Moody's Talks - Inside Economics - New Construction and Niche-y Nerds

Episode Date: May 19, 2023

Richard Branch, Chief Economist for Dodge Data & Analytics, joins the podcast to share his insights on all things construction. Construction is the most interest rate sensitive sector of the economy, yet despite the near unprecedented tightening in monetary policy, it is holding its’ own.  What gives?  The group also digs deep into the different parts of the construction sector, from the struggling office market to the surge in public infrastructure.For more on Richard Branch, click here.For the full transcript, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Chris DeReedies and Marissa Dina Talley. Hi, guys. Hi, Mark. Have you noticed I've kind of gotten into a rhythm introducing this thing? I say this. Your sleep. Pardon me? You can say in your sleep, I think. I can say it in my sleep now. But I'm wondering if that's just getting boring for people. Maybe I need to mix up the introduction somehow. I don't know how I want.

some sound effects or something? Yeah, I'm looking for suggestions. I don't know. You know, we've been at this for, I think, over two years now, or close to two years, I believe, coming up on the second birthday. So hard to believe that, isn't it, that we've been doing this so long. Yeah. Hey, I was in Washington this week, you know, talking to lawmakers around the debt limit. And I'll have to say, what struck me was how wide people's views are with regard to how

this is going to play out. Some people... Wait, wait. So last podcast, I think you were feeling optimistic. You had just been down there to talk to them. Yeah. Something's going to happen. Now that's changing?

No, I think I'm still optimistic. I mean, we're getting actually happy talk coming out of Washington more recently, right? So it feels like they're coming to a deal. But despite that, you know, what struck me was just the wide variability among folks involved as to how they would handicap this playing out. I just found that striking, which goes to say, I think no one really knows, you know, how this thing's going to play out. But I found that, you know, very interesting. We got a guest. We have a guest, Richard Branch, from Dodge. Good to have you, Richard. Thanks for having me, Mark. It's real fun to be. And where are you hailing from? Where are you

speaking to us from. Yeah, I live in Goffstown, New Hampshire, southern New Hampshire. Oh, is that, how'd you end up there? How'd you get up to New York? Is that where you grew up? Our forecasting and analytics offices are nominally based in Bedford, Massachusetts, so on the northern suburbs of Boston and home prices, real estate valuation is much nicer over here in New Hampshire, no sales tax, so it's an attractive place to live. Yeah. Yeah, and you're the chief economist of Dodge. I am, Chief Economist of Dodge Construction Network. And how long have you been chief economist?

Since 2019, so just before the pandemic. So I'm not sure if there's causation or correlation there, but I took over and then the world turned crazy. Yeah, you were saying before we went on, the previous chief economist, who was that? I can't remember who that was. Bob Murray. Oh, yeah, sure, Bob Murray. He was out there all the time.

Absolutely. He had a saying about forecasting. What was that again? His saying about being an economist in general is it's not the knowledge necessarily that's important. It's the appearance of knowledge. Yeah. Right. Yeah, definitely I'd say a lot of truth to that.

Absolutely. But in all endeavors, I would say, not just for economists. Apparenting, everything. Everything. It's just, you know, got to come across as being credible for sure. And tell us about, you know, obviously you are going to provide a very, we're going to talk about the construction markets broadly and you provide the really wonderful window into what's going on into that part of the economy, which is a big part of the economy. Do you want to just tell us a little bit about your work and, you know, what Dodge does? Sure, yeah. So I've been with Dodge. I think I'm going on year number four. 14 now. So I was here for a little while in the early thousands left to try some different things, came back just before Bob retired. In general, what we do at Dodge Construction, it's such a fun story to tell. We've been around since the 20s, as in the 1920s. And what we do at the

core of it is we're tracking construction information at the project level. So we're tracking we have this great mix of longitudinal data, right? We're tracking individual construction projects from when they're essentially first showing up on an architect's desk, if not before, all the way through the planning life cycle. We're capturing geo data, what the project is, how big it is, square footage, dollar value unit, story height.

We're tracking who's working on it, what kind of products are being specified. And then once it breaks ground, which is what we call a start, then we create a time series out of it. And my team, what we do is we forecast that time series across 22 different major verticals within the construction sector, across residential, non-residential buildings, and then into infrastructure. And the vast majority of our clients are in that construction space.

So they are building products manufacturers, they are service providers into the construction sector. A growing number of a growing share of the clients, though, into the consulting and the fire in the banking world as well. So it's a wide-ranging data set. We track, I think every year, about 400,000 new projects come into our planning database. And by I mean new projects, new is in the first time it's being specked out as opposed to new versus a renovation. About 200,000 of those actually break ground every year. So in terms of the sandbox that we get to play in every day as a nerd, right? It's just an amazing tool.

It's an amazing toy to play with. So you count yourself as a nerd. Oh, absolutely, 100%. Yeah. You and Marissa are nerds, I'd say. I know, Chris. Proudly. Chris is too urbane.

You know, he plays botchy. Yeah. You know. Oh, wow. You guys designer glasses. You are boosting my ego today. He's a niche kind of nerd. Yeah.

Oh, I like that. He's a niche nerd. Nouveau nerd. Yeah, Nouveau nerd. Newvo nerd. Well, it's good to have you. Oh, sorry, go ahead. I was going to ask, is this just commercial properties that you're tracking?

Or is it residential, single family residential? Yeah, that's a great point of clarification, Chris, because we're tracking construction projects regardless of what kind of project it is, right? So single-family, multi-family, to be sure. But we're tracking office projects, whether they're on the speculative or the investor side or whether there are corporate headquarters, campus like that, data center, schools, health care, lab buildings, public buildings, airports. We're tracking it top to bottom, left to right. So just big picture.

