February 11, 2025 • 31 mins
The built environment is entering a transformative era.
Connecting the dots between evolving trends, market forecasts and what they mean for your business is crucial in today's landscape.
In this episode of FMI's Built-In Podcast, Partner and leader of FMI's Research and Analytics Practice Jay Bowman joins host Scott Winstead to share his perspective on the Overview.
They talk about sector-specific insights, key themes in the industry and how leaders are prioritizing strategic focus, technological adoption and resilience.
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Transcript
Episode Transcript
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(00:00):
Hello and welcome to our latest edition of Built In.
(00:04):
I'm your host, Scott Winstead, FMI Consulting President.
I'm excited to welcome Jay Bowman back to the podcast today to share his perspective
on the 2025 U.S. construction market overview.
Jay is a senior partner in our strategy practice and the head of our market research function.
His fingerprints can be seen on many of our market overview and outlook publications.
You may also recognize him from our quarterly market outlook videos, sharing his take on
(00:28):
where we think the market's headed.
Jay is our one-of-one internling.
He has a unique ability to analyze vast amounts of data, see the patterns that others don't,
and most importantly, connect the dots.
All in the support of helping clients make better where to play and how to win decisions.
At the risk of dating myself, he's our own EF Hutton.
When he talks, CEOs listen.
(00:48):
Well, Jay, thank you for being here and welcome back to the show.
You're my pleasure.
It's always fun to do this.
Well, to start out, I'd love to kick things off with a bit of context and with some
thinking it might be helpful to look back to look forward, so to speak.
So, as you think about it in those terms, curious, how would you characterize the last
four years for the U.S. construction market versus the next four from a spending standpoint?
(01:10):
Well, if you do start with the past, so saying, you know, what have we experienced over the
past, say, three, four years?
I think it is important because it puts, you know, what we projecting over the next, say,
four to five years in context.
And I think the word that comes to mind when I think of the past began, let's say, you
(01:30):
know, 21 through 24, the word would be remarkable.
I mean, the rate of growth that we saw in the aggregate exceeded 40%.
So I mean, it's been an exceptionally good run in construction, really, since the pandemic
ended.
And I say that because then you have to put into context, what about the next, say, four
(01:52):
to five years?
So it's not 40%, right?
Really kind of seeing over the next, say, five years, say, through 28, 29, just probably
like 3%.
So you're about a third of the growth of what you saw really on a year-to-year basis from,
say, 2020 to 2024.
(02:13):
And I think it's important, though, to put that in context because I think sometimes
we have the misguided interpretation of, oh, well, the market's not good.
You know, we're not getting that growth anymore.
And I think that you could look at it that way, but I think it would miss the point that
it is holding at an exceptionally high level.
I mean, you cannot maintain a pace, at least what we've seen in the modern era.
(02:39):
So going back to, say, the 1960s, a really more than a five-year period or so where you
can sustain growth at that level.
So this is sort of what that stair step, you know, we have this ramp up in activity.
Everything's kind of catching up, but it's still at an incredibly high level.
So again, even at 3% adjusted for inflation, it's still a really, really strong market going
(03:04):
forward.
Now, obviously it's different by different segments, but overall, I say that, you know,
the next five years, even though it doesn't have the growth, I think it's a very positive
outlook that it's holding at such high levels.
You know, a lot of what obviously contributed to that 40% plus growth, I would say it's
really with three main areas.
(03:24):
So one would be what we saw from the residential improvements market.
It might have been one of the strongest residential improvement markets we've frankly ever seen.
Public infrastructure was obviously a large part of that, particularly as it was funded
through things like IHA and IRA.
There was a lot of federal legislation that really bolstered that, but the real, I think,
(03:48):
driver in all of this was still manufacturing.
And even if you say manufacturing, you say, okay, well, it was about 100% increase in manufacturing
spending over the last two to three years.
And I've shared this with you before, Scott, but in my 30 years at FMI, I've never seen
any segment grow at that rate in that short of time period.
(04:12):
But then you also have to give me a little bit more specifics.
And we say manufacturing, well, that sounds great and all, but really it was everything
chip related, right?
So the kind of advanced tech in the computer electronics area.
That's where the growth was bar none.
So one of those are real positive and we can see continued investment in chips and all
(04:34):
the other things that make modern technology work.
It does create a little bit of a risk profile, right?
Because you can't sustain that type of trajectory and whether it's from a supply standpoint
or otherwise.
So that could be a risk in construction spending in manufacturing.
In fact, we're showing a contraction, but slightest of contractions over the next five
(04:56):
years in manufacturing is down, I believe, like 1% compounded annually.
Again, when you've increased spending by 100% over a two year time frame, I could care less.
But when you look at that manufacturing component, again, to put it into context, manufacturing
represented prior to this growth spur about 5% of total construction in the US.
(05:21):
That two year span put it to 10%.
So now one out of every 10 construction dollars in the US is going into some type of manufacturing
and mostly on the tech side.
Thanks, Chad.
I appreciate you sharing some of the underpinnings of the 40% and what's driven construction
in the last four years or so post pandemic.
As you think about that as a frame for the path forward, what are some of the key trends
(05:46):
that you feel are likely to shape the US market in 2025 and the next couple of years beyond
that?
Well, like I said, even if it's relatively flat market going forward, it is holding
historic highs.
If you go back and you think that, okay, really 2023, I believe, was the first time that the
US construction industry exceeded $2 trillion in total construction spending.
(06:11):
And going forward, you heard me say this multiple times before, but bull markets and bear markets
coexist at all times.
What I really see is sort of driving a lot of the spending going forward will continue
to be manufacturing just because again, the size that represents the single family homes
are actually making a strong bounce back.
(06:32):
Almost kind of opposite of what we're seeing on the multifamily, which we're seeing some
contraction there on the multifamily side.
And then the other big one, I think is really a lot of this is power and what we're seeing
in the utility space.
