See It in Action
Are you worried about a slowdown in the construction industry?
Knowing the latest trends is essential for making smart decisions and staying ahead in this changing sector.
In recent years, the construction industry grew significantly, with the U.S. construction market reaching $1.8 trillion in total spending in 2022. However, recent data suggests a slowdown might be occurring. Let's explore current trends, recent data, and what this means for professionals like you.
The construction sector faces a mix of opportunities and challenges. Residential construction surged due to low interest rates and higher demand. Yet, supply chain issues and rising material costs have created new obstacles.
The U.S. Census Bureau reported that construction spending reached $1.57 trillion in August 2023, showing moderate growth. Still, some indicators suggest a slowdown. The Dodge Momentum Index, which predicts nonresidential building projects, declined by 5% in September 2023 compared to the previous month. The Associated Builders and Contractors (ABC) also noted that contractor confidence has decreased due to higher interest rates and economic uncertainties. The ABC Construction Confidence Index fell to 54.3 in September 2023, down from 56.1 in August, indicating reduced optimism among contractors.
Forecasts indicate a noticeable slowdown in the coming years. The American Institute of Architects (AIA) predicts that growth in nonresidential construction spending will decrease from 5% in 2023 to 2% in 2024 and further slow to 1% in 2025. Factors contributing to this include higher interest rates, tighter credit conditions, inflation, and falling commercial property values.
Higher mortgage rates have made borrowing more expensive for builders and buyers. The Federal Reserve reported that the average 30-year fixed mortgage rate exceeded 7% in 2023, the highest in over a decade. This increase has led to less new home construction and a drop in building permits. In September 2023, housing starts decreased by 5% compared to the previous month, and building permits fell by 7%, according to the U.S. Census Bureau.
Regional banks, key providers of construction loans, are under increased pressure. The Federal Reserve's Senior Loan Officer Opinion Survey showed that 60% of banks tightened lending standards for commercial real estate loans in the third quarter of 2023, up from 50% in the previous quarter. This tightening makes it harder for developers to get financing for new projects.
Inflation continues to be a challenge, increasing expenses in the construction sector. The Bureau of Labor Statistics noted that the Producer Price Index for construction materials rose by 10% year-over-year as of September 2023. For instance, concrete prices increased by 12%, and steel prices rose by 15% over the same period. Higher material and labor costs are affecting project budgets and profits.
Weak demand in some sectors is lowering property values, impacting investment. The commercial real estate market, especially office spaces, is seeing lower occupancy rates due to more remote work, leading to fewer new commercial construction projects. According to Cushman & Wakefield, office vacancy rates reached 18% nationwide in Q3 2023, the highest since 2010, and commercial property values declined by 10% compared to the previous year.
These trends highlight the need for strategic planning. With forecasts showing slower growth, you might face fewer projects and requests for proposals, especially in residential and commercial areas. Labor shortages continue to be an issue, with an estimated 375,000 unfilled construction jobs as of September 2023, according to the Associated Builders and Contractors.
Staying informed about market conditions is crucial. Focusing on stable sectors like infrastructure and certain institutional projects can help lessen the impact of the slowdown. The Infrastructure Investment and Jobs Act passed in 2021 allocates significant funding for infrastructure projects in the coming years, offering opportunities in this area.
Using tools and technologies that improve efficiency and support informed decision-making can help your firm navigate these challenging times effectively.
Understanding the economic factors shaping the construction industry in 2025 is vital. We'll examine how inflation and rising costs impact project budgets and how interest rates and credit conditions affect construction activity.
Inflation has been driving up expenses in the construction sector. Higher costs for materials and labor affect project budgets and profitability. The Bureau of Labor Statistics reported significant increases in construction material costs, impacting various sectors differently. The Construction Materials Index increased by 10% year-over-year in September 2023. For example, concrete prices rose by 12%, and drywall costs increased by 15% over the same period.
Manufacturing construction has grown due to investments in domestic production. In contrast, residential construction faces challenges, with many reporting decreased revenue compared to last year.
