Among the numerous challenges, the elevated cost of materials as well as labor hampered construction activity in 2023. Economists, who happen to be worried about rampant inflation, even went on to label some building sectors as recessionary.
In response to this, the Federal Reserve went on to raise its benchmark interest rate four times. Although those hikes impactfully went on to bring inflation down from its peak, heightened lending standards as well as subsequent issues with financing on construction projects went on to worsen as the year passed by.
That went on to affect numerous projects throughout the country in the past 12 months, specifically the privately led developments. For instance, Shopoff Realty Investments went on to pause construction on its almost $550 million Las Vegas Dream Resort in March last year because of construction financing issues. In November, the Clark County, Nevada, Zoning Commission axed yet another $5 billion entertainment complex in Vegas because of financing issues.
Nonetheless, as the new year takes off, it is evident that specific kinds of construction will enjoy a rise in activity all across 2024. On the flip side, there are certain sectors that continue to grapple with challenges that are likely to hang around for the next year. Below happen to be the winning and losing construction sectors of 2024:
Winner: Factories
One of the powerhouses ever since the pandemic speeded up America’s onshoring effort, manufacturing construction is most likely to continue its hockey-stick trajectory in 2024.
The chief economist at Associated Builders and Contractors, Anirban Basu, said larger contractors should keep benefiting from a bevy of megaprojects across the nation. Meanwhile, the president and CEO of Global Location Strategies, which is a Greenville, South Carolina-based business consulting and services firm for manufacturers, Didi Caldwell, labeled the onshoring trend as a once-in-a-lifetime event.
Starts in the industry, which go on to include multibillion-dollar electric vehicle battery plants as well as 1,000-acre semiconductor factory projects, touched $97 billion in 2023, as per the Dodge Construction Network. That ranks as the second-largest amount of funding in one year in the past 15 years. Only 2022, which went on to set the all-time record at $102 billion, happened to post higher activity.
But this year happens to be on track to be even bigger. Dodge predicts $112 billion in funding in the industry for 2024, a potential record amount of activity, said the chief economist for Dodge Construction Network, Richard Branch.
As per Branch, the good side of the market here is that they are indeed starting to see chip demand elevate and semiconductor sales are starting to increase, which is a good sign after a year or so of softness within the market, said Branch.
Manufacturing construction elevates to new heights
Public funds like IIJA and the CHIPS Act continue to push starts in the sector.
Winner: Bridges along with roads
Beyond manufacturing, it is roadway construction that could really get rolling in 2024.
Almost 63%, or $400 billion, for over 400,000 projects when it comes to infrastructure funding has thus far been highlighted as an announcement ever since President Joe Biden inked into law the Infrastructure Investment and Jobs Act a couple of years ago, opined Branch.
But this does not mean that there are just 37% of funds remaining to boost construction activity. Announced funding, which happens to be captured from agency press releases, is indeed preliminary as well as non-binding, whereas awarded funding goes to actual obligations, as per the White House.
They have not seen that announcement move all the way throughout the allocation or be spent as yet, Branch said. He added that one of the big assumptions they had made way back in 2021 was that 2023 and 2024 were going to be the best years when it came to growth and infrastructure. According to Brach, there is indeed a reason to believe, though, that that can somewhat be more like 2024 and 2025.
The one reason why is due to material prices remaining high. With the emphasis on inflation in 2022 and 2023, local as well as state planners may have chosen to slow activity until later in 2024, where they could benefit from more advantageous pricing conditions.
Data still happens to be out on that one, but as per Branch, he would not be surprised if more robust growth gets pushed out, which means that by the midpoint of this year, one should start to see an acceleration in the forecast. Essentially, what the models happen to be doing here is just pushing the progress out.
That leaves an immense runway for bridge, highway, and street construction. Dodge pegs project beginnings for streets as well as highways to surge 23% in 2024, and another 25% rise in bridge construction, touching about $147 billion worth of activity within these sectors.
Street, highway, and bridge projects move forward
Forecasts peg starts in the sector to touch new heights this year.
Loser: Warehouses
High rates of interest, supply chain disruptions, as well as strict lending standards brought down commercial construction for most of 2023. In spite of the anticipated rate cuts in 2024, Basu has gone on to express his doubt with regards to the Federal Reserve’s ability to attain a soft landing, or raising rates just enough to halt inflation without triggering a recession. He added that he still anticipates a more significant economic downturn in the years to come.
As per him, he thought that the recession would come in 2023. He adds that the question has always been: will this rate-hiking cycle engine by the Federal Reserve end up in recession? Yes or no, and the answer to this, as per him, is the former.
Beginning with the overall commercial projects like retail, office, warehouse, as well as hotel, they dropped around 6% in 2023, as per Dodge. In 2024, the sector is anticipated to tumble by more than 2%.
Much of that negative outlook happens to be focused on a few sectors within the commercial category.
For instance, warehouse starts have gone on to enter a structural decline, says Branch. That slowdown mostly stems from a couple of major warehouse builders, like Amazon and Walmart, scaling back their warehouse construction strategies for the foreseeable future. It is well to be noted that only Amazon accounts for 16% of the warehouse construction market, as per Dodge.
Nevertheless, there happen to be regional variances in warehouse construction, and the impact of recalibration is not standardized across all markets. Some areas may still go on to see positive growth despite the entire adjustment.
Branch says that he hesitates to call this an economic downturn, as if one looks at the fundamentals underneath this, vacancy rates happen to be near record lows; they are heading up, but they are still very low. There happens to be a lot of demand for high-tech logistics infrastructure.
Warehouse starts happen to be in decline
Activity within the sector took a dip due to Amazon’s construction pause.
Loser: Offices
Economists go on to maintain that traditional office construction most likely is not going to return to pre-pandemic levels of activity in the near future and maybe never will.
As a matter of fact, speculative office construction, which goes on to mean building office space before securing a tenant lease, goes on to take up less share of the entire office construction work. Once representing around 65% of work by dollar value, these types of projects now happen to be much less common as compared to alteration-type projects.
Alterations that go on to include remodelling, renovation, or even rearrangements when it comes to existing spaces now comprise approximately half of total office construction activity, remarked Branch. This goes on to indicate a kind of slim outlook for new office construction.
Traditional office construction beginnings are going to drop 6% in 2024, as per Dodge forecasts. Sans alteration projects propping up such activity levels, office construction predictions would likely be even worse, Branch added.
It is well to be noted that traditional office construction is beginning to drop further
Activity in this sector will most likely not return to pre-pandemic levels.
