Construction Outlook 2023
May 08, 2023 from Construction Dive
Recession watch: Why the next one will be different
Almost all economists and contractors expect some sort of an economic slowdown this year.
Some have even baked a recession into their current forecasts. But the unanswered question on many observers’ minds remains how this downturn will be different.
“Our early signs, like most contractors, is that a slowdown of some sort is coming as our projects are pushing to later time frames,” said George Pfeffer, member of the management committee team at DPR, a Redwood, California-based commercial general contractor. “We’ve been through several of these cycles and what we can say is there’s always something different.”
Pfeffer points to workforce shortages and volatility in commodities markets. Material costs’ trajectories play an important role in procurement strategies, he said.
For example, electrical manufacturers and distributors told DPR there is currently a $1.5 billion order backlog of switchgear, components required to provide electrical power and distribution on a projects. As a result, DPR expects shortages in metal sockets and bus plugs due to this high demand, said Pfeffer.
“In terms of new work opportunities, we expect a more challenging market,” said Pfeffer. “There is a lot in the mix, and we expect that to be sorted out in 2023, which may mean fewer customers moving forward on projects until there is more certainty.”
Past as prologue
Looking at data from past downturns can help put the current environment in context.
Nonresidential construction employment growth averaged 3.3% in the months leading up to the Great Recession, according to the Associated General Contractors of America. This time around, that number was about 6.3% in the last seven months of 2022.
“Nonresidential construction has been growing more strongly in the second half of 2022 than in the second half of 2007,” said Ken Simonson, AGC chief economist. “At that time, both single and multifamily residential construction were tumbling, which probably pulled down demand for related retail, street, school and public safety construction, and demand for other types of nonresidential construction was slowing.”
The national unemployment rate sits much healthier now too than in the months leading up to the Great Recession. It hovered at around 4.6% in the summer of 2007, whereas it was around just 3.5% last month, according to the Bureau of Labor Statistics.
The construction backlog in November also reached its highest level since the second quarter of 2019, according to Associated Builders and Contractors, indicating new projects are still coming online now.
“It’s hard to imagine a significant spike in unemployment that we saw during the Great Recession,” said Jeff Hansen, CEO of Adolfson & Peterson Construction, a Minneapolis-based general contractor. “We have a shortage today and jobs are still being created. I don’t see a significant correction taking place.”
Given those differences, a recession in 2023 will have its own unique markers this time around compared to past economic downturns, said John Fish, CEO of Suffolk, a Boston-based construction contracting company.
“Despite rising interest rates and high inflation, the fundamentals of our economy are still strong,” said Fish. “We have seen upward trends in our GDP, consumer confidence is still high, Americans still have money to spend, and we have seen strong jobs reports with low unemployment rates.”
Interest rates take a toll
At the same time, interest rate hikes remain a concern for the construction industry, said Fish. The Federal Reserve boosted its benchmark rate in December to a range of 4.25% to 4.5%, up from 0% to 0.25% at the beginning of 2022. Meanwhile, two Federal Reserve officials recently said this month additional hikes could push rates above 5%, reports Bloomberg.
“I often describe our economy as a sick patient and the Fed’s interest rate hikes as medication for that patient,” said Fish. “Based on the impact interest rates are having on the housing market, real estate development and consumer demand, we are seeing signs the medication is working. But we must be careful we do not overprescribe.”
Raising interest rates too much means fewer construction starts, said Barry Wurzel, president of Wurzel Builders, an Austin, Texas-based general contractor.
“Interest rates will likely continue to go up and there may be some thunderstorms in the near future over the next six months or more,” said Wurzel. “Inflation affects everyone in the chain.”
The amount of debt in the commercial real estate industry that will be maturing over the next two years, given the increase in rates, remains a top concern as well, said Hansen.
“The real impact is going to be the erosion on the returns for the investors,” said Hansen.“The likelihood of real estate seeing a significantly lower return than current interest rates will create negative leverage and affect the appetite for investors to hold.”
On a similar note, the availability of new debt in the capital markets also will be a top issue for commercial development, said Turner Burton, president at Hoar Construction, a Birmingham, Alabama-based construction company.
That makes financing commercial real estate projects more challenging, said Anirban Basu, ABC chief economist.
Plan for more supply chain shortages, prices hikes
Analysts expect continued material price escalation over the next couple of years, said Michael Hardman, vice president of Turner & Townsend, a U.K.-based global real estate and infrastructure consultancy. Nonresidential input prices remain 11.5% higher than a year ago, and are up 40% from February 2020, according to an ABC analysis.
“What we’re seeing today is the continued impact of the last couple years of inflation and it’s starting to catch up on the marketplace,” said Derek Cunz, executive vice president at Mortenson, a Minneapolis-based construction company. “The last couple of years have seen significant cost increase, that’s starting to make it tougher to get some deals done.”
Inflation rates in 2007 averaged around 2.8%, according to the Bureau of Labor Statistics. In 2022, inflation rates averaged 8%, though the rate has been falling in recent months.
That also leads to higher price tags and uncertainty around accurate budgets, said Burton. For example, Madison Square Garden Entertainment increased the price tag for the MSG Sphere project in Las Vegas to close to $2.18 billion, up from its prior estimate of $2 billion.
At the same time, nonresidential construction input prices slightly ticked down in November compared to the previous month, according to the ABC analysis.
That’s a good sign for supply chain recovery, said Bert Brandt, managing director of construction for the Americas division at Australian contractor and developer Lendlease. Still, the supply chain market shows signs of going into different directions for different materials, said Richard Kennedy, president and CEO of Skanska USA.