And I'm sure you get this question all the time. And I get it and I'm not sure how to answer it. How important is construction to the broader economy? I mean, when you think about broadly speaking, however you want to define it, what share of the economy is it typically? Yeah, it's a smaller share. I think it's probably around 15, 10, 15 percent of total GDP. I think, though, I think about it in a more sociological standpoint. point. If you think about everything that we do every day, what you're sitting in now,

the thing you drove on to get your wah-wa coffee, whatever you do. Oh, he's a listener. He's a listener. You're a listener. I am. I am. Oh, very good. Okay. A client and a listener and a nice guy and a nerd, all all wrapped up into one. Okay. Yeah, but everything we touch is construction. Everything. Yeah, it's true. Good point. And so it's, it's, well, it may be a small share of the economy. from a dollar standpoint or from an employment standpoint, it touches everything that we do. Yeah. So I want to get down and dirty and talk about these verticals you talked about, not all 20 plus verticals, but some of these verticals because there's a lot of interesting things

going on that provide perspective on what's going on in the economy and where the economy's headed. But what is the state of the union for the construction trades right? right now. I mean, or would you say, because again, maybe it's hard to say because there's, depends on which part of the elephant you're touching, but looking at the entire elephant construction, where would you say it is in kind of the cycle? Good question. As we looked at the calendar flipping over from 22 to 23, there was an incredible amount of momentum building up in the sector, mostly in the multifamily space, mainly, manufacturing, some of the more public building side of the markets, and of course, infrastructure.

That momentum hasn't gone away. Other than maybe multifamily, multifamily is certainly eroded. But that momentum is still there. That strength is still there. But it's being countered by weakness and a lot of the income property types, whether that's warehousing, retail, or hotel have certainly weakened considerably as the year has gone on. And then we start thinking about that extra layer of banking and the stresses in the financial system. And we're starting to see particularly on the income property types, the cracks and the foundation of the construction project. So in aggregate, you would say it's kind of holding its own, but there's a lot of cross currents here. It's treading water. And the way I look at it, our forecast for the year, I don't want to get too far ahead of the game here.

But if we look at all those verticals added together, total construction, we're looking at up 2% this year, nominal dollars, constant dollars, it's down five, down six. Because the inflation is, there's a lot of inflation here. Exactly. But as I look across those verticals, there's not a lot that are within that plus two to minus four range. They're either very strong or they're very weak. I was saying this to a client the other day that as I look at the second,

sector today, tomorrow, and even to say 24 and 25, I think this is potentially the most bifurcated market we've seen based around geography, demographics, and the types of projects that are going up. Interesting. And that's kind of reflected in kind of the key, one of the key links from construction back into the broader economy, and that's construction employment. You know, one of the kind of conundrums. I think even Powell may have mentioned this, another policymaker, that employment in the construction trades has not declined, really. I mean, we've had a month or two where we've seen declines,

but, you know, abstracting from the monthly vagaries of the data, we're not seeing the kind of declines in construction employment you would typically see after a period of a significant run-up in interest rates in a Fed that's working really hard to slow the economy down. presumably through the most rate-sensitive sectors of the economy, one of which is construction. So he's like, what's going on? Did I characterize that right? You're absolutely right.

And what I found even find even more amazing than that is the fact that when you look at the largest single vertical in the construction space is single fam. And single fam is in cyclical decline. It is down and out. And so the jobs are still holding up both in the employment numbers, you look at the Joltz numbers, in spite of the fact that single family is where it is, is a testament, I think, to the strength in other sectors. And whether that's manufacturing or infrastructure, there is a lot of demand and an extreme shortage of construction workers.

Yeah, you see he is a little nerdy. See how I did that single fam? Like, I'm a cool kid. I don't say single family. I see single fam. It seems time. Yeah, yeah, it saves time. Yeah, well, I guess if you say it, if you say it 80 times a day.

That's right. You come up with his shorthand. I get it. Do you say multifam too? I say multi-fam. Okay. I'm going to learn this lingo. Yeah.

So this goes to the fact the construction, employment in the construction trade is basically flat. Yeah. And this is testimonial to what you were saying, the strength in some parts of the construction trade is still adding, they're still adding to payrolls. offsetting the job loss that's occurring in single-fam? 100%. 100%. Okay.

Well, I guess a caveat there. Single-fam certainly down in terms of permits and starts, but there's still quite a pipeline of homes that are under construction, right? So could there be just some lag effect here? We need to finish off some of the projects, and then you might see a wave of layoffs. There is that. And what typically happens as well in this part of the business cycle is renovation picks up as well, right?

So people are doing interior renaos and that's adding to that demand for contractors and electricians and whatnot. Very good. You know, one of the, again, this classifies as nerdy, but one of the kind of questions that have been circulating in our nerdy world is around. the productivity growth of the construction trades. And I think it was Austin Gouldsby, who was Chicago professor who just became president of the Chicago Fed, wrote a piece of paper with a colleague. I can't remember who that was. I should remember, but I don't.

You may remember. Talking about the fact that productivity in the trades has been abysmal, really, very, very weak. First of all, I know there's a lot. a lot of measurement issues. Is there, are they understating the productivity gains because of the measurement issues that, you know, plague, uh, measuring productivity in any sector, but particularly in the construction trades? Yeah, you know, I, I read that paper.

I read the New York Times article that I think came out the week. Oh, I didn't see that. Okay. Yeah. And my, my honest reaction to that is I got really defensive, you know, trying to be a defender. And then I think you had some folks on within the weeks after that talking about, I think somebody mentioned nail guns and things like that. And I got even more kind of defensive. But then I went and said, well, well, well, well, let's go back and actually look at the data.

Right. And the math, you mentioned a measurement error. The math isn't necessarily wrong, right? Output for worker has been declining. But when you look at, I think there's a couple of different ways to look at this. First of all, and I think this was mentioned in a construction email list, I think you guys are on that. And we talked about coding, right? Different building codes have changed significantly, whether there are seismic codes on the West Coast, storm flood related codes down in the southeastern part of the United States that has made the construction sector, made a construction job more difficult. zoning issues. But I think overall, two more things, that construction has just become more complicated. The buildings have become more complicated. So if we go back to 2000, the average square footage for a non-residential building was around 50,000, 50,000 square feet for a new non-residential building. The average right now is well over 100,000 square feet.

It's office warehouse, combining everything. Convention centers, manufacturing, everything. If you think about the kinds of projects that were at the top of the list back in 2020 that broke ground, or sorry, 2000, that broke ground, they were big hotel and convention centers, airport terminals. And then you compare that to the kinds of projects that are breaking ground now. The largest project that broke ground last year was a 9 million square foot manufacturing facility. I have spatial issues in terms of trying to picture a 9 million square foot facility. So I always put it back to how many Walmarts would fit inside it.