And all this is just a direct reflection again of the technological advancements and just
(06:53):
the, not just the advancements, but just say how prevalent it is and everything, particularly
now with the advent of artificial intelligence and what that means to data center construction.
So all these things are so power dependent that I think that's where you're going to
see a lot of the investment because it's not just powering these new projects or these
(07:16):
additional needs, but it's the homes and the businesses and everything else in between
as well.
But those would be the big areas I'd say these single family homes, continued growth and
manufacturing.
And then on the power side and probably just right behind it, water wastewater.
There's been several huge projects that have come out recently and will continue going forward
(07:38):
just as we see a lot of different markets expanding just with more people moving in,
net migration patterns, et cetera, but very, very bullish if we will overall.
I really think there's probably three things that are underpinning a lot of the demand
that we see going forward from a construction spending forecast perspective, but the big
(07:58):
three again, I'd say infrastructure investment, there's just seems to be continued emphasis
on infrastructure driven by federal funding and policy reauthorizations within new administration.
I think you'll see continued emphasis in infrastructure related things as part of, you know, making
it the country more resilient or just meeting the demands to compete on a world stage.
(08:22):
The technology integration is the second one and by no means is it second in terms of importance.
It's just the mention second.
But again, artificial intelligence, quantum computing, what we've seen from a 5G advancement,
all these things that are reshaping the data center construction market.
And then third just continues to be the manufacturing thing again in high tech sectors like semiconductor,
(08:46):
semiconductors and EV batteries.
Those will continue to drive growth over the next five years.
But if I had to kind of nail it down to those three, those would be the primary ones I'd
see is really driving a lot of the investment going forward over the next five years.
You mentioned that when the market first eclipsed the $2 trillion market, I'm reminded of a phrase
(09:07):
I think futures you hear talk about, you know, the futures here is just not evenly distributed.
You know, that $2 trillion isn't evenly distributed either.
And so as you think about that in the context of which regions and which cities, the way
we think about markets, which markets in the US do you feel like are emerging as real growth
markets?
Well, so there's two ways to look at it.
(09:27):
Let's just start with where do we see most of the growth occurring?
So it really be sort of in two areas, really sort of what census determines as the West
South central, but really it's the Texas market.
We look at different metro markets across the country.
Last year was sort of an interesting year.
And the fact that the Dallas Fort Worth Metroplex actually eclipsed Los Angeles as the second
(09:53):
largest construction market in the US.
And Los Angeles has perpetually been the second largest construction market in the US behind
New York.
And it's not that Los Angeles was contracting and Dallas was expanding and therefore eclipsed
in terms of size, it's just the rate of double digit growth that we've seen just from a demographic,
(10:15):
economic construction perspective.
Dallas Fort Worth is now the second largest and Houston is not too far behind at number
four.
And to put that into perspective, we're talking about metropolitan markets that have more
construction activity than some states do.
So for example, more construction activity in Dallas Fort Worth Metroplex and what you
(10:39):
might see in the entire state of Indiana, for example, or the entire state of Oregon.
So these are just massive markets.
But again, I'd say West South central, particularly Texas is a strong growth market, not only
because of what we're seeing from a business investment or infrastructure investment with
people voting with their feet, but also sort of the Ohio kind of River Valley area, a state
(11:03):
of Ohio, particularly with what we're seeing because of water availability and power, which
attracts more siding for data center construction and semiconductors.
And some of the largest projects in the country right now are in Ohio.
So we see some of that going on.
So those would be the two areas.
But the other thing I think you just got to remember is that, you know, there's roughly
(11:24):
400, less than 400 metropolitan markets in the US.
You mentioned the $2 trillion market, which is true, but half of that spending occurs
in less than 25 metropolitan markets.
So out of 400, you're saying that roughly two dozen, less than two dozen actually represent
50%.
(11:45):
I cut that number in half and I'm still over a third of construction spending.
So you do see this continued concentration spending in fewer and fewer markets, which
is great if you're there and maybe not so great if you're not there.
And if you are there, you're going to be inbound from a lot of the folks that are competing
in markets where there's not that activity.
(12:07):
So you need your future competition, right?
That's right.
That's right.
You know, Jay, I've heard you just touched on it, but just the 50% of activity happens
in 5% of the markets.
Just pretty fascinating.
I know you spend a lot of time in the market and with client boards and leadership teams
really thinking about where to play and how to play, you know, what markets to pursue and
(12:30):
what segments.
And so sort of the same question I asked just a moment ago, but if you'll take that to the
sector designation, so what sectors do you see as really breakout growth sectors over
the next few years?
I think of how I've decided where I think some of those growth markets are going to be
by first starting with sort of a spectrum, if you will, meaning that on one end of this
(12:54):
spectrum or this line is projects that are dependent on the economy, meaning if the economy
is good, rates are right, investment is occurring, people will build.
So I think of that as like developer driven type of work.
And then the other end of the spectrum, I think of it as terms of, well, it's not economic
(13:15):
condition that is striving.
There's something else that is creating demand.
And if I think about that, that end where it's economic developer dependent, well, then
I am looking in those markets that we were just talking about places like Dallas, places
like Los Angeles, Atlanta, New York, et cetera.
(13:37):
And in those cases, you still are going to see growth actually in some of those areas
like office construction, lodging, you see even some multi-family growth, things like
transportation, you'll see some of those traditional segments, healthcare education, continue to
grow, but they become very strong market dependent.
(14:00):
If I think about that broader view of the other end of the spectrum where we're talking
about, well, things that aren't necessarily driven by the economy, and I don't get me
wrong, I'm not saying that the economy has zero influence.
I'm just saying that's not the ultimate driver.
That's where things like the semiconductors power the data centers come into place.
(14:22):
Don't believe, and I haven't had these conversations within these levels, but that some of these
data center developers are, as I say developers, like the Mendoza of the world and the AWS's
and et cetera, are sitting around saying, well, you know, we really shouldn't build
this data center because interest rates are at 6% or whatever.
(14:43):
That's not the driving factor.