“We have seen a combination of some improvement in the supply chain with architectural and structural product lines improving, while critical mechanical and electrical equipment lead times remain at unprecedented levels,” said Kennedy. “Pricing levels across the board remain escalated with many leading construction indices reporting flattening in the fourth quarter, which would be welcome relief to the industry.”
Keeping an eye on subs
Jeff Hansen, CEO of Adolfson & Peterson Construction, a Minneapolis-based general contractor, said subcontractor risk management will become more important in 2023. He suggests spreading the work around to several different subcontractors in order to reduce the risk of a defaulted sub who is performing on multiple projects.
Supplementation costs of a defaulted subcontractor could cost up to 150% of the contract balance, he said.
Hansen also cautioned against rushing into new markets or product types blindly.
Lessons learned from past recessions
The key to staying ahead of slowdown in 2023 is diversification, contractors said.
Though some commercial sectors, such as retail and hospitality, will feel the impact of recession more quickly, that still leaves plenty of resources for more institutional projects to help keep things in balance, said Burton. Pfeffer agrees, and named the healthcare, life sciences and manufacturing sectors as potential safe havens.
“We need to pursue work that allows us the best opportunity to overcome shortages in skilled workforce as well as the volatility in commodities markets that affect procurement,” said Pfeffer. “We’re looking at the things that have helped us weather previous storms.”
Other sectors slated to do well in 2023 include life sciences, data centers and manufacturing projects, said Fish. Brandt agrees the life sciences sector should remain resilient against an economic slowdown over the next 12 months. Kennedy also added infrastructure projects tend to be executed in an economic slowdown.
“Recessions are a great reminder to remain committed to your business strategy and focus on securing work that is core to your geographies and markets,” said Kennedy. “Otherwise, you may find yourself taking on projects that are not financially right for the business or do not match your organization’s risk profile.”
The hardest construction jobs to fill
Construction needs to find more workers, and there are no easy-to-fill jobs in the industry.
In fact, according to an Associated General Contractors of America survey of its members, 91% of contractors had trouble filling positions last year, and experts say the labor crunch for these positions isn’t going to let up anytime soon.
The number of workers in construction has failed to meet the high demand. Fewer new workers have joined the industry, and retention has remained low as experienced workers retire.
Among hourly craft positions, AGC respondents had the most trouble with staffing pipelayers; 89% of contractors had trouble filling those spots. Glaziers were the least difficult job to staff, but even so, 70% of respondents had trouble finding workers in those positions.
Salaried positions, such as architects, engineers and estimating personnel, are easier to fill, but 81% of firms still struggled to find project managers/supervisors and 77% estimating personnel. Half had trouble with vital jobs like safety personnel.
“We continue to be faced with the challenge of hiring superintendents and skilled craft labor,” said Alison Tripp, national recruiting lead for Redwood City, California-based DPR Construction. “As our more seasoned superintendents are getting closer to retirement, we must double our efforts to make careers in the field attractive to younger talent.”
The toughest positions to fill are some of the most vital: ones that require leadership or experience in the trades.
Some of the toughest construction jobs to fill
|Job||% contractors having trouble staffing||Mean hourly wage||Mean annual salary||Employment (2021)|
SOURCE: BLS and AGC data.
“There was a point in time where he who had the people hoped he got the work,” said Greg Sizemore, vice president of workforce development, safety, health and environmental for Associated Builders and Contractors. “Now it’s he who has the work hopes he can find the people.”
Sizemore said having a secure workforce plays an important role in knowing if a contractor can deliver a project. The work is out there, he said, but contractors may not have the confidence to chase it and win it if they don’t think they can find the staff.
Tripp said DPR has focused on training craft laborers in an effort to highlight longer-lasting career paths in the field.
The toughest roles to fill
When asked about which craft positions’ shortages would have the biggest impact on construction in 2023, AGC Chief Economist Ken Simonson found it tough to select just a few.
“Every craft is important at some stage of a project,” Simonson said.
A lack of workers on any one task can slow a project to a crawl, Sizemore noted. Waiting for a concrete pour or electric wiring can prevent the next step from happening.
Sizemore said from his vantage point, the toughest jobs to fill are ones like carpenter, electrician, plumber, mechanic or millwright and project manager.
Tripp said she doesn’t see the labor shortage getting better any time soon, and as the experienced workforce ages out, the industry will face a crisis with trying to find, recruit, train and retain workers and potential superintendents.
The industry will soon need even more workers. Increased spending, largely resulting from the Infrastructure Investment and Jobs Act, will mean more projects with open spots to fill. At the same time, the industry has grown dependent on foreign labor, but immigration is down, Tripp said.
Tripp said she anticipates DPR and its competitors will continue to have to raise pay and benefits for workers. Additionally the number of women in construction has jumped, which Tripp attributed to efforts to open the door wider and recruit from a broader pool.
Even still, the end is not in sight.
“Currently, there are over 25% more construction opportunities available than qualified people to fill them throughout the industry,” Tripp said. “The trends for 2023 and beyond are showing that this gap will be there for several years to come.
Combating the problem
The reasons for worker hesitation around the construction industry are many. For one, construction doesn’t provide year-round employment, said Anita Grantham, head of HR at software company BambooHR, which consults with thousands of construction clients. Most construction work is done when the weather is warmest.
“Employees who seek year-round employment may change industries or move to another location where the winter weather won’t impact their ability to work,” Grantham said, adding that the talent pipeline hasn’t been built to support the trades long-term.