So an average Walmart's around 180,000 square feet. And if I did my math, right, that's about 50 Walmart super centers in that manufacturing facility. How many Wawas is that? Mark? I'll work on that. Yeah, that's a good one. I'll chat GPT that. But we're doing those.

those more complicated projects, those chip factories, those EV battery plants with essentially the same level of workforce, that hasn't really changed from 2000, 2006 to now. You know, there's been cyclical issues, of course. So that's perhaps a counterpoint that we're doing these much more complicated projects with the same amount of workers. Well, it sounds like a measurement issue. You know, it's like, right, because you're getting presumably with all that complexity, you're getting something out of that, right? I mean, there's benefits to whatever that complexity is. I mean.

And I think that the easy math, right? Chris, that you kind of shook your head. I saw that. No, I agree with that. Okay. Definitely think there's measurement, but my other question would be, I don't know the answer to this. I don't know, Marissa or Richard, if you know, what about worker safety, right?

If we're getting less productive, but the workers are, their health is reserved or, you know, is that a, I don't think that's factored in that study. No. Right. Right. So your, your sense is then, if that, what you just described sounds like a, it's like, like measuring productivity in the vehicle industry, you've got to account for the quality of the vehicle that's being produced.

And certainly the vehicles that are being produced today are more complex and provide much greater service to us than the ones that were produced five years ago, 10 years and 50. And if you don't account for that, then your measurement of productivity will be biased lower. And it feels like that's part. So your defensiveness was appropriate, right? I think so. Okay. Okay.

Very good. Okay. I think there's a separate issue too, right? That just from a data perspective, when you do the productivity math, you're talking about construction starts or construction put in place as in the works actually, the work actually underway at this moment. But I think we need to remember a construction project doesn't start when the shovel hits the ground, right?

These projects are in the planning cycle for as much as a year to two years before they even break ground. And that's where we've seen some productivity improvements in terms of design, 3D design, less on paper, more virtual product procurement, supply chain. That's where we've started to see more investment. That's where we've started to see more productivity improvements to get that job to groundbreaking sooner. Yeah, I can speak to that personally. My son has a BIM company, building information management company.

They digitize everything. Exactly right. And then they make sure that everything works digitally before the physical, actual construction of the building. And it significantly reduces the error rate, the mistake, because there's a lot of mistakes being made that cost a lot of money, a lot of time. and the digitization really improves that process. So when I see that, I go, well, maybe that's still small potatoes in the grand scheme of things, because it feels like that hasn't really been adopted broadly through the construction trades yet, but that feels like that's coming, that coming pretty quickly.

Absolutely, it is coming very quickly. And I would add to that what I see anecdotally is there's a lot of interest from outside of the construction industry to get into that, whether it's BIM or digitization of of information. So you're seeing bigger technology firms coming into the sector. You're seeing a lot of venture capital come into the sector to exactly address that issue. Yeah, interesting. Okay, well, let's talk about those verticals.

And I'm not sure how I want to do this, but maybe we start with the biggest single family, single fam, I should say, single fam. And I guess the question from a macroeconomic perspective is, are we at bottom, right? because single family starts, and you know the data better than I'm speaking from memory, and hopefully I'm not taking anyone's statistic. But before interest rates took off a little over a year ago, you know, mortgage rates were at record lows. We had seen single family construction kind of pick up, get back to something that would

be more consistent with historical norms. I think we were running, what, 1.2 million, 1.25 million per annum, something like that. Now we're down to 850K per annum, I believe, if I've got the number. right. And that's impressive, right, Marissa, that I just was able to rattle. I could be, this goes back to your, your quote, your act was surgery. What was it? It's all a matter of appearance. I have no idea if those members are right. I sound like I know what I'm talking about. I think I got it roughly right. Chris will correct me, but. 846,000. Okay, 846,000. Yeah, there you go. are we at bottom, do you think, in terms of starts in the single-fam market?

I think we are. When I look at our starts data, and again, we capture our own single-family data separate from census. Instruction starts, these seasonal adjusted annualized rates have been up for the past four months. They're still down double digits from where they were in early 2022. too. But I think that inflection point is here. And you start looking at other data. The home builder confidence is starting to rise. I think we're at the bottom. Do we go anywhere from here? Probably not. At least I don't think that happens much this year. I've been likening it to, you know,

you throw a flat stone across a pond, then it just kind of skims there for a while. That's how I view the single family market now and over the next several quarters. Okay. Okay. And, And the 850K, where do you think? Oh, and I should say, I meant to say, you must be assuming a lot of things, but just to call out a couple things. One is mortgage rates aren't going any higher. I assume you're assuming that. Correct.

Okay. So we're at a 6.5% 30-year fixed, roughly speaking. That's kind of sort of where we'll be. Yeah. Okay. And the second thing, no recession? Absolutely no recession. Absolutely no.

Oh, he said that was, now he said that's the assumption. He says that's the assumption, right? Oh, okay. We built some softness into our macro side, but this goes back to that. We just kind of skid along the bottom here before we start to see real organic growth later in the year. Got it. And the other kind of question that Chris and I are always debating is long run. I mean, you can define whatever that means long run.

run, but it's kind of through the business cycle, what is the quote, unquote, I'm using air quotes here, a kind of the appropriate level of starts, you know, consistent with, because here now it's about demographics, you know, how many households are forming, are they going to more likely rent, or are they going to be single family homeowners, you know, got to make those kinds of forecast, but is 850K below that kind of long run through the cycle level of construction? Or is it, it meaningfully higher than that? Do you have a view on that? Yeah. I'll settle a dollar bet that Chris and I have. Oh, boy. I lost that bet a long time. I know I did. But I can always win again, depending on what Richard has to say. Okay. All right. I am not overtly positive on the long-term

prospect for single-family construction, not because of the demand side, but just the inability to build, whether that's because of construction workers, whether that's because of nimbism and the inability to build large track affordable single family housing. So in my view, and I'm, I think Mark, we mentioned this before the podcast, you know, I'm going to answer a question, not necessarily the question. But, you know, we didn't have to tell me that. The other trick to doing that is not telling you. The fact that you told me that now, now everyone knows you're making stuff up. But go ahead. So we kind of view single family underperforming here over the next several years. Okay.