So if I'm going to be really bullish on where those activities are going to be in the future,
I would really kind of put them squarely in sort of that manufacturing data center market,
if you will, just because again, just what we're seeing from a development standpoint.
And then it kind of pulls some of these others with it, mentioned power, mentioned water waste
(15:04):
or because those are requirements to operate those facilities.
So if I was saying, well, where the strongest markets over the next couple of years because
it's not dependent on the economy, meaning that if some recession were to happen or some
other black swan event between now and say 2028, 2029, I would still be confident in
(15:26):
development in those areas because again, the decisions that are driving were not solely
based on economics.
So let me give you an example.
We've talked about IHA and IRA.
So the transportation segment, which includes aviation, rail and transit and marine type
work is one of the faster growing segments over the next five years, companion rate just
(15:53):
north of 4%.
So I would say fairly good, particularly in comparison to all the others.
Manufacturing, you could say, well, maybe it's not so good because, wow, the company
annual growth rates forecast are the next five years is negative 1%.
So well, 4% must be better than negative 1%.
Well, yes and no, because if I compare them by size, I mean, okay, well, in 2025, let's
(16:19):
just take this year, for example, well, the transportation market, yes, is growing at,
let's say plus 4% companion annually, but total spending is around $70 billion.
So not an insignificant amount, but the manufacturing segment, even at that negative number is still
(16:39):
around $250 billion.
So more than three times larger than the spending in transportation, meaning that if I wanted
transportation to get anywhere near the size of manufacturing, I'm not talking about 4%
growth over five years, I'm probably, it had to be like 20, 30% growth on an annual basis,
(17:04):
right?
So I think it's important to rebalance those things out because I think a lot of times
the tendency for a lot of people to get enamored with percentage growth to the detriment of
just missing that there's still huge opportunities elsewhere.
But the public versus private markets, what are the shifts that you're seeing in the balance
to public markets versus private sector construction spending over the next few years?
(17:28):
Obviously, as I mentioned earlier with IJA and IRA, pushing more investment into the
public sector markets.
While that has been beneficiary, you still have to say that you have to realize that
roughly 75% of all construction spending in the US is private, the public, which includes
(17:49):
state and federal, is really about a quarter of spending.
I mean, that's not an insignificant amount.
But even with the big pushes that we've seen, you're talking a point or two difference.
Well, that translates to really big dollars as a balance or share wise, it doesn't really
move the needle that much.
It's still so dominant from a private perspective, particularly in the residential space is what
(18:13):
we think of, which makes up almost 50% of the market.
But we're still pricing the private market continuing to be the dominant share.
It's just like IJA and IRA, as I mentioned, have boosted a lot of the public spending,
well, the data center market and the manufacturing, particularly in the tech space, that's not
private.
(18:34):
So, you know, you're kind of getting it both ways, maybe.
So shifting gears a little bit, I want to come back to something you shared a little
bit earlier, Jay.
When you talk about the market and where things are headed, talk a little bit about just the
energy transition and how you see that unfolding over the next several years.
I think the transition of renewable energy will remain pivotal with probably over 90%
(18:57):
of new generation capacity likely coming from renewables.
Utility scale solar particularly, I think will expand because what we've seen not only
driven by federal incentives, but also based on some of the technological improvements we've
seen and also with batteries.
Simultaneously, I'd say that grid modernization and energy storage investments will accelerate,
(19:22):
particularly in light of meeting increasing demand from data centers and AI.
The wind is a little bit more of an unknown just because of the new administration, you
know, looking to probably stop some of those subsidies that go to wind.
And then there's the question of what happens from a Canadian perspective, and with geothermal,
(19:44):
not just geothermal, hydro basically is what I'm talking about being another form of energy,
particularly if we can import more of that power.
But I do believe that you will see this continued transition to renewables.
And I think one of the ones that has probably the most interest, but interest is always equate
to activity is small modular nuclear reactors.
(20:07):
You know, in my personal opinion, it makes all the sense in the world is clean.
It's cheap.
We've seen it work.
I mean, we have submarines and aircraft carriers that have been working on small modular reactors
for half a century.
And so that seems to be part of the equation going forward.
(20:29):
But there's a whole host of legalities and just personal issues that kind of go with
that.
But I think the good thing is that a lot of what nuclear was sort of conflated with, which
was weaponry, that generation, you know, is there's a whole new generation coming in that
(20:49):
Cold War and fear of nuclear weapons is sort of not the same as it used to be.
So I think you're going to start to see some of the friction towards nuclear start to subside
at the time.
So Jay, we've talked a lot so far about growth, which is super helpful.
I'm curious on that now on the flip side.
So what do you see as the biggest risks to the industry and to spending over the next
few years?
(21:10):
Well, in my personal opinion, there's really three.
And that's economic uncertainty, resource constraints and policy shifts.
And so from an economic uncertainty perspective, you look at some of the things that our economics
team measures and you would say that there are some red flags that suggests that there
(21:34):
is a potential for a recession, say 26 to 27 time period on the private market side.
Now just because those are flags doesn't mean it's going to happen, right?
But we know that recessions come and go.
I'm not counting on one, but I'm obviously keeping my eye on what happens.
(21:58):
I'm not just domestically, but internationally, that could cause some type of recession, if
you will.
The resource constraints is probably more of a concern.
I can't believe I'm going to say that labor is an issue because it's just a problematic
characteristic for our industry.
That hasn't changed in 60 years, but it has been more acute lately because of the growth
(22:22):
that we saw that 40% growth of the last couple of years.
But it's also just we're seeing from material standpoint, not just the material that is
used to construct these, but the chip shortages that we see and other things to kind of build
these things.
So resource constraints are probably more of a concern of mine.
(22:44):
If we can't get some of the things we need, and it's not just direct resources, like I
said, it's the indirect resources, the power, the water, et cetera.
And that third one being policy shifts.