In the competitive workforce of 2023, Grantham provided three tips to employers:
- Create a formal onboarding process: Workers are more likely to stick around for three years or longer when there is a formal onboarding process, Grantham said. Buddy programs and check-ins for example, are investments that can pay off in the long run.
- Offer competitive compensation: “Employees expect to be paid what they’re worth,” Grantham said. It’s time to revisit rates, benefits and perks contractor’s offer workers, she added, suggesting that employers survey crews on which benefits they need and which they don’t use.
- Develop a strong culture: Keep employees happy. Jobsites aren’t conventional workplaces, so contractors need to be creative about how they engage with workers about company goals and values. This can start with training managers as part of the onboarding process.
Contech trends to watch in the new year
2022 was a year of consistent turmoil and only one thing was certain — that the future is unpredictable at best, chaotic at worst. From the war in Ukraine, which gnarled supply chains, to skyrocketing inflation and the ever-present labor shortage, contractors have had their work cut out for them keeping their businesses afloat.
This is where contech comes in. Technology will be a key driver of progress and efficiency in 2023, and experts believe that the benefits are too useful to ignore in such tumultuous times. But, it’s important that contractors utilize technology with intention.
“Companies must have the right strategy and motivations when approaching technology,” said Matt Abeles, the vice president of technology and innovation at Associated Builders and Contractors. “Innovation should add to the value proposition of a business, so thorough research is key in finding the tools that add value to your business.”
Going into 2023, here are areas where tech will help contractors work smarter, harder and more safely.
Experts agree that one of the largest problems facing the construction industry is a severe lack of skilled workers. Over half a million workers are needed and the shortage is prompting a myriad of problems. Contractors face issues such as the lack of an employee pipeline, delays due to the labor gap and the new reality of being selective with projects they take on.
“You can have great project management skills, but if you simply don’t have the capacity to take on the project, then you’re not going to be able to deliver it on time,” said Mallorie Brodie, CEO and co-founder of workforce management firm Bridgit.
But, that’s where tech can make a difference, say experts.
Aside from apps that manage employees and schedule workflows, experts also say that robots may become a boon to the workforce. That solution, while further out, is a field that can’t, and shouldn’t, be ignored through the coming year.
Robots like Spot, created by Boston Dynamics, along with other specialized machines that take care of difficult tasks like mapping and drywall, are already in use on the jobsite, and more is possible as time goes on.
The $1.2 trillion Infrastructure Investment and Jobs Act has opened a lot of doors for the construction industry, including an incentive for the industry to adopt more tech-enabled solutions. The legislation includes $100 million to encourage adoption of advanced construction management technologies.
Most contractors also see software as the big stepping stone they’ll need to cross as they prepare to take on these jobs.
“At the end of the day, this likely means producing more projects in less time for less cost, in which case, [technology] can help deliver much more of this IIJA plan,” said Matt Blake, director of VDC and BIM at Cheshire, Connecticut-based Lane Construction, in an interview with Construction Dive.
Russia’s invasion of Ukraine last year highlighted an issue that contractors need to keep an eye on — their digital security.
Even before the war, contractors were known to be among the most targeted businesses for cyberattacks. But in 2022, construction was the top sector for ransomware attacks, according to a report from encryption software firm NordLocker, which analyzed 1,200 companies across 35 industries.
“Small- and medium-sized enterprises, which contractors often fall into that realm, are among the most targeted organizations, and often that is because they’re especially vulnerable to cybersecurity attacks,” Raymond Monteith, senior vice president with HUB International Limited’s risk services division, told Construction Dive.
The attacks themselves are simple, with ransomware and business email breaches at the top of the list, Monteith said.
These kinds of threats are only growing more worrisome as contractors continue to adopt programs like BIM, which come with their own inherent security risks.
To avoid issues the British National Cyber Security Center recommends that contractors avoid common passwords, enable two-factor authentication and be careful about the information they share on social media.
In 2023, contractors will also benefit from tech-focused financial systems that can help with everything from payroll and accounting to billing and invoices.
Software and other tech-focused tools can even alleviate one of the most flagrant and disruptive issues for contractors — late payments, which cost contractors $208 billion in 2022.
The issue has led to a flood of new providers plying solutions for all stages of the process, from material procurement to subcontractor payment.
“One of the biggest problems in construction is cash flow. That’s been true for the last decade, and it’s going to continue to be true in 2023,” said Maria Davidson, the CEO of material procurement platform Kojo.
The issue has even grabbed the attention of bigger, more established firms. In November, Carpinteria, California-based Procore announced a payment service through a partnership with Goldman Sachs Transaction Banking.
2023 could be the year that more pros see the benefits of leveraging and sharing the data they collect every day. From machine telematics and supply chain management to staff location tracking and payroll, the data can come together to help solve bigger problems, experts say.
For construction companies willing to gain fluency in the language of data intelligence, leveraging the vast amount of info that’s already in their systems promises unheralded gains in efficiency, productivity, product quality and jobsite safety.
“We see contractors of all sizes using data to be safer and more profitable and to win more work,” ABC’s Abeles told Construction Dive. “Data intelligence allows contractors to make decisions by using real insights that maximize potential for growth and improvement.”
Big data can help contractors not only keep track of what’s going on in the present, but look back to figure out what went wrong on past projects — and how they can do better going forward.
“How did that project go? You know, are there ways that we can improve that in the future? Are there certain projects that we simply don’t have the capability to take on?” said Bridgit’s Brodie. “These are all questions that contractors have been asking, but if they don’t have the data available to answer those questions, there’s not a lot that can be done.”