Okay, very good. Chris, can I ask you that question? I've kind of lost track of where your mind is. What do you think the long, through the cycle, business cycle, kind of, let's call here's now a little nerdy jargony equilibrium level of single family construction. Single family starts to be more precise. Yeah, so over the next five, ten years, I think it's a bit higher. I think there's still pent up demand out there.

The supply definitely is an issue, though, so I don't see this taking off anytime soon. But if you told me it's, you know, closer 900,000. Oh, just marginally higher, not marginally higher. It's $9.50, something like that. A little else than a million. I'd probably accept that. But after that, I think the demand picture looks very different. Demographics really start to kick in.

and unless there's a wave of immigration. Right. Right. That trend is going to be downward for the foreseeable future. Yeah, that's a great point. Oh, sorry, Richard. You wanted to say something there? So we track single family.

We define it a little differently. For us, single family, it's just detached. So we put townhousing and two family into our multifamily sector. So as I look at our longer term single family units, again, take out that two-fam attached. kind of building, we're looking at mid-8s through the bulk of our forecast here. So it's underperformed. Okay. Okay, very interesting.

And that goes to, does that go to lower homeownership and just increased demand for rental? Going back to your point about finding land to build on, that kind of thing, in affordability? I think it boils down to that affordability. Will we actually see measurable improvements in affordability? short-term, medium-term, long-term, certainly not short and medium, in my opinion.

Yeah, okay. The supply is the right mix of supply isn't there. Okay, so you're kind of saying single-family starts have bottomed, but they're not going anywhere fast, and in the long run, I don't see them rising to any meaningful degree. In longer, longer run, given demographics,

to Chris's point, they'll start declining, right? Because household formation, unless we change immigration policy pretty significantly. Okay. Okay. Okay. Well, let's turn to multifamily then. And.

Pardon me? Multi-fam. Multi-fam. I was getting there. Multi-fam. Yeah, I was getting there. You know, just for the listener so they can see multi-fi-see how I do this, multifamily.

And then I say multi-fam so that, you know, everyone's on board. On the multi-fam side, I think we've been around here five. 500 to 600,000 units per annum. That was the case before the run-up in interest rates, and that's the case now, still roughly the same. And that goes to, obviously, the run-up in rates has crushed single-family housing affordability. People can't afford a single-family home,

therefore more likely to stay in a multifamily unit. And there's a real shortage. What's bad for single-fam is good for multi. Yeah. And we have, coming into all of this mess, the pandemic, we already had a shortage, an affordable housing shortage. The vacancy rates for, if not at record lows, pretty close to record lows. So do you think, what do you, what's your prospects for multifamily starts? Do you think they start to come in here or, you know, where are they headed?

Yeah, just to put it in our perspective in terms of our data, 22, 823,000 units of multifam. So that's apartments plus those two fam attached houses. Best year for multifamily construction starts going back to the mid-80s. So it was that hot of a market. We see a decline here coming up, but still you'd have to go back to the 80s from a level perspective to get where we are. I'm a little concerned on the downside, though, on multifamily because I think the mix has gotten scattered. I think what's going on right now is a lot of high-end construction in dense urban areas and not necessarily what the market needs. So I think there could be a comeuppance, maybe more than we're expecting in 2023, particularly in larger metropolitan areas like New York, Miami, Dallas, where we've seen a lot of this high-end high-rise construction go up. Yeah, and I think this might go to the banking situation too, right?

because I think a lot of multifamily developers rely on banks, small mid-sized banks in particular, to kind of finance the construction and ultimately provide mortgage loans to those properties. And presumably, you know, we can see that banks have tightened down their underwriting aggressively. They were doing that even before the banking crisis. And post-crisis, they obviously continue to do that. Do you sense that that's really starting to bite into multifamily starts? We're seeing starts decline, starts of decline in the past three months, but I think more importantly, from a pipeline perspective, if we look at those projects coming into the earliest stages of planning, so we call them in NERG World version one reports, it means it's basically it's brand new and it's got an architect and a GC attached to it. projects in that space are down about 15% from where they were at the end of of 2020.

So definitely not just the start side, but the planning side of the equation is falling as well. Okay. So dead ahead, not immediately because there's a record number of multi multifam units in the pipeline going to completion that got bottled up during the pandemic because of supply chain and labor market issues that are now going to completion. But on the other side of that, which is probably as we end the year moving into next, starts will start to come in. Activity will start to come in. Yeah, we're looking at around a 12 to 13 percent decline. Okay.

Okay. Again, I feel that there's probably more downside potential in that market. Yeah. So overall residential construction activities is going to weaken. It's not going to get any better here anytime soon. is going to likely continue to weaken over the course of the next, I don't know, 12, 18, 24 months, something like that. Yeah, I do think just, you know, tonality-wise, I'm going to go with the glasses half full because I do think the inflection point in single is here, as opposed to, say, an inflection point in multifamily. We won't see that turn to the positive in multifamily probably to early 2024.

Okay. So there's some positive. Because the single family market, too, I worry a little bit about that in the context of the banking, uh, crisis because a lot of home builders, not the big publicly traded builders that have access to capital markets to fund their building, but kind of the smaller mom and pop builders, which by the way, is about half, I believe it's still about half of all construction, typically, single-family construction. They're likely under a lot of pressure because of the tightening down and underwriting by the small

mid-sized banks. And I just wonder if we're not going to see a further weakening and single fam because of the lack of credit. I think you're spot on there, but I would even also add to that the labor issue. The labor issue. The small and medium-sized builders are having, they're fighting it more difficult to access labor, particularly as construction labor gets pushed towards the bigger projects, whether those are bigger multifam manufacturing, those types of projects. So they can't lift their wages the same as a big builder would do.

They can't offer the kind of money that say an Intel is going to offer to build their plan. So they're, I think, doubly hit here in 2023. Okay. Okay. So we cover residential. Let's cover non-residential. And then we'll do the game. And then we'll come back and do public construction.

Also, you've done some work around the debt limit in what. potential scenarios might be for the construction trades and we can maybe end there. On the non-Rest side, there's a lot of obviously verticals there, as you say. Let me, let me, maybe we can have the, do the conversation this way. Which vertical are you most nervous about, you know, that in terms of, you know, construction activity going forward here in the near term? Traditional offices. Offices, okay.

