The Dodge Construction Network held its 2023 Dodge Construction Outlook, a mainstay in the construction industry for more than 80 years. The forecast predicts that total U.S. construction starts will be unchanged in 2023 at $1.08 trillion. When adjusted for inflation total construction starts will dip 3%.
“As the clouds of uncertainty mount on the fate of the economy in 2023 the construction sector has already started to feel the impact of rising interest rates,” stated Richard Branch, chief economist for Dodge Construction Network. “The Federal Reserve’s ongoing battle with inflation has raised concerns that a recession is imminent in the new year. Regardless of the label, the economy is slated to significantly slow, unemployment will edge higher, and for parts of the construction sector it will feel like a recession.
“[This] year, however, will not be a repeat of what the construction sector endured during the Great Recession when the financial system collapsed,” Branch said. “Residential construction, already reeling from rising mortgage rates, will continue to contract and will be joined by nonresidential construction as the commercial sector retrenches. The funds provided to the construction industry through the Infrastructure Investment and Jobs Act (IIJA), The CHIPS and Science Act, and the Inflation Reduction Act (IRA) will counter the downturn allowing the construction to tread water. During the Great Recession, there was no place to find solace in construction activity – 2023 will be quite different.”
Nonbuilding/infrastructure projects will be supported by an infusion of public dollars through IIJA. Public works starts will gain 18% in 2023 (+12% adjusted for inflation) led by gains in streets and bridge work, while the utility/gas category will gain 8% (+2% inflation-adjusted) as the extension of the investment and production tax credits in IRA will lead to gains in utility-scale wind and solar projects.
Some other key takeaways from the 2023 forecast:
- The dollar value of single-family starts will be flat (-5% when adjusted for inflation), however, units will be down a further 6% to 891,000 units (Dodge basis) as higher mortgage rates and worsening affordability eat away at demand.
- The multifamily sector has been reaping the benefits of the affordability issues plaguing the single-family market, pushing demand for space up and vacancy rates down to record lows. The softening labor market and investment outlook will eat away at these gains in 2023. While the dollar value of multifamily starts will rise a scant 1% (-7% when adjusted for inflation), units will fall 9% to 723,000.
- Commercial starts will fall 3% in 2023 (-13% when adjusted for inflation) led by pullbacks in warehouse and office sectors. Hotel and retail starts will post tepid growth in nominal dollars, but when adjusted for inflation will also slip; but the declines will not be as dramatic as in office and warehouse. There is some positivity in the commercial space in 2023, though, as data center construction is expected to remain brisk.
- Institutional starts, meanwhile, will hold steady in 2023 (-1% inflation-adjusted) as gains in healthcare offset losses elsewhere. Traditional education starts (classrooms) have languished as slow demographic growth eats away at overall demand, however, life science buildings have flourished and will continue to do so in the new year. Healthcare starts will be the engine of growth in the institutional sector as greater demand for both outpatient clinics and hospitals is on the rise.
- Manufacturing starts have been robust since the pandemic as reshoring has led to numerous chip fabrication plants, EV battery plants, and other large facilities breaking ground. Manufacturing starts are expected to nearly triple in 2022, and while they will decline in 2023 the level of 2023 starts at $51 billion has not been seen since the beginning of Dodge’s historical starts time series in 1967. The CHIPS and IRA acts will support abnormally high levels of activity for years to come.
Cement Production
According to the U.S. Geological Survey, portland (including blended) cement consumption increased by 4% in the third quarter of 2022 compared with that of the third quarter of 2021. Consumption in the first nine months of 2022 increased by 4% compared with that in the same period of 2021.
But gains such as those may not last. The Portland Cement Association (PCA) released its fall cement consumption forecast for the United States, which projects a near-term demand decline of 3.5% for 2023 – the first decline in 13 years.
Thankfully, the softening of consumption is expected to be short-lived, with growth returning in 2024 (4.3%) and beyond (2025, 3.6% and 2026, 3.8%).
