Economists from the AIA, the National Association of Home Builders, and the Associated Builders and Contractors convened this week to deliver a midyear status update on the health of the construction sector. While recovery among the market sub-categories—commercial/industrial, multifamily, institutional, and single-family residential—has largely been uneven and will continue to be, the economist trio forecasts growth across the sectors through 2017.

“Revenue at architecture firms continues to grow, so prospects for the construction industry remain solid over the next 12 to 18 months,” said AIA chief economist Kermit Baker, Hon. AIA, in a press release. “Given current demographic trends, the single-family residential and the institutional building sectors have the greatest potential for further expansion at present.”

Baker and Dietz both kicked off their presentations by discussing household formation and home-ownership rates. Baker expressed concern about household formation, noting that the national home-ownership rate has fallen to the lowest level in a half century, and that it "looks as if we haven't quite hit bottom yet." Household formation is not at historically normal levels but is starting to pick up and is expected to continue as millennials age. However, Baker expressed uncertainty about whether the households formed at that time will be owners or renters.

Dietz noted that a slight recovery in household formation has been seen since the recession, but many of those households are renters. The biggest impediment for younger buyers to purchase homes is the lack of supply of affordable product. Dietz said there is a paradox in the fact that inventory of existing homes is extremely tight while the supply of new homes is growing. There is opportunity for home-building growth, but the lack of both affordable lots and labor is dampening expansion and construction of affordable homes for buyers.

From January to June of 2016, spending in the commercial/industrial sector was $113.2 billion, a 9.5 percent gain from the same period a year ago. Of that spending, lodging and office construction are up more than 20 percent each year-over-year, thanks to international capital flowing into the U.S. due to economic factors including the ‘Brexit’ decision in Europe and longtime low interest rates in the U.S. Commercial spending, which includes sub-categories such as retail, is projected to increase by just 6.5 percent from 2016 to 2017—roughly half of the prior year's gains and anticipated due to the projected slowdown in office construction in the next year.

In 2017, growth is expected to swing to the institutional sector, where spending is already up 3.2 percent in the first half of 2016 from the first half of 2015. Specifically, health care and education construction increased 2.2 percent to $19.6 billion and 6.2 percent to $41 billion, respectively, for the same period. Health care construction spending is expected to double in 2017.

“The demographics are incredibly favorable on the long run for health care,” the AIA's Baker said in a conference call on Monday discussing the mid-year forecast.

The hard-hit single-family residential sector has more than doubled spending since the market trough during the Great Recession, but it has a long way to go before reaching full recovery, the economists say. A combination of low lot supply, a shortage of skilled labor, and a tightening in financing is driving up housing costs and pricing many potential buyers—especially Millennials at the early stages of their careers and many with burdensome student debt—out of the housing market, according to the NAHB's cheif economist Robert Dietz.

Dietz also dove deep into the biggest impediments for residential building growth in the future, focusing primarily on the three L's: labor, lots (the low supply of them), and lending.

The lack of skilled, affordable labor has been plaguing builders across the country for years–and in the first half of 2016. As reported the past three months, construction industry employment continues to shrink. Job openings declined in March, April, and May, and increased in June to 3.0%. However, as the total number of separations continues to outpace the total number of hires, the job openings rate is representative of unfilled positions versus new positions being created and represents a shrinking workforce overall.

National construction industry employment in the residential building sector is up year-over-year, however, a fairly modest 4.3% increase from 690.5 in July 2015, to 719.9 in July 2016 has not eased stress. Dietz noted that in a NAHB survey conducted last year, builders expressed that labor was the top building challenge in 2015 and the top anticipated challenge expected in 2016.