Following a gangbuster year in 2023, spending on the construction of nonresidential buildings is estimated to slow to a more modest pace of growth of just over 7% this year. Next year, gains in spending are projected to grow just 2%, according to the American Institute of Architects’ Consensus Construction Forecast panel—a pace that likely wouldn’t even offset inflation in the cost of labor and materials for a typical construction project. While new construction may have led the charge in recent years, the real momentum now lies in reconstruction.
RENOS AND RETROS AND REUSE, OH MY
For the past two decades, the share of architecture firm billings from reconstruction projects—renovations, retrofits, additions, historic preservation—has steadily increased. Currently, U.S. architecture firms report that 46% of their billings come from reconstruction projects. That’s up from just 35% during the construction boom that preceded the Great Recession. And while adaptive reuse and conversion surged during the pandemic, the core issues plaguing the new construction outlook will have less of an impact on reconstruction moving forward.
As we recover from the distorted construction market during the pandemic, might we assume that the reconstruction fad has peaked? There are at least three reasons that the transition from new construction to reconstruction will continue and even expand in the coming years: our aging building stock; a renewed focus on building sustainably; and the ongoing high cost of construction.
The average age of buildings in the U.S. is about 55 years, and a 2018 government survey reported that 75% of all U.S. buildings were constructed prior to 2000. As a result, in a recent survey of architecture firms, 68% indicated that updating and modernization of the building interior was one of the principal goals of reconstruction projects that they have undertaken recently, while about 60% mentioned upgrades to basic building systems and to the building shell. The aging building stock has also put a renewed emphasis on energy efficiency. The U.S. Energy Information Administration reports that the building stock in 1979 used a third more energy per square foot than the stock in 2018. While much of this is due to the efficiency of newer buildings, some of that decrease in energy consumption is due to upgrading the efficiency of the older stock. Moving forward, more emphasis will be placed on improving the efficiency of existing buildings. The 2022 federal Inflation Reduction Act provides funding for building owners to reduce their energy use. Much of the funding made available under this $260-billion program has not yet been spent, and more than a third of the funding had not even been awarded as of its two-year anniversary—so more improvement is yet to come.
TO PUT IT SIMPLY
A final factor favoring gains in reconstruction work is simple economics. New construction is still expensive. Even though construction input prices have leveled off, they are still 35% to 40% higher, on average, than they were pre-pandemic. Existing buildings, in contrast, are more affordable. Compared to their mid-2022 highs, overall commercial property values have fallen an average of 12%, according to Real Capital Analytics, with apartments down 20% and offices down 24%. If there is a choice between building a new facility and retrofitting an older one, reconstruction will increasingly be the preferred option.