That data, once elusive, is now attainable.
“The data is starting to be available through a combination of solutions,” Brodie said.
Sector watch: ‘A lot of money on the table’ for civil construction this year
Editor’s note: To kick off 2023, Construction Dive is taking a look at the outlook for the country’s top construction verticals. Click here for the second story in the series.
The Infrastructure Investment and Jobs Act will boost activity in the civil construction space in 2023, according to Dodge Construction Network.
Dodge expects civil construction starts, such as public transit, roads, bridges, EV charging stations, water-related projects and power plants, to total $281 billion in 2023, a 16% jump from last year. That’s because infrastructure funds will steadily flow into the market in 2023. As of July 2022, only a small fraction of IIJA dollars had entered the market, according to Dodge.
Out of all the IIJA dollars already allocated for projects, 19% has made its way to road and bridge projects, 21% to public transit projects, 15% to EV charging stations and 14% to water infrastructure, said Branch.
“There’s a lot of money still on the table waiting to be spent,” said Branch. “We continue to think 2023 and 2024 are the best years for infrastructure construction,” he said, though it’s possible that timeline could get pushed out by a year.
Dodge’s forecast assumes that 85% of infrastructure money will be spent by 2027.
For that reason, there remains much runway for construction activity in the civil space, said Branch. Still, questions remain whether the bulk of that activity will begin in 2023, or get pushed out to 2024.
Below are the 2023 outlooks for highway and bridge construction, water-related infrastructure and power plants.
Big year ahead for highway and bridge construction
Public funding will continue to support construction activity in the highway and bridge sector, said Branch.
Over the past year, that money started stretching across the U.S., said Branch. For example, road and bridge construction in Texas jumped 40% in 2022 and accounted for 12% of all highway and bridge construction activity in the country. Other states, like Florida and South Carolina, have also seen surges in activity over the last year, said Branch.
Dodge pegs highway and bridge construction starts both to jump 20% in 2023 to reach $94.4 billion and $26.6 billion, respectively. Together, that’s $121 billion worth of activity in the highway and bridge sector in 2023, eclipsing 2022’s level of $100.8 billion.
No recession concerns for environmental public work activity
The infrastructure boost will boil over to environmental public works in 2023 as well, said Branch. That includes water-related infrastructure, such as dams, reservoirs and sewage.
Dodge expects starts in the sector to total $68.8 billion in 2023, more than a 14% jump from 2022.
Water supply systems will lead work in the sector, with a projected $23.8 billion worth of activity in 2023, a 12% jump from a year ago. Reservoirs and sewage systems closely follow, with about $22.8 billion and $22.2 billion worth of activity in 2023, a 15% and 17% increase from last year, respectively, according to Dodge.
“If we think about infrastructure and the influence of the federal dollars, we’re not expecting much change here [due to] a recession,” said Branch. “A recession would lower the demand for construction workers and put more downward pressure on prices. So, if we were to go into recession in 2023, it could mean here for infrastructure that more real work actually gets done for the dollars allocated.”
More demand for domestic power and gas plant projects
The Inflation Reduction Act will continue to boost the renewable energy market in 2023, a boon for the power and gas plant sector, according to Dodge.
Dodge pegs the power and gas plants category, which includes local utilities, wind plants, solar plants and LNG export facilities, to reach $56.4 billion in 2023, a 7% increase from 2022’s level of $52.5 billion.
Additionally, as more European countries push to wean themselves off Russian natural gas, those companies would turn to U.S.-based LNG projects. For example, LNG production off the coast of Louisiana can support the European Union’s goal to end its dependence on Russian fossil fuels, said Jim Breuer, Fluor’s Energy Solutions Group president, in a company release.
That should continue to boost activity in the power and gas plant sector well beyond 2023.
“There’s already been a bigger buildout to [LNG] capacity, but there could be even more,” said Branch. “But the process to get those approved is pretty long, so I’d view that more as a 2024 element, rather than a 2023.”
New year, new challenges for IIJA
As the Infrastructure Investment and Jobs Act enters its second year, the landscape for civil work looks challenging in many ways. A volatile economy, battered supply chains and high demand for labor will all make it difficult for contractors to meet demand.
Amid the uncertainty, the IIJA provides a welcome stable infusion of $1.2 trillion in funding to a variety of construction sectors over five years. The legislation will boost a wide range of infrastructure work, from bridges to broadband, as well as bolster industries focused on low-carbon and American-made materials.
However, there are a number of headwinds that could hamper the rollout of federal infrastructure work in 2023, and overcoming them requires careful planning.
“It’s a once-in-a-lifetime opportunity that all came together, but the biggest concern is: Is this going to become a perpetual raindrop that does not hit the ground? We need to make sure that things are all aligned so that it hits the ground sooner than later,” said American Society of Civil Engineers Senior Vice President K.N. “Guna” Gunalan.
Here are some of the likely challenges ahead.
Lack of subcontractor capacity
Large contractors will be able to adapt as needed to win these new federal jobs, according to Certified Public Accountant Jack Callahan, construction industry leader with New York City-based tax and advisory firm CohnReznick. The challenge will be for the primes to find enough subcontractors to staff them. The IIJA stipulates a certain number of MWBEs to meet its inclusion goals, which adds to the difficulty of finding enough of the right subs.
“You’ve got a very large diversity, equity and inclusion requirements built into these contracts. When you look at billion-dollar programs, and you look at 20% participation goals in there: Where do you find that many contractors with that much capacity to perform in what many cases are going to be highly complex, heavy civil infrastructure jobs?” said Callahan. “I think the large primes that have spent a lifetime gearing up will tackle this work, but where are they going to find the subcontractors, both from the traditional side and the diverse side?”