No, no question. about it. Yeah, right. And it's the obvious. It's the obvious. Yeah. It's the push towards hybrid remote work. Yeah. And the increase in vacancy that's resulting in big urban centers. Yeah. And how big a deal do you think that is from a macroeconomic perspective? I mean, is it, is it a big deal or is it kind of on the margin? Office construction. Yeah. It's in terms of our data, it's one of the medium-sized sectors. It's certainly not the largest by any stretch of the imagination. It's not the smallest. It's stuck in the middle. Yeah.

Have you looked into the one kind of potential saving grace might be the conversion of office into residential? Again, going back to, you know, we do have an affordable housing shortage. And maybe these office towers can be converted in some of these big urban cores. where the shortage is most severe and help alleviate that shortage. Have you looked into that kind of dynamic at all? We've been paying attention to the data as it comes in. It is hard to track, whether this is a conversion project or a new project.

We haven't seen any significant trend in the data that points to this is happening. Certainly a lot of anecdotal, a project here or project there, but no sort of ground swell in the data that says this is, is going to be the next big deal. Chris, have you seen anything in this area? No, I did, I did have a question, though. Do you see any differentiation between the urban core and suburban offices? Is there, because of the hybrid work, are you seeing any pick up in suburban office demand for? Yeah, I'm going to be very careful here because I don't want to burn my stat. Oh, okay. We can hold off. All our ears just picked up when you said that.

Yeah. So if, as we track the office sector, it really goes into three different buckets. There's that office construction project that is, we'll call the income property type, right? That's about two-thirds of all office construction is that more spec side of the market, whether it's suburban or urban. About 25% of the market, actually, 25% to the end. Around 8 to 9% is dedicated corporate headquarters. those kinds of projects are still moving forward, right? And I think those are the projects, whether they be in suburban locations, it's fueled by that push towards more hybrid work,

that you have a central locus or a node where you can bring workers to, whether that's once a month, once a quarter. So those kinds of projects seem to be moving forward. The last part of our office data, which is a little different to, think about is we put data centers in our office sector. So it's data. If you look at our overall office market for 2023, it's only down 5% in terms of dollar value. But that's because data centers are boosting up. There's a huge demand for data centers. So to go back to your suburban versus urban question,

you're right. The urban market is in trouble. But that suburban market, because of those more build-the-suit corporate headquarter campuses, is actually doing reasonably well. It's just a small part of the market. Okay. And not enough to offset the down draft. Not enough, not at all. Yeah. So, so office is at the end, at the bottom of the distribution of construction activity. What else is down there with office? Maybe not as bad, a warehouse. A warehouse, yeah. I would view that though is more of a structural issue rather than an economic issue. So a warehouse project for us is whether it's a build-the-suit or a spec space, right? And in terms of our time series, which goes back to 67, starting in 2018 or 2019,

we've set construction records for warehouse every single year. And it's fueled by one person, Amazon. Oh, that would have been a great stat that I would have gotten. Yeah. That's why I didn't. So in terms of warehouse construction, Amazon's about 16% of the space. Wow. And we know that Amazon said, we're done, we're stepping out of this market. And so they're seeing that structural shift down. There's still a lot of demand, particularly for high-end, whether it's robotic or heavily conditioned warehouse space.

So even out through 2027, as this market shrinks, it's still going to be about where it was in 2018 or 2019 when it set records. It's just one big player stepped out of the market. So not economic per se, structural, I would say. Yeah. Although I would have thought there, too, that kind of the shift from goods to services in terms of consumer preferences might be playing a role too, right? Because it's reduced global trade and transportation, demand, and needs,

and therefore the need for a warehouse space. In fact, I think inventories of warehouses that I looked is still pretty influxing. and they're trying to work down those inventories. I would potentially offer a cross or a different way to think about that is you think about it from that last mile perspective that it's not just construction workers that are short. It's not just manufacturing workers. It's truck drivers. And so there's probably an incentive for warehousing and logistic companies to build more units,

more space that are closer together. So more spoken hub rather than a big five or six million. square foot facility because you just don't necessarily have the drivers to fill in all the local spaces. You need more small local distribution facilities. So that might be a counter to that, I would think. Yeah, very interesting. Like there be a boost from on-sharing or near-shoring? Yeah, maybe. Shoring of manufacturing. Yeah. Absolutely. Yeah. It's just amazing the cross-currents. Exactly. But yeah, but there's so many cross-currents. Okay. So let's look at the other side of the distribution, what's booming. You mentioned data centers. That seems pretty clear, given the cloud and

maybe Bitcoin, I don't know. We do have Bitcoin mining facilities included as data centers, and we're seeing a few of those come up for sure. Yeah, yeah, yeah. So what else is at the top of the list of sectors that are doing really well? Yeah, I would put three in here manufacturing. Manufacturing. Absolutely. There's your onshoreing. There's your on shoring, yeah. Healthcare. whether it's hospitals, whether it's clinics, you know, the dock in the boxes or the urgent care centers, as well as laboratories, life science buildings. Yep. Philly's booming, right?

Absolutely. So those counter some of those weaknesses that we're seeing in the office, retail warehouse space. Right, right. And the manufacturing industrial, that is people, manufacturers bringing back production. in part because of the supply chain issues related to the pandemic, in part because of perhaps relationships with China and bringing in those supply chains. And of course, policy.

We've got policy that's helping here, too. Chips Act would be an example, I guess. It's turned it into between chips and the Inflation Reduction Act, fueling EV and the battery plants. It's somewhat turned the sector into a quasi-public sector. Interesting. If we look at our concerns, instruction starts for for 2022 manufacturing, $101 billion.

In terms of our data set back to 67, nominal dollars, that's a record. If you look at it in square fee or constant dollars adjusted for inflation, it's a 35-year high. Amazing. And there's a lot of stuff in the pipeline. There's a lot of projects sitting in the pipeline that are ready to go. So just to complete our discussion around the non-residential commercial market, is there anything else you want to call out that I, Was, that I didn't tease out, anything, any other, uh, observations you want to make there? No, I, I think that that lab, that life science work, that laboratory, the, the, the health care, the clinic, that's really, we're looking at the action is that that we've seen in those two sectors.

