Construction activity will decline slowly except for data centers.
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The nonresidential construction sector of the economy has changed substantially in recent years. Contractors in this sector and their suppliers must understand how fabs and data centers have altered the long-time concentrations of the different components of total activity. And public sector contractors should understand the winding down of the 2021 infrastructure bill.
Businesses leaders should expect continued growth of data centers but a retrenchment among semiconductor fabs, with small declines across most other parts of the industry.
Chip Fab Construction
Chip fabs and data centers surged in recent years.
Dr. Bill Conerly using data from U.S. Census Bureau
Semiconductor fabs and data centers dominated the growth of nonresidential construction since 2022, as shown in the chart nearby. Chip fabs, though, are tapering off. (The data actually cover all facilities manufacturing computers and electronics, but chip fabs drive the changes.) The surge began with the post-pandemic chip shortage. Automakers had dialed down their chip orders in anticipation of weak sales. When stimulus money pushed up demand for cars, the chip makers had already dedicated their production capacity to other uses. Chip prices soared and new fabs were built as quickly as possible—which is never very quickly. Afterwards the Biden administration pushed the CHIPS Act, which added federal funding for fabs.
Chip fab construction declining now.
Dr. Bill Conerly using data from U.S. Census Bureau
The semiconductor industry, though, has long been to be susceptible to boom-bust cycles. The upfront capital costs are extremely high, while the ongoing production costs are relatively low. Once a fab is built, equipped and the personnel trained, operation continues even if prices drop a good deal. The continued supply into a soft market further depresses prices. Little new capacity is added. Then demand eventually increases, and prices soar because it takes a long time to get new fabs up and running. This cycle is common to many capital-intensive sectors, including mining, airlines and shipping.
Data Center Construction
Data center construction continues to grow.
Dr. Bill Conerly using data from the U.S. Census Bureau
Although fab construction has peaked, data center construction continues to grow. The earlier wave was driven by cloud storage. Now artificial intelligence needs more data center capability. The first needs for AI were model development: building the AI systems. That continues, but interpretation—using the models to answer questions—requires more data centers. Although the course of AI usage is not easily forecasted, increasing application of the technology is the obvious bet.
Other Private Nonresidential Construction
Some of the other parts of private nonresidential construction were impacted by the pandemic and its aftermath. Warehouse construction rose rapidly as people switched to online shopping, and retail construction dropped. As demand for warehouse space increased, developers saw the opportunity and … overbuilt! It’s not a terribly bad sector in most cities, but certainly overbuilt. And retail probably underbuilt. Some of the old shopping malls are now obsolete, but the retail market is enjoying more demand for activities, such as gyms, yoga studios, hands-on pottery shops, etc. Careful development will prove profitable.
Office space was found to be overbuilt when people began working from home in large numbers. Even the brightest markets have above-normal vacancy today, but there are always some unmet needs. Suburban medical offices, for example, are growing.
Hotel/motel demand increased after the pandemic lockdowns were over, leading to rising construction in 2022. Now that sector has adequate capacity, and only small increases will be likely in the coming years. Manufacturing construction not counting chip fabs has declined over the past year and probably has sufficient capacity in most cases.
Public Construction
Public construction surged due to the 2021 infrastructure bill.
Dr. Bill Conerly using data from U.S. Census Bureau
Public sector construction enjoyed a big boost with the 2021 infrastructure bill, which appropriated $1.2 trillion, more than twice the usual public construction budget. Spending will continue for a couple more years, as many of the projects entail multi-year activity. But the ramp-up phase is over. A little bit more plateau will ensue, and then construction will decline with the end of the huge federal funding. Infrastructure is not nearly as large a priority for Congress as it was a few years back.
Construction Forecast
Total nonresidential construction will taper down. Slower growth in the overall economy dictates lower need for new buildings. Tariffs and limited labor force growth have increased costs, which will prevent marginal ideas from becoming active projects. The sector will not crash but will gradual decline over the next two years.