With the new administration, what they have suggested, whether it's in terms of tariffs
or immigration policies, now obviously there's a Congress that gets involved with that and
(23:07):
how quickly some of these policies can be put in place, if at all, those could significantly
elevate cost, have impact obviously on material availability, workforce availability, et cetera.
So that could be a risk.
These represent probably more supply side risk than demand side risk.
So Jay, I have one question before my final question.
(23:29):
That is just, is there anything that either we have talked about that you feel like needs
to be elaborated on or anything that we haven't talked about, do you think it's worth adding?
Yeah, absolutely.
So I think this is where it gets to, how do you look below the surface?
I think Daniel Kahneman had a really good acronym he used, which is basically what you
(23:50):
see is all there is.
For example, an office growing at 4% competently over the next five years.
But that office is a blend of what we think it was traditional office buildings and data
centers.
And I've made the argument that, well, data centers are an office.
The only difference is it's a digital workforce instead of a human workforce.
(24:14):
But I think it does at least give indication of how we need to really be thinking about
what is happening and for the lack of a better word, what I call the source industry or go
back to the very front of the train that we're on, construction design, we're sort of at
the back end of the train.
People aren't designing and building infrastructure and buildings just for the sake of it.
(24:34):
They're doing it for one of three reasons.
They're seeking a financial return.
They're delivering a service or they're producing a product.
Beyond that, there's really no reason to design and build any type of building or infrastructure.
And so if we go back and we say, well, what is happening in these source industries that
will ultimately impact what is going to be designed and built is a skill set that we
(25:01):
have to increasingly as leaders develop.
So I'll give you one example, but there's one for every one of these segments.
But let's just take healthcare because it's one of the larger segments from a spending
perspective.
Well, if we look at what's happened over the last decade, let's say, or even really
last seven years, healthcare construction has been positive.
(25:25):
It's grown at a fairly good rate.
But if I give a lot of the surface, hospital construction has been relatively flat, whereas
medical office building, which include outpatient clinics, things like that have grown just
exponentially during that time period.
And so it's not because people all of a sudden are really interested in medical office buildings
(25:47):
or hey, I think I want to design and build a new clinic or an outpatient.
It is a reflection of what is happening in that source industry, which is a distributed
form of delivering healthcare, which then determines what is being built.
So what you used to have to have a doctor do within a TA could do it, now a nurse can
do it.
(26:08):
And so we're distributing out who can deliver that healthcare.
And by distributing out who can deliver the healthcare, we're distributing out the place
or the locale, which that can occur.
I don't have to have necessarily hospital to do that.
I can do it in a day.
I can do it in an hour.
I can go to a CVS or a Walgreens or whatever and see a nurse.
(26:29):
And so it's important, I think that we continue to look back at these source industries, particularly
as leaders of our organization, what is happening there that will make its way to something
that I care about in my position well, or that shift that is coming.
Yeah, we've talked a lot so far about the external market, which I think is great.
(26:51):
I always really appreciate your perspective on what you're seeing and where you think
things are headed.
Now for this last question, I'd love to shift a little bit and tap into what you're seeing
and what you're hearing inside these board rooms and inside these client strategy rooms
as you go out and do the work that you do.
So if you were to summarize the top three themes that you are consistently hearing from
(27:13):
clients, be it concerns or where they see opportunities or what are they asking you
and your team for, curious how you would frame those big three top of list items.
Yeah, it is a privilege to be able to sit in these meetings and see what people are
struggling with or what they're questioning.
(27:34):
And there probably are three big ones that I'm seeing more frequently, not necessarily
that they're out of the ogre.
And then you see different things being emphasized at different times, but those three really
being strategic focus, technological adoption and resilience.
Those are the big three.
The strategic focus, you know, so many of the firms that I've had the pleasure of working
(27:57):
with are really reevaluating not just service mix, but geographic expansion or coverage,
looking at underperforming assets.
Because we all know this industry operates at a very high level risk, very thin margins
(28:18):
in many cases.
And that strategic focus is really a way of protecting, I'd say, the organization more
than anything.
It reminds me of something that Howard Marx, one of the founders of Oak Tree Capital, has
always said, which is his job and I'm paraphrasing the CEO is primarily to keep the bad deals
(28:38):
out because the good ones tend to take care of themselves.
And I think the strategic focus is sort of a reflection of that, where a lot of leaders
are recognizing that, you know, one bad project might take 10 projects to make up for it.
So that focus of we're not going to try to be all things to all people, but where is
it that we excel, we can manage our risks, we can seek the returns that we want is a
(29:03):
big part of it.
The technological adoption, I think this is a challenge for everybody.
And nobody really has the exact answer yet.
We're all kind of trying to figure things out because things are moving so quickly,
but it's really understanding and leveraging artificial intelligence.
(29:24):
Artificial intelligence not just in its own from a knowledge perspective, but I think
from automation to improve efficiency to reduce risk.
This is a real game changer.
I mean, artificial intelligence to me is sort of like we go through this door and there's
no coming back.
And this is going to have this was one of those mega transfer.
(29:44):
This is going to have a significant disruption, just in even what it means to be in the AEC
industry to be a contractor, to be a designer.
And then the resilience one is probably one that I really appreciate trend wise to see
more than anything, because it's one of the things obviously that you and myself and others
(30:06):
at FMI for 75 years have really been pushing.
But how do you prepare for any type of market that may come?
I strongly believe that the right position changes everything.
And I do think that position can be knowable.
(30:28):
It goes back to what I was saying earlier about strategic focus, but it also has elements
of the technological adoption.
I mean, what are the tools and resources that we're going to use to strengthen that position?
But the right position absolutely changes everything.
It gives you options.
It sets you up for resilience and growth, despite what the economy may look like.
(30:50):
And I'm just really, really very pleased to see that really being part of the efforts
and the attention of so many leaders today in the AEC industry.
Jay, thanks so much for taking the time to be here.
That's a great one to end on and always great to be with you.
I appreciate you taking the time to do this.
My pleasure.