Still, Callahan thinks there are simple ways for contractors to improve their chances of finding the people they need — namely, pay bills on time and treat subcontractors professionally.
The country saw 40-year-high levels of inflation in June that hit certain building materials especially hard, such as lumber and cement. While prices for some key construction inputs have moderated, others are still elevated or remain volatile. Difficulty predicting prices means it’s harder to plan projects, and to assess and assign risk, said Gunalan.
The projects that move forward amid high prices will translate to less infrastructure bang for the federal buck. In light of this dynamic, some projects, such as the Des Moines International Airport, are adopting a phased approach since inflation has made it too expensive to conduct all of the work at once.
In addition, some state and local decision makers may be trying to time the market and push projects to later when prices are lower, according to Associated Builders and Contractors Chief Economist Anirban Basu. That could reduce the overall pace of building that the Biden administration hoped to achieve.
Materials delays and shortages
Although supply chains have bounced back somewhat since the early part of the pandemic, COVID-19-related shocks look set to continue and obtaining certain materials in a timely fashion will likely still prove challenging in 2023. This strain may be particularly noticeable in the spring, when construction season begins in the Midwest and Northeast, according to Callahan.
What’s more, the infrastructure act’s Buy America provision requires contractors to use a certain amount of U.S.-made materials, but since the country’s manufacturing capacity is still low and demand is set to skyrocket, it may take the limited number of American plants a long time to fulfill orders. Production of green materials, needed to fulfill Buy Clean requirements, is similarly in its early stages.
In light of these challenges and high levels of economic uncertainty, Christopher Livingstone, managing director of project finance and consulting with CohnReznick, thinks there will be a great deal of negotiation between primes, subs, suppliers and jurisdictions. Cooperation, communication and flexibility will be key to getting the most value from the federal funds.
“We’ve got a great opportunity to use these dollars to make meaningful change,” said Livingstone. “We need to think very carefully up front about how we do that and what the best way to do that is, and some of that is to use new approaches.”
The infrastructure workforce has big gaps in hiring, training and retention, a December 2022 report from nonpartisan think tank Brookings Institution found, especially among younger students, women and people of color. The IIJA will only drive demand higher. Ken Simonson, chief economist with Associated General Contractors of America, expects the dearth of labor to be a key problem in 2023.
“I expect labor availability to remain the no. 1 challenge for most contractors, with continuing high job opening rates and rising wages,” Simonson said.
The IIJA also stipulates a certain number of roles be filled through apprenticeships, and Callahan questions whether there are enough people who want to take part at this time, and whether unions have had enough time to gear up a pipeline of candidates for these roles.
“We all have labor challenges as is today, but as you look at some of these mandates and the actual stipulation of how they play down to the prime contractors and subcontractors, is the union workforce robust enough to meet all of these requirements?” said Callahan.
Slow tech adoption
Since the IIJA is being carried out in part by state agencies, it will likely draw contractors who have not worked on federal jobs before and are not familiar with their unique stipulations, such as security clearance and cybersecurity requirements. That means these builders will need to get educated on federal compliance, and quickly.
“It’s [a matter of] having a team of people to reach out to and making sure that before you bid the job, you understand what all the ramifications might be and getting the skill set and tools you need to build up for it,” said Callahan.
Construction is notoriously slow to adopt technology, and Callahan thinks that’s holding many contractors back. More tech investment can free up scarce workers for other roles, and tools like BIM can make complex projects more organized and transparent. To that end, the IIJA contains $550 million to promote the use of construction tech on its jobs.
Sector watch: Lab, hospital projects will keep institutional building healthy
Editor’s note: To kick off 2023, Construction Dive is taking a look at the outlook for the country’s top construction verticals. Click here for the first story in the series.
Construction leaders can expect institutional building construction to hover around the same level of activity in 2023 as it did in 2022, said Richard Branch, chief economist at Dodge Construction Network.
Dodge forecasts institutional building starts, which include education, health care, recreation and transportation structures, to hit $171 billion in 2023, the same amount in nominal dollars as 2022. That level could have been less, but government stimulus dollars in the space should hold up institutional project starts in 2023, similar to past recessionary environments.
“If you think back to the Great Recession, institutional construction didn’t bottom out until 2011,” said Branch, noting that government relief programs at the time helped prop up the sector. “It was actually stable in the first couple of years because of public funding for education, healthcare and other projects. We think the same is the case here.”
Here are the outlooks for some of the sector’s most important project types:
Lab projects boost education activity
Education project starts, which make up a little more than half of all institutional construction, will climb up to $72.7 billion in 2023, a 5% gain from 2022 activity, according to Dodge. That growth is due in large part to laboratory projects associated with schools, which are included in Dodge’s education category.
Starts in traditional K-12 and college projects are “essentially flat” because of weakening demographics, said Branch. In states like New York, New Jersey, Pennsylvania and Massachusetts, the education building stock dates from the 1920s through the 1940s. That will eventually translate to increased renovation and replacement activity in the K-12 sector, despite population trending down in that region.
On the other hand, Sun Belt states where demographic growth is a lot stronger will see new construction in order to accommodate the increase in population, said Branch.
“As we look at 2023, K-12 [starts] will continue to be flat to slightly down, college [starts will be] flat to slightly up,” said Branch. “The real strength in education in 2023 will continue to be in the lab space.”