“Due to inflation and rising interest rates, economic growth is expected to remain sluggish through mid-2023 with unemployment reaching 4.7%,” said Edward J. Sullivan, PCA chief economist and senior vice president. “Inflation is expected to remain high, leading to further monetary policy tightening through this year and into early next.”
Residential cement consumption accounted for nearly 80% of growth in the demand for cement in 2021. This year, rising mortgage rates coupled with double-digit gains in home prices has resulted in a weakening in housing starts – a nearly 13% decline is expected in 2023.
Nonresidential construction is also expected to weaken as several sectors have not recovered from Covid-induced downturns. “Easing economic conditions typically result in higher vacancy rates and soft leasing rates,” explained Sullivan. “In the context of net operating conditions expected for 2023, nonresidential construction will likely add to the declines originating from the residential sector.”
While the national infrastructure program will provide some relief in private sector construction, its near-term influence is likely to be modest given the time required between spending allocations and actual pouring of cement.
In 2024, PCA expects a modest recovery as interest rates begin to ease and more significant impact is felt from the infrastructure bill.
Construction Spending
According to the U.S. Census Bureau, construction spending during November 2022 was estimated at a seasonally adjusted annual rate of $1,807.5 billion, 0.2% (±0.8%) above the revised October estimate of $1,803.2 billion. The November figure is 8.5% (±1.3%) above the November 2021 estimate of $1,665.2 billion.
During the first 11 months of 2022, construction spending amounted to $1,657.6 billion, 10.5% (±1.0%) above the $1,499.8 billion for the same period in 2021.
In November, the estimated seasonally adjusted annual rate of public construction spending was $381.1 billion, 0.1% (±1.5%) below the revised October estimate of $381.6 billion. Highway construction was at a seasonally adjusted annual rate of $115.0 billion, 1.0% (±3.3%) below the revised October estimate of $116.2 billion.
Other infrastructure categories also slipped. Spending declined 0.2% for transportation facilities and 2.0% for water supply projects. These decreases offset upticks of 0.1% for education construction and 0.3% for sewage and waste disposal construction.
Spending on private construction was at a seasonally adjusted annual rate of $1,426.4 billion, 0.3% (±0.5%) above the revised October estimate of $1,421.6 billion.
- Residential construction was at a seasonally adjusted annual rate of $868.0 billion in November, 0.5% (±1.3%) below the revised October estimate of $872.4 billion.
- Nonresidential construction was at a seasonally adjusted annual rate of $558.3 billion in November, 1.7% (±0.5%) above the revised October estimate of $549.2 billion.
“A variety of private nonresidential categories, as well as multifamily projects, posted solid spending gains in November,” said Ken Simonson, Associated General Contractors of America chief economist. “Many of these segments should continue to do well in 2023. But the timing of public construction, while well-funded, remains unclear.”
“The average nonresidential contractor starts 2023 with considerable backlog,” said Associated Builders and Contractors (ABC) Chief Economist Anirban Basu. “Not coincidentally, contractors also have significant confidence regarding current year prospects, according to ABC’s Construction Confidence Index, which indicates expectations for growth in sales and employment with margins remaining stable.
“November’s construction spending report suggests that this confidence is warranted,” said Basu. “However, there are countervailing considerations. First, growth in nonresidential construction spending in November was not especially broad. Much of the growth came from the manufacturing category, which is partially attributable to construction related to large-scale chip manufacturing facilities. The balance of growth came mostly from conservation and development, which includes flood control expenditures. Were it not for those two categories, nonresidential construction spending would have been roughly flat in November.
“Second, backlog could dry up,” said Basu. “Anecdotal evidence suggests that banks are more cautious in their lending to the commercial real estate and multifamily segments. Fears of recession this year remain pervasive in an environment characterized by high and rising interest rates. It will be interesting to see how well backlog will hold up as contractors continue to build and the economy heads toward what is likely to be a Federal Reserve-induced recession.”