Thanks, everyone, for listening to another edition of Built In.
(31:13):
As always, please remember to like or subscribe to the podcast to make sure you don't miss
an episode.
And be sure to tune in next month when I'll be joined by Ed Kutsky, Executive Vice President
of Aldridge Electric.
Hello and welcome to our latest edition of Built In.
(00:04):
I'm your host, Scott Winstead, FMI Consulting President.
I'm excited to welcome Jay Bowman back to the podcast today to share his perspective
on the 2025 U.S. construction market overview.
Jay is a senior partner in our strategy practice and the head of our market research function.
His fingerprints can be seen on many of our market overview and outlook publications.
You may also recognize him from our quarterly market outlook videos, sharing his take on
(00:28):
where we think the market's headed.
Jay is our one-of-one internling.
He has a unique ability to analyze vast amounts of data, see the patterns that others don't,
and most importantly, connect the dots.
All in the support of helping clients make better where to play and how to win decisions.
At the risk of dating myself, he's our own EF Hutton.
When he talks, CEOs listen.
(00:48):
Well, Jay, thank you for being here and welcome back to the show.
You're my pleasure.
It's always fun to do this.
Well, to start out, I'd love to kick things off with a bit of context and with some
thinking it might be helpful to look back to look forward, so to speak.
So, as you think about it in those terms, curious, how would you characterize the last
four years for the U.S. construction market versus the next four from a spending standpoint?
(01:10):
Well, if you do start with the past, so saying, you know, what have we experienced over the
past, say, three, four years?
I think it is important because it puts, you know, what we projecting over the next, say,
four to five years in context.
And I think the word that comes to mind when I think of the past began, let's say, you
(01:30):
know, 21 through 24, the word would be remarkable.
I mean, the rate of growth that we saw in the aggregate exceeded 40%.
So I mean, it's been an exceptionally good run in construction, really, since the pandemic
ended.
And I say that because then you have to put into context, what about the next, say, four
(01:52):
to five years?
So it's not 40%, right?
Really kind of seeing over the next, say, five years, say, through 28, 29, just probably
like 3%.
So you're about a third of the growth of what you saw really on a year-to-year basis from,
say, 2020 to 2024.
(02:13):
And I think it's important, though, to put that in context because I think sometimes
we have the misguided interpretation of, oh, well, the market's not good.
You know, we're not getting that growth anymore.
And I think that you could look at it that way, but I think it would miss the point that
it is holding at an exceptionally high level.
I mean, you cannot maintain a pace, at least what we've seen in the modern era.
(02:39):
So going back to, say, the 1960s, a really more than a five-year period or so where you
can sustain growth at that level.
So this is sort of what that stair step, you know, we have this ramp up in activity.
Everything's kind of catching up, but it's still at an incredibly high level.
So again, even at 3% adjusted for inflation, it's still a really, really strong market going
(03:04):
forward.
Now, obviously it's different by different segments, but overall, I say that, you know,
the next five years, even though it doesn't have the growth, I think it's a very positive
outlook that it's holding at such high levels.
You know, a lot of what obviously contributed to that 40% plus growth, I would say it's
really with three main areas.
(03:24):
So one would be what we saw from the residential improvements market.
It might have been one of the strongest residential improvement markets we've frankly ever seen.
Public infrastructure was obviously a large part of that, particularly as it was funded
through things like IHA and IRA.
There was a lot of federal legislation that really bolstered that, but the real, I think,
(03:48):
driver in all of this was still manufacturing.
And even if you say manufacturing, you say, okay, well, it was about 100% increase in manufacturing
spending over the last two to three years.
And I've shared this with you before, Scott, but in my 30 years at FMI, I've never seen
any segment grow at that rate in that short of time period.
(04:12):
But then you also have to give me a little bit more specifics.
And we say manufacturing, well, that sounds great and all, but really it was everything
chip related, right?
So the kind of advanced tech in the computer electronics area.
That's where the growth was bar none.
So one of those are real positive and we can see continued investment in chips and all
(04:34):
the other things that make modern technology work.
It does create a little bit of a risk profile, right?
Because you can't sustain that type of trajectory and whether it's from a supply standpoint
or otherwise.
So that could be a risk in construction spending in manufacturing.
In fact, we're showing a contraction, but slightest of contractions over the next five
(04:56):
years in manufacturing is down, I believe, like 1% compounded annually.
Again, when you've increased spending by 100% over a two year time frame, I could care less.
But when you look at that manufacturing component, again, to put it into context, manufacturing
represented prior to this growth spur about 5% of total construction in the US.
(05:21):
That two year span put it to 10%.
So now one out of every 10 construction dollars in the US is going into some type of manufacturing
and mostly on the tech side.
Thanks, Chad.
I appreciate you sharing some of the underpinnings of the 40% and what's driven construction
in the last four years or so post pandemic.
As you think about that as a frame for the path forward, what are some of the key trends
(05:46):
that you feel are likely to shape the US market in 2025 and the next couple of years beyond
that?
Well, like I said, even if it's relatively flat market going forward, it is holding
historic highs.
If you go back and you think that, okay, really 2023, I believe, was the first time that the
US construction industry exceeded $2 trillion in total construction spending.
(06:11):
And going forward, you heard me say this multiple times before, but bull markets and bear markets
coexist at all times.
What I really see is sort of driving a lot of the spending going forward will continue
to be manufacturing just because again, the size that represents the single family homes
are actually making a strong bounce back.
(06:32):
Almost kind of opposite of what we're seeing on the multifamily, which we're seeing some
contraction there on the multifamily side.
And then the other big one, I think is really a lot of this is power and what we're seeing
in the utility space.
And all this is just a direct reflection again of the technological advancements and just
(06:53):
the, not just the advancements, but just say how prevalent it is and everything, particularly
now with the advent of artificial intelligence and what that means to data center construction.
So all these things are so power dependent that I think that's where you're going to
see a lot of the investment because it's not just powering these new projects or these
(07:16):
additional needs, but it's the homes and the businesses and everything else in between
as well.