Hospital construction dominates
Healthcare construction, such as inpatient hospitals, nursing homes and standalone clinics, will remain “one of the big opportunities in the institutional space,” said Branch.
Dodge projects starts in the sector to reach $42.3 billion in 2023, a 14% jump from 2022 activity.
Branch expects inpatient hospital construction to continue to grow considerably, especially as more hospital projects enter the planning stages.
Through September 2022, seven of the top 10 institutional projects were in the healthcare space, specifically hospital construction, according to Dodge.
“We’ve seen a huge underinvestment in inpatient facilities over the last decade and as we look at projects entering planning, we’re seeing a huge uptick in hospital projects,” said Branch. “So, we think we’re starting to see a reversal of that trend, and that will push healthcare construction considerably higher as we move into 2023.”
Recreation and transportation sectors remain level
Dodge expects recreation projects, such as casinos, convention centers and student centers, to tick slightly up just 1% to $19 billion in 2023. That market is closely aligned with the hotel and higher education outlooks, both of which are not expected to perform considerably well in the next year.
Meanwhile, Dodge forecasts transportation-related construction, such as airline terminals, to drop 36% in 2023 to $17 billion.
That big drop in 2023 is due to the massive $9.5 billion Terminal 1 expansion and $1.5 billion Terminal 4 expansion at JFK Airport that kicked off in 2022 inflating the year’s overall comparative numbers. Without the JFK Airport project, transportation starts in 2022 totaled $16 billion, meaning 2023’s forecast of $17 billion will be an increase of $1 billion, or about 6%.
What’s keeping contractors up at night?
Builders are bullish on infrastructure work this year thanks to federal funding, but expect supply chain snarls and hiring difficulties to persist, according to Associated General Contractors of America’s 2023 Construction Outlook National Survey.
COVID-19 continues to impact the industry, hitting supply chains in particular. That’s the top concern for builders in the survey, as the uncertainty has caused a variety of negative ripple effects that ultimately mean higher costs and lower profits. As inflation and the specter of a recession continue to loom, contractors are feeling less confident about private sector work.
Builders have reason to be worried: last year 36% of respondents had projects canceled or postponed but not rescheduled. The main reason given, for about half the projects, was rising costs. The association received 1,032 responses overall, primarily from general contractors.
Although contractors are optimistic overall, that doesn’t mean there aren’t rocky times ahead, said AGC Chief Economist Ken Simonson in a webinar last week about the survey.
“Even when we’ve had recessions or slow growth expectations for the economy, contractors are by nature optimists,” Simonson said. “But it is notable that in nearly all of these categories, particularly on the private side, contractors have lower net positive readings or deeper negative readings than they did in previous years.”
Here are some other takeaways from the survey:
Supply chains are still broken
Contractors’ biggest concern for the coming year is the supply chain. The ongoing issues cause project delays, time-consuming logistical headaches and price hikes for materials.
“Supply chain issues and material cost issues will continue, and will continue to have profound effects on schedules and affordability of new projects,” said Mac Caddell, president of Caddell Construction headquartered in Montgomery, Alabama, during the webinar.
To cope in 2022, 70% of respondents accelerated purchases after winning contracts, about half turned to alternative suppliers or used alternative materials or products and 22% stockpiled items before winning contracts.
Hiring will only get harder
Workforce shortages make projects take longer and cost more, and look set to worsen in 2023. In the coming year, 69% of contractors expect to hire and only 11% expect to reduce their headcount, according to the survey. To entice workers, last year 72% increased base pay rates more than in 2021 and about a third boosted bonuses and benefits.
Despite those efforts, 80% are currently having difficulty finding workers and a majority of respondents expect those difficulties to persist. Plus, 83% of contractors worry the shortage and resulting inexperienced skilled labor pool will pose a challenge to the safety and health of their firm’s workers — the biggest threat respondents identified by far.
Cultivating new workers will take time and effort, according to Pittsford, Vermont-based Casella Construction co-founder John Casella.
“I think a lot of the easy levers have been pulled from a wage and a benefits standpoint, and now we’re really needing to look at all the things that no one’s talking about, with demographics and culture and what our jobs look like,” Casella said during the webinar.
Infrastructure a bright spot
While the outlook is more dim for private jobs, contractors are optimistic about infrastructure and other public work, the survey shows. That optimism is widespread even though only 5% of respondents are working on new projects funded by the infrastructure act, while 6% have won bids but have not started work. Another 5% have bid on IIJA projects but haven’t won awards yet, while 21% said they plan to bid on projects but nothing suitable has been offered so far.
AGC CEO Stephen Sandherr warned the IIJA’s Buy America and labor stipulations are still unclear, and said that will make it harder for state and local jurisdictions to advance these projects.
“Federal officials need to deliver on the promise of these substantial new investments in infrastructure and construction,” Sandherr said. “To do that, they will need to address much of the regulatory and permitting uncertainty that muted the hoped-for benefits of the bipartisan infrastructure law in 2022.”
Sector watch: Overall commercial starts to tumble this year
Editor’s note: To kick off 2023, Construction Dive is taking a look at the outlook for the country’s top construction verticals. This story is first in the series.
Manufacturing starts will be one of the few bright spots in 2023 in a shrinking commercial construction sector, according to Richard Branch, chief economist at Dodge Construction Network.
Total commercial starts are beginning to show strain as the economy slows, said Branch. Dodge expects starts on the commercial side, which includes retail, office, warehouse, manufacturing and hotel projects, to fall 13% in 2023 when adjusted for inflation.
