a 3rd felt income can be basically flat. On common, design billings are projected to extend solely very modestly this yr. Bigger corporations, corporations specializing within the institutional sector, and corporations situated within the South have been probably the most optimistic about their anticipated 2025 efficiency.