But those would be the big areas I'd say these single family homes, continued growth and
manufacturing.
And then on the power side and probably just right behind it, water wastewater.
There's been several huge projects that have come out recently and will continue going forward
(07:38):
just as we see a lot of different markets expanding just with more people moving in,
net migration patterns, et cetera, but very, very bullish if we will overall.
I really think there's probably three things that are underpinning a lot of the demand
that we see going forward from a construction spending forecast perspective, but the big
(07:58):
three again, I'd say infrastructure investment, there's just seems to be continued emphasis
on infrastructure driven by federal funding and policy reauthorizations within new administration.
I think you'll see continued emphasis in infrastructure related things as part of, you know, making
it the country more resilient or just meeting the demands to compete on a world stage.
(08:22):
The technology integration is the second one and by no means is it second in terms of importance.
It's just the mention second.
But again, artificial intelligence, quantum computing, what we've seen from a 5G advancement,
all these things that are reshaping the data center construction market.
And then third just continues to be the manufacturing thing again in high tech sectors like semiconductor,
(08:46):
semiconductors and EV batteries.
Those will continue to drive growth over the next five years.
But if I had to kind of nail it down to those three, those would be the primary ones I'd
see is really driving a lot of the investment going forward over the next five years.
You mentioned that when the market first eclipsed the $2 trillion market, I'm reminded of a phrase
(09:07):
I think futures you hear talk about, you know, the futures here is just not evenly distributed.
You know, that $2 trillion isn't evenly distributed either.
And so as you think about that in the context of which regions and which cities, the way
we think about markets, which markets in the US do you feel like are emerging as real growth
markets?
Well, so there's two ways to look at it.
(09:27):
Let's just start with where do we see most of the growth occurring?
So it really be sort of in two areas, really sort of what census determines as the West
South central, but really it's the Texas market.
We look at different metro markets across the country.
Last year was sort of an interesting year.
And the fact that the Dallas Fort Worth Metroplex actually eclipsed Los Angeles as the second
(09:53):
largest construction market in the US.
And Los Angeles has perpetually been the second largest construction market in the US behind
New York.
And it's not that Los Angeles was contracting and Dallas was expanding and therefore eclipsed
in terms of size, it's just the rate of double digit growth that we've seen just from a demographic,
(10:15):
economic construction perspective.
Dallas Fort Worth is now the second largest and Houston is not too far behind at number
four.
And to put that into perspective, we're talking about metropolitan markets that have more
construction activity than some states do.
So for example, more construction activity in Dallas Fort Worth Metroplex and what you
(10:39):
might see in the entire state of Indiana, for example, or the entire state of Oregon.
So these are just massive markets.
But again, I'd say West South central, particularly Texas is a strong growth market, not only
because of what we're seeing from a business investment or infrastructure investment with
people voting with their feet, but also sort of the Ohio kind of River Valley area, a state
(11:03):
of Ohio, particularly with what we're seeing because of water availability and power, which
attracts more siding for data center construction and semiconductors.
And some of the largest projects in the country right now are in Ohio.
So we see some of that going on.
So those would be the two areas.
But the other thing I think you just got to remember is that, you know, there's roughly
(11:24):
400, less than 400 metropolitan markets in the US.
You mentioned the $2 trillion market, which is true, but half of that spending occurs
in less than 25 metropolitan markets.
So out of 400, you're saying that roughly two dozen, less than two dozen actually represent
50%.
(11:45):
I cut that number in half and I'm still over a third of construction spending.
So you do see this continued concentration spending in fewer and fewer markets, which
is great if you're there and maybe not so great if you're not there.
And if you are there, you're going to be inbound from a lot of the folks that are competing
in markets where there's not that activity.
(12:07):
So you need your future competition, right?
That's right.
That's right.
You know, Jay, I've heard you just touched on it, but just the 50% of activity happens
in 5% of the markets.
Just pretty fascinating.
I know you spend a lot of time in the market and with client boards and leadership teams
really thinking about where to play and how to play, you know, what markets to pursue and
(12:30):
what segments.
And so sort of the same question I asked just a moment ago, but if you'll take that to the
sector designation, so what sectors do you see as really breakout growth sectors over
the next few years?
I think of how I've decided where I think some of those growth markets are going to be
by first starting with sort of a spectrum, if you will, meaning that on one end of this
(12:54):
spectrum or this line is projects that are dependent on the economy, meaning if the economy
is good, rates are right, investment is occurring, people will build.
So I think of that as like developer driven type of work.
And then the other end of the spectrum, I think of it as terms of, well, it's not economic
(13:15):
condition that is striving.
There's something else that is creating demand.
And if I think about that, that end where it's economic developer dependent, well, then
I am looking in those markets that we were just talking about places like Dallas, places
like Los Angeles, Atlanta, New York, et cetera.
(13:37):
And in those cases, you still are going to see growth actually in some of those areas
like office construction, lodging, you see even some multi-family growth, things like
transportation, you'll see some of those traditional segments, healthcare education, continue to
grow, but they become very strong market dependent.
(14:00):
If I think about that broader view of the other end of the spectrum where we're talking
about, well, things that aren't necessarily driven by the economy, and I don't get me
wrong, I'm not saying that the economy has zero influence.
I'm just saying that's not the ultimate driver.
That's where things like the semiconductors power the data centers come into place.
(14:22):
Don't believe, and I haven't had these conversations within these levels, but that some of these
data center developers are, as I say developers, like the Mendoza of the world and the AWS's
and et cetera, are sitting around saying, well, you know, we really shouldn't build
this data center because interest rates are at 6% or whatever.
(14:43):
That's not the driving factor.
So if I'm going to be really bullish on where those activities are going to be in the future,
I would really kind of put them squarely in sort of that manufacturing data center market,
if you will, just because again, just what we're seeing from a development standpoint.
