FMI'S Five-Year Forecast

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Hello, and welcome to another episode of The Market Edge, a podcast produced
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by the Market Intelligence Committee of the American Council of Engineering Companies.
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In each episode, we bring you insights from industry leaders and subject matter
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experts on the trends, challenges, and opportunities shaping the engineering
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profession and the markets we serve.
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This series is presented in partnership with ACEC Nationals Engineering Influence Podcast.
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I'm Diana O'Lear, Vice President of Market Intelligence, and I'll be your host.
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Today, I am pleased to be joined by Brian Strawberry, Chief Economist at FMI.
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Brian leads the firm's research on market sizing, forecasting,
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construction material pricing, and broader industry trends.
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His work focuses on primary research, market analysis, and forecasting models
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that help contractors, owners, private equity firms, and industry associations
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make informed business decisions.
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Brian also founded FMI's Construction Insurance Benchmarking Practice and is
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a frequent contributor to industry publications and thought leadership on the
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future of the construction and engineering markets.
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Brian, thank you so much for joining the Market Edge.
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Oh, thank you for having me. Yeah, thank you. Absolutely.
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So, Brian's perspective is especially valuable because FMI's research is among
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the key indicators many of us, including myself, watch to understand where engineering
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and construction industries might be heading.
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So, they have quarterly outlooks and long-range forecasts that provide a data-driven
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view of market demand, investment trends, and sector performance across the built environment.
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So with FMI's Q3 Outlook now released, this was an ideal opportunity to invite
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Brian here to discuss what's changing in the marketplace and where the most
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significant opportunities could emerge over the next five years.
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So without further ado, I'm just going to jump right into questions here.
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People want to know with this Q3 outlook being out there, what would you say
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are the two to three most important takeaways that AEC leaders should understand
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from this quarter's data if they weren't to read the report?
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Yeah gosh there there is a lot there however if you just look at the numbers,
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if you're just looking at construction spending the the environment looks pretty
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tame you know we've got uh you know.
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Basically a flat 2025, mild declines in 2026.
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But if you look under the headline numbers, there's actually a lot of volatility
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and a lot of big movements going on in the different segments,
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which I'm sure we'll get into.
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And there's a whole bunch of factors impacting why that is happening between
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the policy environment and supply and demand imbalances. So,
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yeah, looking forward to getting into that.
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So if you look across all the market segments that you track,
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what would you say are the growth or the major decline stories that you're seeing?
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Yeah, so there's growth concentrating in what I speak to as digital infrastructure,
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which I'm mainly talking about data centers, no surprise there.
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But then all the infrastructure that supports that build out.
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So power is a significant one. water communication.
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And then we've got a whole broader infrastructure kind of theme going on in our forecast.
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Where concentration is showing up this year and last is.
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A big decline in manufacturing that's really kind of pulling total non-res down this year.
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We've also got challenges in residential, single family and multi-family new
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construction is is looking like it's going to be down this year which is concerning but yeah growth,
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growth on the digital infrastructure side and then declines and manufacturing
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and residential and and you've got uh some some reasons and and movement therein.
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Yeah, let's stick with manufacturing for a second. So it's really been one of
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the defining stories of the last several years. It has been the largest and
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fastest growing market of them all.
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So what are you seeing in particular to that market today? And how do you expect
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it to perform over the next few years? Obviously, it's declining.
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Some say it's like, is it a rebalancing? Is it a bubble? You know,
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what do you think's going on there?
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Yeah, so it definitely looked like a bubble, all stemming from the Chips and
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Science Act, which started, I think, mid to late 2021.
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You started seeing spending in 2022 in an environment where inflation was a big deal.
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And so where we are currently, 25 and in 26 and,
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The declines that I'm speaking to are basically the backside of the spending
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wave, which is a large majority of the semiconductor fat plants.
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That's really interesting because, you know, we all thought that with the onshoring
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and the tariffs that it would potentially fuel that market further.
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But just like you're saying, it sounds like you can confirm that the spending is falling off.
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I mean, it's still a very large market. I think it's still the second largest
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market that's out there.
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But you're saying we're probably not going to see future growth there.
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So I'm talking about the declines last year and this year. I do expect kind
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of a broadening return to growth over the forecast period.
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But what we're seeing right now is declines. And that's bringing the whole industry down this year.
