TRG | The Bottom Line – 5/26

A hotly discussed topic has been whether the non-res/commercial end market will see a soft patch in 2H’23 (i.e., anticipated weakness following a slowdown in resi) or will large-scale/mega projects in the works be enough to offset a softer light construction market. This past week TRG sought to settle the score on this debate with the publication of our thought piece, “Pip Pip, Hooray! (Non-res PIP Analysis): Follow the Money – Capital Flowing Into Non-res Supports Fullish Outlook.” On balance, our conclusion is a variety of key secular tailwinds, coupled with analysis of non-res PIP data, points to modest growth continuing over the next 2-3 years. TRG’s Q1’23 Survey Season outlined a bullish view on non-res construction – 1) current activity is robust, 2) backlogs for many GCs are at record levels, 3) there is a large pipeline of new projects coming to market still, 4) cancellations have been minimal, 5) projects are sizable (i.e., $1B+), and 6) office is a smaller portion of the pie given it has been a minimal and declining contributor since 2020+. Against this backdrop, investors’ macro views are worsening, interest rates are up meaningfully YOY, the banking system is shaky, and office financing is dour with many owners allowing defaults on their non-recourse mortgages on properties. While capital is flowing out of rate-sensitive verticals (office and commercial), an enormous amount of capital is flowing into a variety of other verticals. We are finding that the capital flowing in less rate-sensitive projects and far outweighs the challenged sectors. Industry contacts share there is not enough labor to complete projects quickly, and as such, we believe the non-res cycle is elongated at modest growth rates for the next 3-5 years.