And then it kind of pulls some of these others with it, mentioned power, mentioned water waste
(15:04):
or because those are requirements to operate those facilities.
So if I was saying, well, where the strongest markets over the next couple of years because
it's not dependent on the economy, meaning that if some recession were to happen or some
other black swan event between now and say 2028, 2029, I would still be confident in
(15:26):
development in those areas because again, the decisions that are driving were not solely
based on economics.
So let me give you an example.
We've talked about IHA and IRA.
So the transportation segment, which includes aviation, rail and transit and marine type
work is one of the faster growing segments over the next five years, companion rate just
(15:53):
north of 4%.
So I would say fairly good, particularly in comparison to all the others.
Manufacturing, you could say, well, maybe it's not so good because, wow, the company
annual growth rates forecast are the next five years is negative 1%.
So well, 4% must be better than negative 1%.
Well, yes and no, because if I compare them by size, I mean, okay, well, in 2025, let's
(16:19):
just take this year, for example, well, the transportation market, yes, is growing at,
let's say plus 4% companion annually, but total spending is around $70 billion.
So not an insignificant amount, but the manufacturing segment, even at that negative number is still
(16:39):
around $250 billion.
So more than three times larger than the spending in transportation, meaning that if I wanted
transportation to get anywhere near the size of manufacturing, I'm not talking about 4%
growth over five years, I'm probably, it had to be like 20, 30% growth on an annual basis,
(17:04):
right?
So I think it's important to rebalance those things out because I think a lot of times
the tendency for a lot of people to get enamored with percentage growth to the detriment of
just missing that there's still huge opportunities elsewhere.
But the public versus private markets, what are the shifts that you're seeing in the balance
to public markets versus private sector construction spending over the next few years?
(17:28):
Obviously, as I mentioned earlier with IJA and IRA, pushing more investment into the
public sector markets.
While that has been beneficiary, you still have to say that you have to realize that
roughly 75% of all construction spending in the US is private, the public, which includes
(17:49):
state and federal, is really about a quarter of spending.
I mean, that's not an insignificant amount.
But even with the big pushes that we've seen, you're talking a point or two difference.
Well, that translates to really big dollars as a balance or share wise, it doesn't really
move the needle that much.
It's still so dominant from a private perspective, particularly in the residential space is what
(18:13):
we think of, which makes up almost 50% of the market.
But we're still pricing the private market continuing to be the dominant share.
It's just like IJA and IRA, as I mentioned, have boosted a lot of the public spending,
well, the data center market and the manufacturing, particularly in the tech space, that's not
private.
(18:34):
So, you know, you're kind of getting it both ways, maybe.
So shifting gears a little bit, I want to come back to something you shared a little
bit earlier, Jay.
When you talk about the market and where things are headed, talk a little bit about just the
energy transition and how you see that unfolding over the next several years.
I think the transition of renewable energy will remain pivotal with probably over 90%
(18:57):
of new generation capacity likely coming from renewables.
Utility scale solar particularly, I think will expand because what we've seen not only
driven by federal incentives, but also based on some of the technological improvements we've
seen and also with batteries.
Simultaneously, I'd say that grid modernization and energy storage investments will accelerate,
(19:22):
particularly in light of meeting increasing demand from data centers and AI.
The wind is a little bit more of an unknown just because of the new administration, you
know, looking to probably stop some of those subsidies that go to wind.
And then there's the question of what happens from a Canadian perspective, and with geothermal,
(19:44):
not just geothermal, hydro basically is what I'm talking about being another form of energy,
particularly if we can import more of that power.
But I do believe that you will see this continued transition to renewables.
And I think one of the ones that has probably the most interest, but interest is always equate
to activity is small modular nuclear reactors.
(20:07):
You know, in my personal opinion, it makes all the sense in the world is clean.
It's cheap.
We've seen it work.
I mean, we have submarines and aircraft carriers that have been working on small modular reactors
for half a century.
And so that seems to be part of the equation going forward.
(20:29):
But there's a whole host of legalities and just personal issues that kind of go with
that.
But I think the good thing is that a lot of what nuclear was sort of conflated with, which
was weaponry, that generation, you know, is there's a whole new generation coming in that
(20:49):
Cold War and fear of nuclear weapons is sort of not the same as it used to be.
So I think you're going to start to see some of the friction towards nuclear start to subside
at the time.
So Jay, we've talked a lot so far about growth, which is super helpful.
I'm curious on that now on the flip side.
So what do you see as the biggest risks to the industry and to spending over the next
few years?
(21:10):
Well, in my personal opinion, there's really three.
And that's economic uncertainty, resource constraints and policy shifts.
And so from an economic uncertainty perspective, you look at some of the things that our economics
team measures and you would say that there are some red flags that suggests that there
(21:34):
is a potential for a recession, say 26 to 27 time period on the private market side.
Now just because those are flags doesn't mean it's going to happen, right?
But we know that recessions come and go.
I'm not counting on one, but I'm obviously keeping my eye on what happens.
(21:58):
I'm not just domestically, but internationally, that could cause some type of recession, if
you will.
The resource constraints is probably more of a concern.
I can't believe I'm going to say that labor is an issue because it's just a problematic
characteristic for our industry.
That hasn't changed in 60 years, but it has been more acute lately because of the growth
(22:22):
that we saw that 40% growth of the last couple of years.
But it's also just we're seeing from material standpoint, not just the material that is
used to construct these, but the chip shortages that we see and other things to kind of build
these things.
So resource constraints are probably more of a concern of mine.
(22:44):
If we can't get some of the things we need, and it's not just direct resources, like I
said, it's the indirect resources, the power, the water, et cetera.
And that third one being policy shifts.
With the new administration, what they have suggested, whether it's in terms of tariffs
or immigration policies, now obviously there's a Congress that gets involved with that and
(23:07):
how quickly some of these policies can be put in place, if at all, those could significantly
elevate cost, have impact obviously on material availability, workforce availability, et cetera.
So that could be a risk.
These represent probably more supply side risk than demand side risk.
