The industrial and distribution sector continues to lead the commercial real estate market for investment and development prospects, according to Urban Land Institute’s Emerging Trends in Real Estate 2023 survey. Investor preference for this market can be seen as far back as before the financial crisis of 2008-09 because this sector historically enjoys low vacancy rates, making for a worthwhile investment opportunity, especially during an economic downturn.
Design and construction spending for the commercial real estate market is expected to increase 9 percent year-over-year (YoY) in 2023 to an estimated $125 billion. Investments are forecasted to be predominantly driven by warehouse and distribution centers, which will account for more than 50 percent of annual spending within the market. Sector property types include R&D, manufacturing, warehouse, flex, and fulfillment centers.
In February 2023, the U.S. Census Bureau released a new Monthly Subnational Construction Spending report for the private manufacturing market. At year-end 2018, private investment totaled approximately $72 million, and by 2022, investment totaled roughly $107 million, a 49 percent increase (see graph below for monthly data).
The manufacturing market, including public and private spending, is forecasted to experience growth until 2025. Investments are forecasted to grow 27 percent YoY in 2023, worth $138 billion, and up 9 percent in 2024, at $150 billion. Related market segments, including ports, rail, and transit, are also poised to experience increased investment due to the increase in manufacturing construction activity. Growth overlap worth $65 billion will also be felt in the communications market from the Infrastructure Investment and Jobs Act, which is slated to fund centers for data, manufacturing, logistics, and distribution.
The recently passed CHIPS and Science Act also intends to increase demand for domestically manufactured goods, which could lead to an improved U.S. supply chain. This new law intends to encourage local manufacturing activity, increase the number of jobs, lower the cost of goods, and ease supply chain pressures. The passage has led to the federal government investing $50 billion into American semiconductor manufacturing, with billions more expected from private sector semiconductor investments, according to the White House.
Forecasters at FMI believe that between 2025 and 2027, the manufacturing market could be negatively impacted by geopolitical tensions, trade disputes and the net zero transition and will not be able to sustain its current level of growth, according to FMI’s North American Engineering and Construction Outlook, Second Quarter Edition. Demand for logistics facilities has recently slowed from record-breaking pandemic years, however, investments remain high.
Total U.S. design and construction spending for 2022, including private and public markets, showed a 10 percent increase from $1.6 trillion in 2021 to $1.8 trillion, according to the U.S. Census Bureau’s February 1, 2023, Construction Put-in-Place report. Private residential spending increased by 13 percent for the year, nonresidential increased 9 percent, and public spending increased by about 5 percent. Despite the Federal Reserve System increasing monetary tightness, rising interest rates, and a potential recession, the A/E/C industry remained strong through 2022.
Recently, the housing market showed its first decline since 2009. The National Association for Business Economics reported that housing starts were down 12 percent in 2022 with a projected 18 percent decline for 2023. FMI’s 2022 North American Engineering and Construction Outlook; Fourth Quarter Editionprojects rising interest rates through early 2023 and a 30-year fixed mortgage rate nearing 7 percent or higher. As of April 2023, the 30-year fixed mortgage rate in fact hit more than 7 percent. For the reporting year 2022, the largest nonresidential markets were transportation (19 percent); commercial (13 percent); power and manufacturing (tied at 12 percent); education (11 percent); and office (10 percent). Nonresidential segments, including the commercial real estate market, are projected to follow the residential market decline later in 2024-2025. Other markets, including transportation, will trend upward, given funding from the Infrastructure Investment and Jobs Act. Below are the market trends forecasted through 2026, per FMI:
The Private Side column in Engineering Inc. focuses on the private-sector markets listed above, and information and insights on economic data relevant to the industry. For more on these topics, subscribe to ACEC’s bimonthly Private Industry Briefs: https://programs.acec.org/industrybrief.
Diana Alexander, CPSM, is ACEC’s director of private market resources. She can be reached at email@example.com.