Kermit Baker, chief economist of the American Institute of Architects (AIA), delivered a comprehensive outlook for the residential and commercial sectors in 2024 at the annual WDMA Executive Management Conference on October 5th.
Drawing on a meticulous analysis of the previous years’ data, he conducted an in-depth examination of the housing market, commercial building construction and general design activity, all of which contribute to the forecasted trends for the upcoming year.
From pinpointing critical economic indicators affecting housing stability to scrutinizing the performance of architecture firms in recent quarters, here are some highlights that will shape the anticipated industry landscape in 2024.
Economic Indicators
According to the Bureau of Labor Statistics, major monthly leading indicators remain mixed, but show general improvement across the board. From September 2022 to September 2023, consumer prices have decreased by 4.6 percentiles, while housing starts (SAA) have also fallen 14.8%.
On the other hand, we have seen an increase in three-month treasury bills, 20-year fixed rate mortgages, consumer sentiment, retail sales and nonfarm payrolls.
Overall, the probability of an economic recession appears to be receding. While the certainty of a recession was pressing at the top of 2023, the National Association of Business Economists survey in early August found that 69% of respondents feel confident that the federal government can achieve a “soft landing”. Nevertheless, most respondents still feel it will be mid-year 2024 or later before inflationary pressures recede.
Despite a more positive outlook on the state of the economy, hurdles remain. A quick overview includes:
- Regional banking conflicts have led to tighter lending standards.
- Political turmoil in Congress has increased the likelihood of future federal budget stalling.
- Worker strikes, the resuming of student loans and rising oil prices elongate economic fallout.
- Potential geopolitical tensions accelerate and inflict international relations.
- The meltdown of the Chinese economy is felt in the U.S.
In reference to construction loans, 16.7% of banks have said that their credit standards have tightened considerably. 56.7% have said they have tightened standards somewhat. While the overall consumer inflation has been decreasing faster than predicted, the core rate through January 2020 remains sluggish with its steady increase and plateau in 2022.
Housing Market Factors
The housing market peaked in 2022 and is now reaching near the bottom. In 2022, total spending on construction and renovations totaled to $1.9 trillion, in which 23.3% was towards home improvements. According to the American Institute of Architects Home Design Trends Survey, over 40% have continued to remodel with additions and alternations to existing spaces like the kitchen and bath.
The number of housing stats has gone down in 2022 and 2023, they remain higher than pre-pandemic levels. More focus is being placed on building single-family homes, a sign that people are investing in their existing properties. Construction growth has led to increased vacancy rates, which, in turn, has slowed down the growth of rent prices. But overall, total new housing demands are projected at just over 15 million units in the next decade.
Photo Credit: Masonite
Commercial Building
According to the U.S. Department of Commerce, the 2012-2022 average spending on nonresidential buildings was $493.6 billion. Commercial and industrial purposes accounted for 49.8% of that spend ($245.6 billion). So far, the spending in the construction of buildings in 2023 has totaled $286.3 million.
In 2022, the warehouse construction industry dominated all other retail categories, making up 55.8% of all commercial building. Although the pandemic slowed construction in some sectors, the manufacturing, retail and healthcare sectors have seen growth between February 2020 and August 2023. Generally, inputs to building construction are almost 40% above pre-pandemic levels.
The most common goal of reconstruction projects is adaptive reuse and conversion and basic interior modernization, proving again that the sustained improvement of buildings and homes remains strong.
Photo Credit: Velux
Architecture Business
After a strong year for commercial activity in 2023, 2024 will likely see more modest growth. The AIA/Deltek Architecture Billings Index (ABI), which is a monthly survey that examines the business conditions at U.S. architecture firms (including multi-family, commercial, industrial and institutional), leads construction spending activity by 9-12 months with a high degree of accuracy.
According to the ABI, architecture firm billings have been weak since July 2022, mostly due to the multi-family residential sector. However, construction spending is expected to accelerate this year before slowing significantly in 2024. Overall, business activity has been generally softening since Q4, which means this will carry on through the new year.
Photo Credit: VT Industries
In Summary
While the economic outlook has shown signs of improvement, existing challenges remain. Housing markets have moderately softened, notably milder than previous cycles. The remodeling sector has been a standout performer, though the limited housing turnover may lead to a slowdown in future improvement projects.
On the other hand, building construction has kicked off the year on a strong note, particularly in sectors like manufacturing, distribution, lodging, and healthcare. However, the softening of business activity at architecture firms in the last quarter of the previous year predicts a slowdown in multi-family and commercial construction.
To get a deeper insight into the data behind the current landscape, see the full presentation here.
Photo Credit: Pella
Webinar: Understanding Window, Door & Skylight Certification
Understand the benefits of window, door and skylight certification and how certified products can enhance your projects.
Webinar: Understanding Window, Door & Skylight Certification
The Understanding Window, Door & Skylight Certification webinar is designed to help architects and remodelers understand the benefits of window, door and skylight certification and how certified products can enhance their projects.
