AMU: Non-residential construction sends mixed signals

Some areas show signs of stabilization. Others are still buckling under structural pressures.

Across office and industrial construction, the blend of both sentiment and hard market data offers an outline of the trajectory of non-residential construction.

Office space

The commercial segment exhibited selected growth areas offsetting broader caution, but the office sub-segment painted a particularly gloomy picture.

According to Cushman & Wakefield’s Q2’25 “Office MarketBeat”, positive net absorption in Sunbelt metros such as Austin, Tampa, and Charlotte helped temper national weakness. New leasing activity in those regions was concentrated in modern, Class A space, which typically uses curtain wall systems and commercial glazing that is a boon to aluminum demand.

That said, nationally, vacancy rates remain elevated, and construction starts on new office buildings continue to decelerate.

Besides the actual rate of occupancy, the key aspect of that analysis is the “Class A” space designation.

Office buildings are generally grouped into three tiers: Class A, Class B, and Class C. Determining factors for these designations include age, location, amenities, and overall quality of the structure.

Class A buildings are the most modern, often located in prime business districts, with high-end finishes and energy-efficient systems. Buildings meant to attract tenants looking to upgrade workspaces or major companies with deep pockets. When you think of innovative curtain wall systems, “green” windows, and high-end heating, ventilation, and air conditioning (HVAC) systems, you’re typically thinking of Class A real estate.

Class B and Class C buildings are typically older and less well-equipped. In an economic doldrum, these buildings struggle to compete barring a substantial renovation. While the retrofitting process can drive its own demand for HVAC installations and window upgrades, investment can also be concentrated in replacing mechanical, electrical, and plumbing (MEP) systems, interior renovations, and security systems.

Office construction remains the clear laggard in the non-residential sector, with vacancy rates at 20.8% and continuing to rise, according to Cushman & Wakefield. In contrast, industrial real estate, while no longer at historic lows, now sits at 7.1%. (For context, the industrial vacancy rate hovered at 2.8% three years ago, underscoring the segment’s own problems.)

On the aesthetic design front, the most recent American Institute of Architects (AIA) and Dealtek Architectural Billings Index (ABI), a diffusion index measuring architecture firm billings, was in June and remained in contraction – below a reading of 50 – for the eighth consecutive month.

The ABI covers a wide swath of end segments in the building and construction sector – not just office-based real estate. The 46.8 reading for June was a decline on a sequential basis from 47.2 in May, while the year-over-year figure was slightly higher than the 46.4 level from June 2024.

Inquiries for projects improved on both sequentially and annually, and signaled an expansion at a reading of 53.6. The inquiries index has only sunk below the billings index four times in nearly 30 years: August 1998, August 2001, and March-April 2020. Meanwhile, the new design sub-index logged a 45.9 reading, the sixteenth consecutive month of contractions.

Regionally, the South was a relative bright spot with a slight increase in billings (50.6 in June), the only expansion across the four regions of the US. The others being the West (45.8), the Midwest (45.7), and the Northeast (46.5).

Industrial arts

The industrial segment continues to be one of the stronger performers in the US construction market, with the Sunbelt cities of Dallas-Fort Worth, Houston, and Atlanta leading in leasing and completions, according to Cushman & Wakefield’s Q2’25 “Industrial MarketBeat”.

The national market added over 100 million square feet of industrial inventory in the second quarter, underpinned by steady demand for logistics, distribution, and data center capacity.

Construction pipelines in the non-residential sector have been building up recently.

Planning activity has been surging for warehouses, infrastructure, and health care facilities, and remained robust for data center planning, as evidenced by the Dodge Momentum Index (DMI), issued by the Dodge Construction Network, hitting record highs.

The DMI is an indicator of non-residential construction valued between $100 million and $500 million, excluding manufacturing and transportation projects, that leads spending by about 12 to 18 months.

For non-residential projects across companies valued at $30 million to over $100 million range showed lengthening backlogs, according to data from the Association of Builder’s and Contractors’ June Construction Backlog Indicator, which widened to 8.7 months from 8.4 months in both May and the prior June in 2024.

That said, the growth (or lack thereof) in project pipelines broken down by company size varied significantly. This isn’t atypical, but it should be noted.

Queues for construction tend to expand as the value of a project or company undergoing the build-out climbs.

Companies valued at over $100 million added an entire month to their queue at an 11.9-month fulfilment timeline, from 10.9 months in May and 10 months in the prior year period, while companies valued between $30 million-100 million showed slight declines on a sequential and annual basis.

Infrastructure backlogs grew sharply from May to 9.3 months in June, from 6.8 months in May, while commercial and institutional schedules logged slight upticks on both annual and monthly bases.

A significant outlier across all segmentation dimensions, heavy industrial projects registered a sharp downturn to 6.8 months from 9.6 months last year.

What it means

To make sense of the fragmented building and construction picture, it’s important to distinguish among the types of indicators referenced here.

The DMI is a leading indicator, meaning it indicates what the construction spending market may be a year from now. It doesn’t mean that construction has started, but it does mean that demand for these types of buildings could remain firm over the next year and beyond.

Compare that to the Construction Backlog Indicator, which measures how many months of contracted work remain to be completed in the near term. So, contractors still have work booked – and it’s growing, especially for data centers, logistics hubs, and transportation, the latter of which is excluded from the DMI. On the other hand, backlogs for heavy industrial projects did decline from a year earlier, which might suggest that the segment has reached a peak.

Meanwhile, the Architectural Billings Index tends to track a phase of construction somewhere in between the two cited above. It tends to lead construction by several months, though not the 12- to 18-month period noted in the DMI. The soft figures may suggest that construction for the latter half of the year, or at least investment in such activity, might hit a lull by the year’s end. It should be noted that the ABI covers a wider swath of construction than just office or industrial projects, or even just non-residential.

The Cushman & Wakefield reports are fairly straightforward. Strong leasing and occupancy rates encourage long-term investment in additional commercial real estate units.

When sentiment-based indicators like the ABI are cooling, while planning-based ones like the DMI remain strong, and real-world backlog indicators are holding steady in some categories but dropping in others, it indicates a transition.

Projects under construction reflect optimism and have available capital from the six to 18 months prior to when they were in the planning and design phase. Now, high-end industrial and certain infrastructure categories are seeing firm demand, but the design pipeline is weak. The office segment remains the sector’s weakest link, which is little changed from a longer-term trend since the Covid-19 pandemic.

Aluminum demand tied to industrial construction is supported by construction already underway, but weakening design activity and continued high vacancy rates in office leasing might underpin lackluster demand going into 2026. If demand for Class A dips further, it may be a result of developers opting to upgrade Class B and Class C office space, which could be a tailwind on its own.

For those tracking regional disparities in the aluminum market as it pertains to non-residential construction, it might be time to look to the Sunbelt for finished product demand or greater scrap generation.