Residential spending has been rising since February of 2019, increasing by nearly 18% on a year-over-year basis in November. These strong numbers helped to lift construction spending by 0.9% overall in November, according to data released this week by the Commerce Department.
The demand for housing was initially powered by the low interest rates put in place before the pandemic hit in March of 2020. It has since been bolstered by the extraordinarily quick change in housing preferences after the pandemic set in as families demanded more space between them and their neighbors.
While the data is undeniably robust, demand for housing will continue to outstrip supply this year, setting the stage for strong and sustainable growth in residential investment over the next two years at a minimum.
Nonresidential consumer spending peaked in the last months of 2019 when it became clear that the U.S. trade war would dampen global economic growth. The deceleration in business construction is increasing, falling by more than 5% in November.
One development that may put a floor under nonresidential investment is what I would call the “great conversion,” or the move to convert commercial real estate to residential real estate over the next few years. With the onset of the pandemic, occupancy rates for office buildings have been under pressure, prompting owners to rethink their best use. We think that this is something to monitor in the 20 major metropolitan markets.
We would expect the effects of the pandemic to have lingering effects on construction once the pandemic eases as firms and families rethink their living conditions and as businesses consider the risk and return of capital investment.
Much of the latter will depend on the size and scope of government injections of demand and the ability of the international trading community to find suitable solutions for what have become intractable problems.
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