Diving brief:
- Total U.S. housing starts will fall 3% when adjusted for inflation to $1.08 trillion next year, according to the Dodge Construction Outlook 2023.
- The report predicts that commercial housing starts, such as retail, office, warehouse and hotel projects, will fall 13% in 2023 after adjusting for inflation, driven by declines in the sectors warehouses and offices.
- Public funding will support manufacturing and infrastructure activity, but a slow economic growth environment will weigh heavily on the residential and commercial sectors, according to the report.
Overview of the dive:
High interest rates have started to weigh on key construction industry metrics, said Richard Branch, chief economist at Dodge, in a press release shared with Construction Dive.
For example, the Architecture Billings Index, a forward-looking indicator of construction activity, dropped significantly in October after 20 months of positive growth. Meanwhile, the Builders and Associated Contractors Backlog Indicator, which tracks work that construction companies have booked but have not yet started, Has fallen below its pre-pandemic reading from February 2020, largely due to a drop in the commercial and institutional category.
“The construction sector has already started to feel the impact of rising interest rates,” Branch said. “The Federal Reserve’s ongoing battle with inflation has raised concerns about an impending recession in the new year. Whatever the label, the economy is expected to slow significantly, unemployment will rise slightly, and for parts of the construction industry it will look like a recession.
Nonetheless, some sectors will continue to outperform, Branch said.
For example, Branch expects data center construction to “remain buoyant” as demand for colocation data centers grows, despite job cuts by Big Tech companies.
Meanwhile, reshoring, the make-it-here push among corporate America, continues to drive manufacturing startups, particularly chip factories and electric vehicle battery plants. These types of projects remain on track to nearly triple this year, according to the report.
Some massive space projects include:
While Dodge doesn’t expect that blistering pace to continue into 2023, its forecast for next year still sits at $51 billion. This is because the CHIPS Act and the IRA will support abnormally high activity levels in the coming years, according to the report.
Similar to the booming manufacturing sector, public funding will also support projects unrelated to construction and infrastructure, Dodge predicts. Public works starts will jump 12% after inflation, led by gains in street and bridge work.
Laggards in 2023 include the office, warehouse, hospitality and retail sectors, according to the report. Branch also expects single-family home starts to fall about 5% next year, when adjusted for inflation.
But Branch remains optimistic that a downturn in the construction industry this time around won’t be as bad as the Great Recession more than a decade ago.
“Funds provided to the construction industry through the Infrastructure Investment and Jobs Act, the CHIPS and Science Act and the Inflation Reduction Act will help counter the slowdown allowing the construction [industry] tread water,” Branch said. “During the Great Recession, there was no room to find solace in construction activity – 2023 will be quite different.”