So Jay, I have one question before my final question.
(23:29):
That is just, is there anything that either we have talked about that you feel like needs
to be elaborated on or anything that we haven't talked about, do you think it's worth adding?
Yeah, absolutely.
So I think this is where it gets to, how do you look below the surface?
I think Daniel Kahneman had a really good acronym he used, which is basically what you
(23:50):
see is all there is.
For example, an office growing at 4% competently over the next five years.
But that office is a blend of what we think it was traditional office buildings and data
centers.
And I've made the argument that, well, data centers are an office.
The only difference is it's a digital workforce instead of a human workforce.
(24:14):
But I think it does at least give indication of how we need to really be thinking about
what is happening and for the lack of a better word, what I call the source industry or go
back to the very front of the train that we're on, construction design, we're sort of at
the back end of the train.
People aren't designing and building infrastructure and buildings just for the sake of it.
(24:34):
They're doing it for one of three reasons.
They're seeking a financial return.
They're delivering a service or they're producing a product.
Beyond that, there's really no reason to design and build any type of building or infrastructure.
And so if we go back and we say, well, what is happening in these source industries that
will ultimately impact what is going to be designed and built is a skill set that we
(25:01):
have to increasingly as leaders develop.
So I'll give you one example, but there's one for every one of these segments.
But let's just take healthcare because it's one of the larger segments from a spending
perspective.
Well, if we look at what's happened over the last decade, let's say, or even really
last seven years, healthcare construction has been positive.
(25:25):
It's grown at a fairly good rate.
But if I give a lot of the surface, hospital construction has been relatively flat, whereas
medical office building, which include outpatient clinics, things like that have grown just
exponentially during that time period.
And so it's not because people all of a sudden are really interested in medical office buildings
(25:47):
or hey, I think I want to design and build a new clinic or an outpatient.
It is a reflection of what is happening in that source industry, which is a distributed
form of delivering healthcare, which then determines what is being built.
So what you used to have to have a doctor do within a TA could do it, now a nurse can
do it.
(26:08):
And so we're distributing out who can deliver that healthcare.
And by distributing out who can deliver the healthcare, we're distributing out the place
or the locale, which that can occur.
I don't have to have necessarily hospital to do that.
I can do it in a day.
I can do it in an hour.
I can go to a CVS or a Walgreens or whatever and see a nurse.
(26:29):
And so it's important, I think that we continue to look back at these source industries, particularly
as leaders of our organization, what is happening there that will make its way to something
that I care about in my position well, or that shift that is coming.
Yeah, we've talked a lot so far about the external market, which I think is great.
(26:51):
I always really appreciate your perspective on what you're seeing and where you think
things are headed.
Now for this last question, I'd love to shift a little bit and tap into what you're seeing
and what you're hearing inside these board rooms and inside these client strategy rooms
as you go out and do the work that you do.
So if you were to summarize the top three themes that you are consistently hearing from
(27:13):
clients, be it concerns or where they see opportunities or what are they asking you
and your team for, curious how you would frame those big three top of list items.
Yeah, it is a privilege to be able to sit in these meetings and see what people are
struggling with or what they're questioning.
(27:34):
And there probably are three big ones that I'm seeing more frequently, not necessarily
that they're out of the ogre.
And then you see different things being emphasized at different times, but those three really
being strategic focus, technological adoption and resilience.
Those are the big three.
The strategic focus, you know, so many of the firms that I've had the pleasure of working
(27:57):
with are really reevaluating not just service mix, but geographic expansion or coverage,
looking at underperforming assets.
Because we all know this industry operates at a very high level risk, very thin margins
(28:18):
in many cases.
And that strategic focus is really a way of protecting, I'd say, the organization more
than anything.
It reminds me of something that Howard Marx, one of the founders of Oak Tree Capital, has
always said, which is his job and I'm paraphrasing the CEO is primarily to keep the bad deals
(28:38):
out because the good ones tend to take care of themselves.
And I think the strategic focus is sort of a reflection of that, where a lot of leaders
are recognizing that, you know, one bad project might take 10 projects to make up for it.
So that focus of we're not going to try to be all things to all people, but where is
it that we excel, we can manage our risks, we can seek the returns that we want is a
(29:03):
big part of it.
The technological adoption, I think this is a challenge for everybody.
And nobody really has the exact answer yet.
We're all kind of trying to figure things out because things are moving so quickly,
but it's really understanding and leveraging artificial intelligence.
(29:24):
Artificial intelligence not just in its own from a knowledge perspective, but I think
from automation to improve efficiency to reduce risk.
This is a real game changer.
I mean, artificial intelligence to me is sort of like we go through this door and there's
no coming back.
And this is going to have this was one of those mega transfer.
(29:44):
This is going to have a significant disruption, just in even what it means to be in the AEC
industry to be a contractor, to be a designer.
And then the resilience one is probably one that I really appreciate trend wise to see
more than anything, because it's one of the things obviously that you and myself and others
(30:06):
at FMI for 75 years have really been pushing.
But how do you prepare for any type of market that may come?
I strongly believe that the right position changes everything.
And I do think that position can be knowable.
(30:28):
It goes back to what I was saying earlier about strategic focus, but it also has elements
of the technological adoption.
I mean, what are the tools and resources that we're going to use to strengthen that position?
But the right position absolutely changes everything.
It gives you options.
It sets you up for resilience and growth, despite what the economy may look like.
(30:50):
And I'm just really, really very pleased to see that really being part of the efforts
and the attention of so many leaders today in the AEC industry.
Jay, thanks so much for taking the time to be here.
That's a great one to end on and always great to be with you.
I appreciate you taking the time to do this.
My pleasure.
Thanks, everyone, for listening to another edition of Built In.
(31:13):
As always, please remember to like or subscribe to the podcast to make sure you don't miss
an episode.
And be sure to tune in next month when I'll be joined by Ed Kutsky, Executive Vice President
of Aldridge Electric.
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