What to expect in the coming months for construction

Dodge Construction Network’s Richard Branch says residential construction starts increased for two consecutive months – something not seen for more than a year. Photo: jhorrocks/E+/Getty images

Nearly halfway through the year, the construction industry is riding its fair share of tailwinds.

Funds from the Infrastructure Investment & Jobs Act (IIJA) are being put to use, nonresidential construction is performing well thanks to a number of sub-sectors, and residential construction is poised for a comeback year after a slow 2022.

Economic pressures, on the other hand, are poised to challenge and, possibly, curtail some of the growth the industry is seeing. So far, though, the industry has weathered the challenges well.

The Federal Reserve once again raised interest rates in May by another 25 basis points. For the year, the Fed has raised rates 500 basis points to combat inflation and fight off a recession.

As interest rates continue to increase, various construction sectors will feel the brunt of those increases differently.

“Those rates are rising the cost of borrowing and really changing the calculus of a ‘no-go’ or a ‘go’ decision on a project,” says Richard Branch, chief economist at Dodge Construction Network. “That weight isn’t spread equally across the sectors. Income property, offices, warehouses and hotels – those are certainly feeling the effects of not just higher interest rates, but now tightening lending standers.

“The other side of that, though, is that it is somewhat balanced out by growth in manufacturing [and] growth in infrastructure – fueled by some of those pieces of legislation,” Branch adds. “The end result is a construction industry [that], in sum, is essentially sitting flat.”

Related: Evaluating the current state of construction

Additional analysis

Following a down year for single-family construction and a bountiful one for multifamily construction, Branch anticipates a script flip in 2023 within the residential sector.

Branch

“If we look at single-family construction starts, they’ve now risen for the past two months,” he says. “We haven’t seen that in well over a year. We have to temper that enthusiasm, though, with single-family construction. It’s not as though we’re all of a sudden going to see a robust year for single-family construction, as affordability remains an issue.

“Multifamily is a little bit different,” Branch adds. “We think that the labor market will erode enough in 2023 – combined with fewer investment dollars working their way into the multifamily space, as well as tightening lending standards. [That] will be a fairly heavy and sizable weight on the multifamily sector.”

In the nonresidential sector, Branch says the first quarter was weak in commercial construction (i.e., warehouse, retail, office, hotel) and kept steady with Dodge’s forecast. Still, several areas stick out as top performers.

“Data centers continue to outperform our expectations on the institutional building side,” Branch says. “Health care construction was pretty strong in the first quarter. Within the institutional space, airline terminal work was pretty solid, thanks to the start of a new concourse at Hartsfield Airport in Atlanta.”

Looking at nonbuilding, Branch notes in his first-quarter report that 2023 could be the biggest year for infrastructure yet. So far, he says the sector has played out as predicted.

“There are many more dollars making their way down from Washington to state and local communities,” Branch says. “That is starting to get spent on road, bridge, water and sewer projects, and we expect that trend to continue through 2023.”