Very cool. Okay. Are you seeing any, uh, hotels being built? Uh, had a good year last year. It's down this year. We think it's going to continue to be down. What's interesting, though, is, again, if, If you look at the pipeline, I think there's a floor on activity. When you look at the kind of projects that are sitting in the planning cycle and you look at it by value class, there's a lot of high end and luxury properties that are nearing the end of the planning process about to break ground. I would say those are, I don't want to say recession proof or slowdown proof, but those projects are likely to go ahead regardless in 2023.

going back to the assumptions of no recession, you know, debt ceiling, whatnot. So that provides a floor for hotel activity. And if you look further down in the value chain to more of the mid-market, mid-market with food, there's a lot piling up in the early stages of planning that I think is really good news for 2024 once the economy is on much, much solid or footing. Great. Well, let's play the game, the stats game. everyone picks a statistic.

The rest of the group tries to figure out what that is through clues, deductory reasoning, and questions. And the best stat is one that's not so easy. We get it immediately, one that's not so hard. We never get it. And if it's apropos to the conversation at hand, all the better. And still tradition, Marissa, we're going to go with you first. What's your stat this week?

29%. in April. In April. 29%. Government statistic? No. Did it come out this week? Yeah.

Is it related to what we're talking about here, the construction trades? Yes. Okay. I know the National Association of Home Builders came out with their sentiment index, but that was good. That was like 50. Yeah. But I know you, you like to dig deep into the bowels of these reports.

Is it in that report? No. Oh. Okay. Chris, Richard, any ideas? 29%. It's related to real estate. Is it on the residential side of the market?

It is residential related, yes. Is it a year-over-year figure? No. No. Is it banking related? It's a share. It's a share. It's a share of something.

Okay. Ah. Hmm. It's not, it's a report that came out this week, but not a government report. They didn't know. I can't think of what that would be. Can you give us any other hints, Marissa? So it's not NHB, but it's.

Something along those lines. NAR. Oh. Is that the number? Home sales. Is it the number of the share of metropolitan areas that did not experience price to claim? No. Okay.

Oh, existing home sales came out, right? So 29% share. So what would the share be in there? There was 29% right? Yep, 29%. It's in the existing home sales report. Yes. Yeah, 29% of home sales are in the south.

I'm making that up. No. Is it regional? No. No. I don't know. Guys, I think she's got us. Yeah.

Yeah. Okay, we give. Give up. Yeah, we give up. I give up. It's the share of home sales made up by first time home buyers. Oh. Oh, that's a good one.

Of course. And that is up a tick from the previous month. It was 28% in March. And it was 28% in April of 2022. But that is very close to an all-time low, since NAR's been tracking the series. So the all-time low was in November. It fell to 26%.

So it's just going to this affordability, what we were talking about, about the single-family market and the demographics. The corollary statistic is the age of the first-time homebuyer has risen to 36. It was 33, like two years ago.

So as affordability erodes, it's just more and more difficult to get first-time. buyers into the market. Is that, is that 36-year-old, is that NAR data as well, the realtor data as well? Does it come from the realtor report? Is that some other? It's from realtors, yeah. It is. Okay. Wow. That is interesting. Yeah, it makes a lot of sense. That's good. We should have, we should have gotten that. Chris should have gotten that. But that was, that was good. That was very good one. Chris, you want to go next?

Sure, 33%. statistic that came out this week? Yes. Housing related? It is housing related. It is a statistic I constructed, though. From government data? Yes.

So I'll hint is existing home sales is an input into the calculation. In what was this number again? 33%. And the data from the existing home sales is part of this this calculation, 33%. Um, well, let me, that's a little misleading. Uh, 32%.

It's, um, is it, is it, it's a share of, let me make it easier. It's, uh, listings. What does this refer to? Oh, my end or, but. No. No. Foreign buyers? No. Investors.

Cash buyers. No. Cash buyers. Nope. Might be. That, that, that's pretty. close, I think, as well. Yeah.

It's a new construction. Oh. The share of active listings that are for new home construction. Okay. That's a record high. That's interesting. Wow. And it just points to the lack of inventory of existing homes out there.

So people are having to look elsewhere. And if they can afford it, they're going with a new home. That is interesting. I thought so. Yeah, yeah, right. What's it typically? What's the percent? Typically, do you know?

Oh, what was? 20 percent. Oh, 20 percent. 20 percent was what it was pre-pandemic, and that was high at the time. Uh-huh. So it's, right. Okay, just good, why, that brings up a really good question, and I don't want to go too deep down this route, but what do you ascribe the low inventory to?

Why is there such a lock-in effect? The lock-in effect. Yeah. It's number one. Existing homeowners locked in a record low interest rate. If they sell, they have to face a much higher rate. It just doesn't work for them. Of course, it was low before the pandemic, too, right?

Before interest rates rose. Right? I mean, inventories have been lean for quite some time. Yeah. Yeah, but they're especially in leisure. No, they're especially. It's even more of a disincentive. Right.

to sell. They hate their home and like their mortgage. That's right. Yeah, that's right. That's good way. So you renovate. Right. Mercer knows all about that.

Yeah. And Chris. Yes. Oh, really? I didn't know Chris is renovating. We just had a therapeutic session last week about our respective renovations going on forever. We can speak to those construction workers focusing on the larger projects and neglecting. Yeah, smaller innovations.

Definitely a problem. Okay, Richard, you're up. Sure. All right. This, I have a long list here, but I'll just pick the one off the top. 1985. Okay, so something happened in 1985. 1985 was the year that multifamily construction peaked.

Nope. A right concept, different sector. Oh, okay. Oh, piqued? Office? Yeah, Marissa got it. Office peak. I think, I think,

I think multifamily peaked in 1985, don't you think? Probably. That's not my stat, but that's... Yeah, well, you know... It's a half-half-it-out. Yeah, check it out. Yeah. So, 1985 was the peak year for new office construction.

And I... What I think is most interesting about that is each subsequent cyclical peak. Yeah. Has been lower and lower and lower and lower. And where I get stuck a lot, certainly talking to clients and folks in the industry is that these construction verticals, whether they're single-fam, multi-fam, education, that they're static. And it's important to remember that these are evolving markets.

