2023 Construction Outlook: Construction Starts Expected to Flatten
There’s a lot to worry about going into 2023 according to Dodge Data & Analytics in its 2023 Construction Industry Outlook:
More oil production cuts from OPEC
Relations between China and Taiwan
Further escalation of the war in Ukraine
While the immediate forecast is choppy, if things stabilize in the back half of 2023, according to Dodge Data & Analytics, total construction starts in the U.S. should remain flat in 2023. While “flat” may not sound particularly optimistic, it is, when you consider that total construction starts in 2022 were up 17%.
“We’re sitting at 14- to 15-year highs in the Dodge Momentum Index,” stated Richard Branch, Chief Economist at Dodge Data, “so it should provide some semblance of confidence and reassurance that developers and owners are continuing to put projects into the queue despite the fact that we’re concerned about what might happen when interest rates keep rising and the economy slows down in 2023.” Labor shortages will continue to be a big hurdle for the construction industry, according to Branch, but a bright spot is in material prices that peaked in 2021 but generally fell throughout 2022.
According to the 2023 Dodge Construction Outlook:
Single Family Residential: Rising interest rates and low inventory has pushed housing affordability to its worst levels in nearly 15 years. Construction starts are expected to fall 6% to 891,000 units in 2023 with a value of $274 billion.
Multifamily Residential: Multifamily construction projects came off of one of its best years since 1986. However, investment dollars typically dry up when the economy slows. As such, construction starts are expected to be down 9% to 723,000 units in 2023 with a value of $153 billion.
Commercial Buildings: The commercial market will see a decline as demand for brick-and-mortar retail stores continue to be weakened by online shopping, office construction is hampered by employees working from home, and hotel construction is diminished by a slow return to business travel. Adding to the problems is warehouse construction which is now overbuilt. However, data centers remain a bright spot. Construction starts are expected to decline 3% to 921 million sf in 2023 with a value of $153 billion.
Manufacturing: Supply chain disruptions during COVID-19 prompted a return of manufacturing facilities onshore. The CHIPS Act, which was passed in 2022, increases the number of semiconductor plants in the U.S., and the Inflation Reduction Act of 2022 was passed to help improve supply chains and bolster domestic manufacturing. Nevertheless, despite a massive run-up in activity in 2022, construction starts are anticipated to plunge 43% to 122 million sf in 2023 but at a still elevated value of $51.2 billion.
Institutional Buildings: Institutional buildings, which were slower to recover in 2022, are expected to increase 1% to 307 million sf at a value of $171 billion. The largest positives are expected to come from the healthcare sector as they expand to increase surge capacity. Education and government buildings are also expected to remain positive as HVAC systems and internal air quality systems are improved in the wake of COVID-19. However, transportation buildings are expected to fall after several massive airports underwent renovation.
Streets, Highways and Bridges: Highways and bridges, which have started to receive funding from the Infrastructure Bill, are expected to increase 16% to $281 billion in 2023.