Construction Law Blog

Spending on nonresidential construction will cool to a modest 4% increase in 2024, after experiencing a remarkable 20% increase in 2023, according to the most recent American Institute of Architects (AIA) Consensus Construction Forecast, published on January 11, 2024. And the pace of nonresidential spending will continue to slow to just over 1% in 2025. Construction spending on commercial buildings will be flat in 2024 and 2025, but spending on construction of manufacturing facilities will increase by 10% in 2024 before falling off modestly in 2025. Finally, institutional construction spending will see 5% gains plus or minus in both 2024 and 2025.

These are the key takeaways from the report this month (January 2024) of the AIA Construction Forecast Panelists, a group comprised of leading construction economists and forecasters from across the county. “There are several economic headwinds behind the projected slowdown,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “We already started to see construction starts either slow dramatically or turn negative in virtually all construction sectors in the latter part of 2023 and the weaker conditions are expected to stay into 2025.” The Forecast cites multiple factors fueling a modest projected slowdown:

• Tighter Credit Conditions. Despite recent easing in interest rates, the rising trend in long-term rates has placed increased pressure on the regional banks that account for the lion’s share of construction lending. As a result, credit standards for construction borrowers have tightened significantly, leading to stalled projects or value-engineered designs.
• Higher Material Costs. While material costs have stabilized recently, the cost increases experienced during the pandemic have persisted. Costs appear to have “stabilized” at a whopping 35% to 40% over pre-pandemic levels, and no one expects prices to revert to early 2020 levels anytime soon.
• Declining Commercial Property Values. Weaker demand since the pandemic has depressed property values for most commercial sectors. Multifamily, commercial, and industrial property values have all decreased about 8% on average over the past year.  And office building values continue to plummet, down nearly 15% in 2023.
• Non-Cyclical Demand Changes. Construction is a notoriously cyclical business – we all know that. But in our post-pandemic world, some of the changes that are being seen and forecasted are more “structural” (that is, maybe here to stay). The post-pandemic revolution in remote work, and in e-commerce traffic over traditional “bricks and mortar” retail shopping have underscored the need of many businesses for less office and retail space.

The 20% growth in 2023 spending was always going to be difficult to sustain. But construction spending remains robust in nearly all nonresidential sectors and we believe that 2024, although perhaps a good time for a bit of a breather after a hectic 2023, will nonetheless be a prosperous year for the Virginia, regional, and national construction industry. Click here to view the complete AIA Consensus Construction Forecast.