“Commercial structures will feel recessionary in 2023,” said Branch. “But I think the really bad side here of commercial construction is really isolated,” particularly retail, traditional offices and hotel projects.
Below are the outlooks for several important sectors of commercial construction:
Retail projects show signs of deceleration
Retail construction starts have benefited from strong single-family residential growth over the past few years, said Branch. That is beginning to hit a turning point.
“There’s a strong relationship here between single-family and retail, it’s about a year lag between groundbreaking of single-family to groundbreaking of retail,” said Branch. “So, all those retail construction starts in 2019, 2020 and 2021 have been pushing retail construction higher [in 2022].”
Construction starts in the retail sector hit $19.4 billion in 2022, a 31% increase in nominal dollars from its 2021 level. But that will change in 2023, said Branch.
Dodge pegs construction starts in the retail sector to reach $20.2 billion in 2023, or a 4% increase in absolute dollars. However, when adjusted for inflation, the sector will shrink.
“As we move into 2023, if we think back to what’s happening in the residential sector in 2022 — single-family declining, multifamily will be declining next year — that’s going to [slow] retail construction starts,” said Branch. With inflation, “you’d be looking at a low-to-mid single-digit decline in retail,” said Branch.
Overbuilt warehouse sector set for peak declines
The warehouse sector is where the market will see more “significant declines in commercial construction starts,” said Branch.
The sector is coming off a record year in 2022, where starts totaled around $57.1 billion, a 19% jump from 2021. But Branch said 2022 was the sector’s peak.
That’s because Amazon, the largest player in warehouse construction, announced pullbacks in warehouse starts in the summer of 2022. The ecommerce giant accounted for about 16% of all warehouse construction starts over the past three years, according to Dodge.
In addition to a halt in warehouse construction, Amazon also announced last week plans to cut over 18,000 jobs.
For that reason, Dodge expects warehouse construction starts to drop 10% in 2023 to $51.3 billion.
Still, that activity level remains much higher than pre-pandemic levels.
“2018 and 2019 saw record levels of activity in the warehouse sector,” said Branch. “So, the one player stepping out of the market will see the levels come down, but overall, they should remain historically very high.”
Leisure travel picks up hotel construction
Hotel construction starts are beginning to mount a comeback from pandemic-induced lows, but the outlook remains mixed, said Branch.
On a nominal dollar basis, Dodge forecasts hotel construction starts to reach $12.2 billion in 2023, a 3% increase from 2022. That growth mostly centers on luxury, upscale properties.
“I don’t want to say that those kinds of properties are recession proof but if you’re going to identify anybody in that sector that’s recession proof, it would be those luxury upscale properties,” said Branch. “That should at least put a floor here on hotel construction in 2023.”
That bounceback is largely due to increased leisure travel, said Sarah Martin, senior economist at Dodge Construction Network. But starts in the sector still remain a fraction of what they were pre-pandemic.
“Note, the total dollar value of hotel starts in 2022 will remain more than 30% below the levels we saw in 2019, on a nominal dollar basis,” Martin told Construction Dive. “This market still has a long recovery ahead. On a constant dollar basis, hotels will mildly recede next year — in tandem with total commercial construction.”
Data centers carry office construction starts
Several factors continue to undermine office construction starts, such as tech slowdowns and remote work trends, according to Dodge.
“If we think about… how tight the labor market is, who has the power in this relationship?” asked Branch. “It’s clearly a seller’s market and more and more workers are demanding either hybrid or remote work in order to stay employed with the company and firms are clearly giving into that.”
Dodge forecasts office construction starts to total $48.8 billion in 2023, a drop of 1% from 2022. Branch added there is not “a lot of support for a strong buildout here over the next couple of years.”
Because the booming data center sector is included under the office umbrella, though, the numbers for pure office construction could be even worse.
“Data centers are incorporated in Dodge’s office category and have accounted for a weighty portion of the growth in the office sector this year,” said Martin. “We continue to expect weakness in traditional office projects over the next year, as remote and hybrid work continue to be prevalent.”
Demand for data center projects will remain strong over the next few years due to the “unwavering demand for data and cloud storage,” said Danny Horton, senior project manager of the data center division PCL Construction’s Seattle office. Branch also remains very bullish on data center construction growth in 2023.
Manufacturing will hold up commercial construction
Manufacturing construction starts will remain a bright spot in commercial construction, said Branch.
Construction starts in the sector reached $89.4 billion in 2022, a 196% increase from 2021. Dodge expects that blistering pace to slow down in 2023 to about $51.2 billion, a 43% drop.
Still, that level would be a record for any year besides 2022 over the last three decades, according to Dodge.
That massive growth is due to the make-it-here onshoring push among American companies to build domestic chip fabrication factories and EV battery plants. The $52 billion CHIPS Act and the $485 billion Inflation Reduction Act will additionally continue to support abnormally high levels of activity in the coming years, according to Dodge.
“I do think this is a real game changer in terms of stabilizing the construction sector in 2023,” said Branch. “I would offer as well that I think that $51.2 billion is fairly conservative for next year. I wouldn’t be surprised if the upside here was closer to $60 billion.”
AI is coming for construction, experts say
With its ability to learn, solve problems and recognize patterns at a velocity and scale no human will ever match, artificial intelligence is poised to reshape how buildings are designed, built and operated — and 2023 will be the year it takes hold.
“Artificial intelligence will transform our industry in the next 10 years more than any other technology in the past 100 years,” said James Barrett, chief innovation officer for Turner Construction, the nation’s largest contractor. “It’s going to be huge because it has such broad application in so many cases. It’s not a question of if. It’s a question of when.”
