The construction market is the source of both headwinds and tailwinds for the industrial economy. U.S. nonresidential construction spending has climbed to a record level of $1.2 billion annually. Yet underneath the surface there are clear leaders and laggards depending on verticals, region and type of projects. For example, certain verticals within the construction market continue to grow at a record pace (data centers, manufacturing, infrastructure) at a time when rate-sensitive verticals are entering a downturn (commercial, private office, hospitality). Market leadership in specialized verticals scale to address larger megaprojects, and geographic exposure matters more than ever.
Hallmark legislative agendas (CHIPS Act, IRA, IIJA) and technology capex are driving a seismic shift within construction: a record amount of megaprojects (those with greater than $1 billion in value) in 2022/23 broke ground across electric vehicle (EV) manufacturing, semiconductors, liquified natural gas (LNG), highways and data centers. Manufacturing is now the largest (and fastest-growing) vertical within construction. Manufacturing comprises ~30% of private nonresidential construction spending vs. just 15% in 2020. Construction spending in the manufacturing sector increased 19% year over year (YoY) in June, yet the growth rate is moderating (2022: +53% YoY, 2023: +55% YoY) following a lower level of projects “breaking ground” this year.
However, other areas of construction are not immune to higher rates and a slowing economy. Projects breaking ground in warehouses, private offices and hospitality are all down this year. Rate-sensitive verticals remain below prior peaks (adjusted for inflation), and weakness is building through 2024: commercial is down 14% YoY so far this year, lodging has fallen 11% YoY and recreation is 9% lower YoY. Leading construction indicators such as Architecture Billings remain depressed. These verticals are likely to remain under pressure until visibility on a Fed easing cycle emerges.
On the contrary, data centers are one of the few verticals where growth is reaccelerating into 2025. Channel checks indicate that contractors that specialize in the data-center market are observing record backlogs and are even turning away work, a stark contrast to general contractors with more broad-based end-market exposure. The data-center market is a tailwind to construction, yet some context is required as it comprises only 8–10% of private nonresidential construction spending, and equipment intensity is lower than on other megaprojects (EVs, semiconductors, LNG).
Simply put, big players with specialized verticals (data centers, manufacturing) exposed to well-financed customers are gaining share while the “tail” of the market struggles with more rate-sensitive verticals and customer bases. We believe certain equipment-rental companies are uniquely positioned to benefit from this backdrop given diverse fleets, entrenched relationships with national accounts and scale.