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I mean, you got the fab plants. You got a pullback in EV manufacturing,
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but we do see chemical, food and bev, metals, pharmaceuticals.
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There is a lot more manufacturing, kind of what I'm talking about,
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the broadening base coming.
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And we can see those projects. And it's just a matter of competing with the
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same resources that the digital infrastructure build out is pulling from.
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So the equipment and the labor. Really, another interesting trend here is the mega projects.
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So a lot of this is billion dollar plus projects, which is only limited to select,
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companies or stakeholders that can perform those projects.
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It definitely sounds like there's a bifurcation going on in the market,
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too. So I'm hearing semiconductor manufacturing lagging, but other segments
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within manufacturing are seeming to do well or are going to rise out of it.
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All right, so let's move on to data centers because that's another hot market right now.
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So they're dominating industry conversations, of course. Are they still the
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biggest growth story in design and construction? What are you watching most
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closely as AI-driven demand continues to expand here?
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Yeah, it's really interesting. I've been watching data centers for, gosh, at least 10 years.
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And so to put this all in perspective, as of five years ago,
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2021, the data center spend is 6x'd.
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And so significant growth, even before AI kind of took hold,
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now that AI adoption is part of the story.
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And, you know, where that goes, it's hard to say, but we've got robotics to think about and,
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you know, different, you know, gen AI, quantum computing, all kinds of things,
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that seem to continue to push the demand story for data centers.
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So, yeah, it is definitely the biggest growth story in our forecast.
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We do expect it to double basically over a five-year forecast,
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so going from about $60 billion to $120 billion.
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And what's really interesting is that data centers are tracked via the census
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as a subsegment under office.
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And so when you think about traditional office construction,
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and you're just looking at it at a segment level, you know, that the data center
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build, you know, is a lot different than a traditional office build.
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And it's just changing the shape of what we think about traditional non-rise buildings.
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So this sets up for a great, great follow-up question from one of our Market
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Intelligence Committee members.
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He wanted me to ask, quote-unquote, we're on a fine line between energy demand
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and the data center explosion.
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What would be the economic consequence if the balance shifts in one direction
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instead of both sides growing equally?
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So really, not only, I mean, I don't want to just say power because it's a water
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drag too. So what happens there?
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If you're talking about a balance at the segment level, I don't think that that,
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would happen. One needs the other.
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But currently there is a supply and demand imbalance impacting both segments
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where you got the same labor,
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similar equipment or same manufacturer's equipment that needs to supply the
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inputs on those projects. Yeah.
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There is some risk in the data center market in that, you know,
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if something disrupts the AI adoption curve or the needs for future data center facilities,
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then the power demands, kind of what we think of as a large load growth in our
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forecast, isn't needed.
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So I don't see that happening. That's not my base case. But,
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you know, the power growth story is rooted in the data center build out and needs there.
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So let's stay with that line of thinking, the power story. You recently told
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me about a new energy and power overview that FMI put out, and you forecast
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that more than a trillion in power-related investment is expected through 2030.
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So what's driving this growth cycle if it's not data centers,
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or is it in fact just them?
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And where do you see the biggest opportunities for contractors and investors? Yeah.
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Yeah, so what's driving the power forecast, and we've got to a 10% kegger on
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our power forecast. Yeah, like you said, a trillion dollar market.
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Approximately half of that is electric transmission and distribution.
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And another third is generation. We've not had a condition where,
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at least in the past several decades, where generation demand growth is on the path that it is.
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And that's coming from data centers, but it's also coming from manufacturing,
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reshoring, alongside electrification trends.
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So, you know, electric cars, electric appliances, and so forth.
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What I attribute most of that 10% CAGR to is large load demand growth.
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So 80% of it is coming from that.
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We've got another 20% coming from kind of grid sustainability,
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you know, just keeping things running.
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So when thinking about the large load growth.
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In that energy report, gas power generation, I think, has the highest kegger
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of anything that we've broken out,
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which is, again, tied to data center campuses and manufacturing.
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But then you've got the whole interconnectivity issue with transmission distribution
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also, you know, in that 10 to 11 percent CAGR.
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So everything is really needed.
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So I did want to ask a follow-up question on the data centers.
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Do you think these moratoriums that we're hearing about and this AI bubble,
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do you think that's going to slow things down or do you think we're going to
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see momentum continuing?
