What to expect from the construction market in 2023

After a strong several years, warehouse spending plateaued in 2022 and is expected to remain below the record
levels seen in 2018 and 2019. Photo: halbergman/E+/Getty Images

Despite the numerous challenges the construction industry faced in 2022, project owners, contractors and materials producers were largely successful throughout the first three-quarters of the year.

Concerns remain, however, for the rest of this year and 2023.

For instance, will the Federal Reserve continue to raise interest rates and, if so, how much higher could rates go? Is the U.S. currently in a recession? If not, will a recession emerge in 2023?

Richard Branch, chief economist at Dodge Construction Network, believes an economic downturn will surface next year. Some construction sectors will likely feel more pain than others, though.

“No matter what you feel about 2023 – whether [you think] we’re going to go into a recession or not go into a recession – the fact remains that the economy is going to slow down to almost stall speed,” Branch says. “That’s probably a best-case scenario.

“In many sectors, it is going to feel like a recession,” he adds. “Single-family housing feels like we’re in a recession, [and] I think multifamily will feel that next year. I think certain elements of the commercial sector will feel that, so buildings like offices and hotels will certainly feel downward pressure in 2023.”

Despite looming pressure, Branch does not believe any economic slowdown will reach 2008 levels.

“There is optimism out there in certain sectors of the construction market that even if the U.S. economy enters into a downturn in 2023, that it will be mild as compared to what we saw during the Great Recession,” he says. “That optimism of, perhaps, a shallow downturn in 2023 means there should still be demand for nonresidential building projects.”

Nonresidential

Branch

Nonresidential spending continues to steadily rise despite increased inflationary pressures, rising interest rates and a scarce workforce.

According to Dodge’s third-quarter report, the Dodge Momentum Index, a monthly measure of the initial report for nonresidential building projects in planning, has yet to show signs of stress amid recession fears. Month-to-month volatility is likely to remain, though.

“Developers and owners remain confident that nonresidential building projects will weather the storm of higher interest rates and a slowing economy,” Branch says. “Whether this can be sustained remains a key question that will ultimately dictate the pattern for construction.”

The momentum index gained 2.9 percent in July, fell 1.2 percent in August and was back up 5.7 percent in September, according to Dodge.

An increase in manufacturing projects is helping to drive the nonresidential sector as companies strive to create domestically based supply chains to combat foreign delays.

“I think the supply chain issues we’ve been dealing with – semiconductors, foodstuffs, building materials – has led to more offshoring and reshoring of manufacturing in the United States,” Branch says. “I don’t think those supply chain issues totally go away in 2023. That should continue to incentivize domestic manufacturing construction, and then you add to it the government funds from the CHIPS Act and the Inflation Reduction Act, and it gives an extra little stimulus boost here.”

One nonresidential area Branch sees slowing is warehousing. While companies such as Amazon and Walmart have been building warehouses at a nearly exponential rate, Branch says 2022 has always been the forecasted peak year for warehousing.

“Projects coming into the planning cycle have plateaued just within the past few months,” he says. “Amazon has also come out and said: ‘We overbuilt the market, so we’re going to be pulling back in construction activity.’ Amazon is about 16 percent of warehouse construction, so when that size of the market goes away, it’s going to take the whole warehousing sector down with it.”

Residential

Coming into 2022, residential construction was booming. As housing prices skyrocketed over the last few years, more people opted to build houses rather than get into a bidding war for a house already on the market.

But with interest rates rising throughout this year, residential construction took a big hit. And while the downturn is expected to linger into the first few months of next year, the overall future of residential is bright, Branch says.

“I think those pressures of high interest rates [and] weakening affordability last until probably early 2023,” he says. “The great thing about the single-family market is that it leads into a downturn and it leads in recovery. The bottom for the single-family market is probably earlier in the first half of 2023. That doesn’t mean it’s going to come back gangbusters, but we should start to see a steady improvement in single-family construction in the back half of the year.”

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