AI and machine learning, a subset of AI that uses algorithms to learn from data without human programming, have been bubbling under the surface of construction operations for a few years now. But this year, Barrett predicted, “the growth curve is going to turn up really fast.”
Combining the power of intelligent machines with human ingenuity, AI is the digital brain that makes industry-changing technologies such as robotics, blockchain and 3D printing possible. With its superpowers in modeling and pattern detection as well as prediction and optimization, AI can reduce expensive errors and worksite injuries; train and eventually replace increasingly scarce workers; enhance sustainability and circularity; design, maintain and operate buildings; and clean up and give transparency to the supply chain.
And just as OpenAI’s headline-grabbing ChatGPT can now deliver AI’s vast knowledge within seconds to anyone who can ask a question, AI can quickly and efficiently solve problems that have plagued construction for centuries, without the need for a department staffed with MIT- and Stanford-educated pros to crack its code. AI is becoming easier to use, opening up to everyone from designers to jobsite crews, Barrett told Construction Dive.
“We’re already seeing AI tools becoming more democratized, if you will,” he said. “There are solutions that don’t require super advanced technical programming language capabilities.”
Data management is key
In 2022, 92% of construction companies said they were using or intend to use AI, according to Peak’s Decision Intelligence Maturity Index, but most are far from ready. Only 65% of construction companies’ AI projects have been successful — among the lowest percentage of all industries surveyed.
In an industry that’s never been known for welcoming change, technological resistance is certainly a factor in lagging AI adoption. But the biggest obstacle construction companies face, both individually and collectively, is getting a handle on their data.
“We all have this abundance of data,” said Tim Gaylord, corporate director of innovation for Redwood City, Calif.-based DPR Construction, which for the past several years has been integrating AI capabilities into its tech stack and developing proprietary AI solutions to address issues such as staffing shortages, safety concerns and cost and schedule overruns. “We’re collecting it from so many different sources, and we’re at this kind of tipping point where I think we’re going to see companies focus on it to really leverage it better.”
Collecting and managing data in a dynamic and complex industry like construction is much more challenging than it is in controlled environments like manufacturing and automotive, said Aviad Almagor, vice president of technology innovation for construction tech provider Trimble.
“Construction is a bit behind,” Almagor added, “but I’m very optimistic that we are moving in the right direction.”
Right now, most of the industry’s data lives in silos, owned by many different entities who are hesitant to share it because of competitive concerns, and the industry hasn’t been collecting a lot of the historical data necessary to make modeling and prediction more precise, said Burcin Kaplanoglu, co-founder and vice president of innovation at Oracle Industry Lab, a Chicago-based incubator that explores, tests and validates technologies for construction and engineering, among other industries.
“We’re not just going to get there by magic,” Kaplanoglu said. “We need to take data from jobsites in a way that we can actually make use out of it. But I work with many industry leaders, and everybody is recognizing that. So, I think in the next two years, we’re going to see significant improvement.”
The key for success is sharing, Almagor said.
“The data any construction company collects, as a single entity, is not enough to get a valuable outcome. But if we as an industry can collaborate and collect the data, process it and then share the anonymized outcome back to the industry, we’ll have the data we need for healthy, valuable machine learning processes that can provide benchmarking and predictive, prescriptive outcomes.”
Inflation could sap infrastructure act’s buying power this year
Inflation could severely weaken the impact of funding from the Infrastructure Investment and Jobs Act, experts say.
High prices for construction materials and other project inputs are already sapping jurisdictions’ additional buying power from the federal legislation, according to analysis from the Pew Research Center, a nonpartisan think tank.
In the past year, states have been seeing 20% to 40% hikes in project costs, depending on the region and materials, Susan Howard, director of policy and government relations at the American Association of State Highway and Transportation Officials, told Pew. That’s leading transportation agencies to scale back on the scope of projects or use it for work that was already planned.
This environment is also challenging for contractors that want to bid on infrastructure projects, according to American Society of Civil Engineers Senior Vice President K.N. “Guna” Gunalan. In addition to higher materials prices, builders are having trouble getting commitment from suppliers for when equipment will be delivered, and shipping was logistically difficult and also more expensive in the past year due to backlogs in the ports.
“It’s a question of how far can you stretch a dollar. Everyone is trying to stretch it as far as they can,” said Gunalan. Staying nimble and adopting a phased approach for projects can help, but it’s still difficult to nail down costs for a project and “there are only so many contingencies you can build into a budget.”
These challenges to executing infrastructure projects look set to continue this year.
Inflation will likely persist for a while since supply chains have still not fully recovered from COVID-19, Michael Hardman, vice president of Turner & Townsend, a U.K.-based global real estate and infrastructure consultancy, told Construction Dive.
“When looking ahead into 2023, we are forecasting escalation year-on-year of 7%, with a return to the long-term average of 2.7% in 2024,” said Hardman. “However, by 2024 we will have seen three years of dramatic price escalation and if projects — and compounding effect — are true, we will see material prices approximately 25% to 28% higher than they would have been by equivalence in 2020.”
There are some positive signs: Prices for many construction materials are starting to even off as supply chains improve, according to the most recent Bureau of Labor Statistics report. So far, inflation is not high enough to completely consume all of the IIJA money, and there may be further easing on the horizon.
Some damage has already been done in 2022, and experts interviewed by Pew worry that continued inflation could eat away most of the benefit from the funding in the coming years. Still, the extra federal money is a help to jurisdictions.
“If we didn’t have these additional resources, states would be in a much bigger world of hurt,” Howard told Pew.