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Well, it's causing a lot of disruption in the data that I look at to forecast,
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data centers in that moratoriums are putting pressure on where the projects are going to end up.
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The owners of these projects want to get them done as fast as possible,
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or at least get them started as fast as possible.
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One, to navigate kind of the future of these policies, but then also just to,
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get their facility in the ground up and running.
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This is the private side of the market, and speed to market is very important,
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especially in an environment like this where there's such a demand imbalance.
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But these moratoriums are changing the landscape of where projects can go.
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Whereas historically, a data
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center owner would look for wherever there's cheap power and cheap land.
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And now we've got to navigate these policies that are set at the state level
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or local level on top of a pretty complicated environment, looking at labor,
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looking at availability of equipment.
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And then on top of that, the interconnection issues where you've got a multi-year
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backlog of interconnection requests ahead of you. Yeah.
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Yeah, that's causing a lot of disruption in the data that I look at,
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whereas we're seeing data center projects canceled for the first time since
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I've tracked this segment,
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whereas historically it's the
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hyperscaler owners, they know what they want to build and they go do it.
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Now you've got speculators in the market, and I have a feeling a lot of these
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policies are a result of the speculators entering the market.
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And the result of the policies is
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that the projects have become much more speculative in nature in that, you,
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know, if you've got a private investor, they might not want to have one project
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as their big bet as entering into space.
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It might create multiple projects.
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And then that results in, you know, a lot of noise in the project level data I look at to forecast.
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Yeah, I mean, it definitely sounds like these data center developers are facing
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an uphill battle with these local moratoriums. But I also wanted to ask,
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because I feel like I can't talk about data centers without power.
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And so I'm also hearing that transmission delays, the turbine delays.
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Do you think the supply chain can keep up with the power growth that's needed
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to fuel these data centers? Well, it's not.
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It's not already. Actually, I don't think so.
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I think if there wasn't an imbalance and we could produce as much equipment
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that was needed to get everything installed quickly, we would see a much more...
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Volatile spending curve. So when I draw these forecasts, I am accounting for.
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Delays and multiple delays and probably projects getting repositioned or shelved for whatever reason.
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Very insightful, Brian. I think I've got time for one more question before we wrap up.
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So let's do a little bit of forecasting. So looking ahead five years,
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because that's what the Engineering Construction Outlook does with FMI,
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which sectors do you believe will
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actually create or could create the most opportunity for our AEC industry?
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And what should leaders be doing today to position themselves for that future? We talked about power.
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That's basically at the top of my list. And if they're not already in data centers,
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you know, there's a connection there.
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Beyond that, I would say repurposing of buildings is a really interesting story,
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whereas we've got traditional office or maybe big box retail,
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things of that nature that need a new story or purpose in their communities.
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And then beyond that, we've got a new infrastructure bill that's on the table
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for the end of this year, which will likely get signed and approved by hopefully this time next year.
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And then that sets up for, you know, a lot of infrastructure and potentially
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new policies to help support other areas of the industry that are struggling.
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You brought up a great market that we didn't even get into, but that is definitely
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one we're looking at as well as the conversion opportunities and the affordability
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discussion of office to residential.
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But I wanted to ask one more, like, quick hit, if I could, because I'm interested in your opinion.
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Is it too late to get into data centers? If you haven't been in data center
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work at all, is it too late to get into it now? Is the market maturing in your opinion?
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I would say no. I mean, I don't see an end to the need to build these things.
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Of course, nothing lasts forever, but it is not in our forecast that spending declines.
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It continues to grow. It grows at a slower rate in the later years of our forecast.
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But, you know, it's $100 billion plus market by 2029, 2030.
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And, yeah, there's a lot of room there. Also, I would say getting into megaprojects,
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more broadly is going to be an interesting area.
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You know, if you look at kind of the split or the, you know,
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the kind of the case shape,
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that the industry is taking hold of with the digital infrastructure build out
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and manufacturing, playing in the mega project space is going to open up a lot
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of opportunities in the future.
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Well, thank you very much for that feedback. That's all the time,
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unfortunately, that we have for today. Brian, thank you so much for joining.
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Yeah, of course. Thanks so much.
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And thank you to our listeners for tuning in to another episode of The Market
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Edge. I'm Diana Olaire. See you next time.