Right. And the pandemic, at least in terms of office, it kind of spinal tapped it, right? It turned that evolution up to 11. But that change or that lack of declining demand for office space has been going on for decades. Yeah, that's interesting. Well, I guess 1985, that's also like peak of labor force growth, right? Because you had the boomers entering in, you had female participation rising quickly. So a lot of folks kind of piling into the, a lot of them more college-educated, white collar kind of piling into that.

market and now we're on the flip side of all of that. Yeah. And I think there were some tax depreciation. That too. That's the department. Right. Exactly. Right. 1985 was the peak of multifamily, uh, starts. I'm just saying. I am just saying. I'm just saying. Yep, there you go. Yeah. Um, okay, that was a good one. That was a really good one. Okay. I think mine's hard. Sorry. Uh, but I'm, I am good at giving clues. And I have two statistics about begin with the first one. Seven percent. Housing related?

It is construction related broadly. Okay. And think macro. You know, think big picture. Think about where we started the conversation. The share of the economy. Yeah, share of the economy. It's construction put in place.

The total value construction put in place. put in place across the whole shoot match according to the bureau not according to dodge although does the bureau of economic analysis use dodge data to construct its estimates i believe it does doesn't it yeah so actually census is a client of ours census i should say yes census yeah data as the basis for the put in place survey for non-residential right exactly so total construction put in place divided by nominal dollars divided by GDP is 7% and you've got data back in this case monthly data back, I think 30 some years. Guess what the average share is of GDP?

7% on the nose. It has a change. It goes up and down and all around. It peaked during the housing boom before the financial crisis. And it hit the bottom in the bust during the housing crash after the crisis. But, you know, we're exactly where, and it's been rock solid stable, you know, a couple years, you know, just rock solid, stable. Pretty amazing. Yeah. Oh, and I think your 15% probably, that in my mind makes sense if you consider all the so-called multipliers, right? You know,

all the inciliary businesses that are not construction, but are obviously driven off of the construction activity. And it feels like that would push it up to 14, 15%, at least in my mind's eye. Yeah. Typically, think of all the housing services. Yeah. Mortgage brokers, insurance, all that. There's a ton of stuff. Yeah. Okay. Okay. Here's the other one.

Same. Think about it in this context. 5%. 5%. Same thing. Big picture, macro. One was output. GDP.

This is... It's not productivity. Is it? It kind of... You're thinking along the wrong... Over the... Share of employment? Share of employment.

Exactly. But there's... 5% of all... all non-farm jobs are construction. You know what the averages? And here we have data back to 1933 from the BLS. You know what the average is? And go five?

Five percent. Five percent. I mean, I find that amazing. I just find that amazing. The construction trades are like right in, right exactly where they, you know, typically are. A lot, obviously a lot of churn, you know, up and down and all around. But, you know, a lot going on underneath the hood here.

but at the end of the day, we're still kind of landing around. And then I look at that, I go, it's got to be a pretty productive sector, doesn't it? If the output share is seven and the employment share is five, I don't know. I'm just pretty simplistic, but nonetheless, anyway. Okay, that was good. That was very informative. Yeah, very informative. Let's now with the remainder of the time, we've got turned back to a very important part

of the construction trades that we, at least I typically don't pay. much attention to, but I think we need to is public construction, public infrastructure. So what's the state of affairs there? I mean, given the bipartisan infrastructure law that was passed, are things kicking in? Are we starting to see that money get out? Aggressively. So, yeah, if you look at data that the White House releases, I think they put it out every two to three months, they give an update of how much the funds have been announced. 40% of all the street dollars have been announced 43% of all the water. and we're starting to see that flow through into starts. We're looking at across the country, north, southeast, west, street, bridge, water, sewer construction is up double digits far in a way.

What's interesting, though, when you think back to that, release to the nerd in me, if that 40% and that 43% announced from the White House, there's a big difference between announced, allocated, and spent. right so that's money that that announcement is just the initial dollars moving from Washington to Texas or wherever then Texas takes it and spends it out to the local DOTs or the state DOTs so there's a lot of money that hasn't been announced there's a lot of money sitting in the allocation pile and we're starting to see the end of the pipeline this starts increase so really really I think a positive outlook here although I I would offer there's a bit of a downside potential here too, right, to all this activity. And I hate saying this, but if we think about...

Before you go there, let's just dwell on the positive for another second. Just because there's something that's very important to our forecast for the economy, given your sense of the lags between, you know, the allies, and the actual implementation and the actual project beginning. When do you think the maximum impact of the infrastructure law will be to the economy, you know, in terms of the timeline, when should we expect that maximum impact?

Yeah, when we started building these assumptions into our model, we assume 23 and 24 would be the best years in terms of growth for infrastructure. We're pushing that out or we'll start pushing that out, I think, to 24 and 25. we are noticing a little more of a delay between that allocation and spend. I think that has a lot to do with labor shortages. It has a lot to do with material prices that are still very high.

So state and local communities, I think, are not putting the brakes on it, but they're certainly slow walking projects just to see if they can see some improvements and materials or labor allocation. Got it. And I mentioned the bipartisan infrastructure law. I mean, that's obvious. That's money directly to public construction. The Inflation Reduction Act, which was predominantly around climate-related investments,

does that also play a role here too, do you think? We are definitely seeing in our utility sector. So utility scale, wind and solar projects, part of the inflation reduction act was the extension of the production tax credit and the investment tax credit for wind and solar. So that has spun up a lot of projects. not just in the pipeline, but as well as in the start. So absolutely we're seeing that. It's big gains there. Okay. So you think that the kind of the, there will be wind in the sales here through 24, probably into 25. Yeah. Yeah. Okay. And even through 27, I think levels are still high.

It's just those dollars are starting to take it. Yeah. Yeah. They start getting kind of negative numbers because the level is starting to come back in. But it's just positive kind of growth rates, for the next year or two, you would expect? Very, very positive. Very positive. High double digit. High double digit. High teams.

Okay. Got it. Okay. So what's the negative? Well, as we've been looking at it and thinking about, and this goes for manufacturing and all the dollars that are flowing into the manufacturing sector, this is a competition for labor. And so the concern that we have is that smaller and medium-sized non-residential projects are

going to get crowded out. They're not going to have access to workers or materials to get these projects done. So I think that's just an added downside. We've seen this before too, right? When just prior to the pandemic, where a lot of construction was in downtown urban cores, these big mega projects, it essentially squeezed out any small to medium size projects in the area because they're just not enough labor to go around. So I think that's a particular downside to whether it's the public side of the building market for schools and health care or whether it's the private side of the building market. I think there's an incredible, I hate to say the word risk, but there is a downside to all these dollars, all these public dollars, fueling, manufacturing and infrastructure. It's

positive for the sector to be sure, but there is a downside there. I guess if you're in the construction industry, you say, I'll take it. I mean, you know, I was talking to a client about infrastructure and I got to that point in the conversation. I said, well, here is where it gets a little bit boring, right? Because everything is up. It's just the rising tide lifts all boats. And he's like, whoa, whoa, whoa, whoa, whoa, whoa, whoa, you know, this is nothing about this is boring. This is, you know, the best news you've had all day. Yeah. Right. And I, you know, I, you know, we are seeing wages in the construction trades rise rapidly, which goes to the construction costs and to your point about delays in construction projects. But presumably that should help alleviate, you know,

some of the labor issues, you know, going forward. But you're right. It's this competition, you know, against other parts of the economy. Okay, very good. One last thing, and somehow I don't want to end on a down note, but the debt limit. Obviously, that's top of mind as the president is negotiating with Speaker McCarthy. Feels like we're getting kind of happy talk. So that today was last hour I lucked. That could change very quickly. But it feels like we're coming to a deal. And hopefully we do in the next week or two without too much kind of drama and damage. But it sounds like you took our couple breach scenarios and ran them through your models to gauge what kind of impact they would have if we actually did breach the debt limit. Do I have that right?

You have it right. Yeah. We do. Okay. Your short breach and your prolonged breach and ran them through our econometric models. And it was stark, to be honest. The short breach was fairly mild. I think I mentioned at the outset, we're looking at total construction up two in

2023. That short breach scenario would change that plus two to a minus three. Okay. So it has ran scenarios through our system very similar numerically in amplitude to, I think it's your S3 scenario in terms of the impact on, not the macro side, but just the impact on construction starts. but the prolonged breach was scary. That plus two in baseline changes to a minus 14.

Yeah. And when we look peak to trough, down 30%. Oh, really? Down 30. And you go back to the Great Recession, peak to trough was down 40. Oh, wow. Okay. So this would be over a shorter period of time. Right.

Right. And of course, that doesn't account for what will be in either scenario. higher interest rates going forward, right? Because investors are going to demand a premium thinking, well, you guys breach this time. What about next time? And the time after that and demand a risk premium. Yeah. Right.

Right. That's interesting. Very good. Hey, I want to end with something we haven't done in a few podcasts and talk about probabilities of recession. And Richard, I don't know if you've thought about this at all. But if you have, I'd like to get your opinion. But let me start with Marissa.

Can you just remind everyone what your probabilities of recession starting in 2023 are and in 24, what they were and if they've changed at all? I'm still at about 50% for 2023. Okay. 2024, I'd up it to 55. Okay. And that's not different than it's been. Not materially different.

No. Yeah. So your mood hasn't changed here. Not really. by all the whatever is going on. Okay. Christ, what is your probabilities?

Well, before I give them, let me just announce to, because you said it, the headline across the wire now is that the Republicans walked out of that ceiling talks. Oh,

the White House isn't being reasonable. So put that in your calculus. Yeah, here we go. Well, it was too good to be true, right? I mean, 45%, 65%. 45%? 45% this year.

this year, next year, in 2024. And that sounds the same, kind of sort of where you've been. Right. Okay. Richard, I know that it's putting it on the spot here,

but do you think about things in these terms? Do you have a sense of the probability recession this year and again next year? Yeah. We certainly put thought into it. We look at all your scenarios across the, the, the spectrum. I would say I pretty much agree with Marissa here.

50, maybe a little bit less than 50 for this year. 55, maybe a little bit higher than 55 for 24. Okay. All right. And has that changed in any material way? Not recently now. Not recently. Okay.

Okay. All right. Well, I think I'm at now 40% for 2023. It's lower. I was at 45 down to 40. And I'd say maybe 50. in 2024, you know, I'd say on the south side of 50 for 2024. I'm feeling increasingly confident that we're going to make our way through without an

economic downturn. Inflation feels like it's coming in reasonably gracefully. It feels like the Fed is done tightening, if not, very, very close. And it feels this economy is just so resilient, no matter what's thrown at it, all the slings and arrows, Russian war, debt limit drama. a kind of an unprecedented increase in interest rates, we still keep chugging away. So I don't know. I'm feeling, I'm feeling better about things than I have.

Even after Chris's statement. Yeah, despite Chris's headline. Well, I thought I could sway you. Yeah, I mean, didn't you think all that happy talk was too good to be true? I mean, really, that this doesn't sound right to me. They didn't sound right to me. They have to come to an agreement by, what, Sunday or something? Is that?

They can suspend, you know, push comes to show. of, you just suspend. Yeah, they could, but will they? I think the odds of that are high. I mean, if the alternatives I'm going to breach, I think the alternative would be, you know, because they're negotiating. It's not like they're not negotiating. So I think they would do that. But, I mean, I'm not, if there's a breach, then, then we're all wrong, right?

Because we were all below 50%, because it's going to be going in recession this year. just a question of. Yeah, but some of us are more wrong than others. I guess so. I guess so. All right, Fair enough. All right, but I don't think that's going to happen. You're not handicapping a breach here either, are you, Chris?

No. No. I think it's still part of the game. It's still part of the game. I mean, at the end of the day, McCarthy's got to get some of these guys on the Republican side to vote for it.

And if he gives in too early, they're going to say, you didn't fight hard enough. I'm not voting for that, right? So I'm not surprised. I'm not surprised. Great.

Anything else? When we missed anything? That was a wonderful conversation. I feel like I've got a much better grip on what's going on in the construction part of the economy, which is a key part of the economy. I think, you know, because going back to my glass, have full kind of perspective, you know, the fact that the construction trades are just simply hanging in there is like, whoa, that's amazing, right? Because interest rates have risen dramatically. Yeah. It's the most

interest rate sensitive sector of the economy, and it's doing okay, really? Okay. I mean, go figure. I mean, that feels like another reason that I hate to say it. Chris, just don't say it. Okay, I won't say it. He knows what I'm going to say. Okay, I won't say it. I won't say it.

Anyway, I think we're going to call it a podcast. Hey, Richard, thanks so much. Yeah, thank you guys. I really appreciate the conversation. Really appreciated it. And with that, we're going to call it a podcast. Take care, everyone.