Labor shortages also add to rising costs. The U.S. Chamber of Commerce found that 88% of contractors are having moderate to high difficulty finding skilled workers. In August 2023, average hourly earnings in construction rose to $33 per hour, up 5% from the previous year, reflecting the increased competition for skilled labor. This shortage raises wages, further increasing project expenses.
High interest rates significantly influence construction activity. Higher mortgage rates make borrowing more expensive, slowing new home construction. Building permits have decreased, signaling less future construction activity. The National Association of Home Builders (NAHB) reported that builder confidence has fallen recently due to rising rates. In September 2023, the NAHB/Wells Fargo Housing Market Index fell to 45, down from 49 in August 2023, indicating declining builder confidence.
Tighter credit conditions worsen the situation. Many regional banks that provide construction loans are under pressure, leading to stricter lending standards. This makes it harder for developers to get financing for new projects. Falling commercial property values also affect credit conditions, causing lenders to be more cautious.
After strong growth in 2023, projections suggest a slowdown in nonresidential construction spending over the next two years. We'll look at projected nonresidential spending and sector-specific outlooks to help you prepare.
Nonresidential construction spending is expected to grow by 4% in 2024 and slow to just over 1% in 2025. Economic factors like tighter credit conditions, higher interest rates, and ongoing inflation contribute to this slowdown.
The American Institute of Architects notes that weakening construction starts and decreasing commercial property values signal challenging times ahead. Architectural firms have reported weaker business conditions, with the Architecture Billings Index (ABI) falling to 47.5 in September 2023, marking the fourth consecutive month below 50, which indicates a decrease in billings and suggests reduced activity.
Kermit Baker, AIA Chief Economist, said, "The drop in the ABI reflects the economic challenges facing the construction industry, and firms need to prepare for the potential impact on their projects."
The slowdown will affect different construction sectors in various ways.
Commercial construction is expected to remain steady in 2024 and 2025. Office construction is projected to decline by 2% in 2024, influenced by the ongoing shift to remote and hybrid work. Retail construction may see a modest increase of 1%, while hotel construction is expected to recover with a 5% growth in 2024.
Manufacturing construction is anticipated to grow significantly, increasing by up to 16% in 2024 before stabilizing in 2025. This growth is driven by investments in domestic production and supply chain resilience. According to the U.S. Census Bureau, manufacturing construction spending reached a record $120 billion in 2023, up 30% from 2022, reflecting significant investments in semiconductor factories and electric vehicle plants.
Institutional construction is projected to see mid-single-digit gains in 2024 and 2025. Healthcare and education sectors are expected to continue investing due to demographic trends and government funding. Education construction spending is forecasted to grow by 4%, while healthcare construction is expected to increase by 6% in 2024, driven by aging population needs and federal funding for healthcare infrastructure.
Infrastructure projects are predicted to grow strongly during 2024–2025, fueled by federal funding from the Infrastructure Investment and Jobs Act. Opportunities in transportation, water resources, and energy infrastructure are expected to rise. The Infrastructure Investment and Jobs Act provides $1.2 trillion over ten years, with $550 billion in new spending on infrastructure projects. In 2023, federal spending on infrastructure projects increased by 15% compared to the previous year.
Residential construction is expected to increase by 3% in 2024, though high interest rates and affordability issues continue to challenge the housing market. The NAHB predicts that multi-family housing may decline, while single-family housing could improve modestly if interest rates stabilize. Housing starts for single-family homes are projected to grow by 2% in 2024, while multi-family starts may decrease by 5%, according to NAHB forecasts.
Warehouse construction is forecasted to drop by 11% in 2024 due to slower e-commerce growth. Warehouse construction starts declined by 5% in 2023 and are expected to decrease further, according to Dodge Data & Analytics. Retail construction may see a modest increase of 9% as stores adapt to new consumer behaviors. Hotel starts are projected to rise by 16% as the hospitality industry recovers from pandemic lows.
The construction industry is slowing down due to several factors. Understanding these can help you navigate the challenges ahead. We'll explore how labor shortages and weakening construction starts are impacting the industry.
A shortage of skilled labor is a major issue. The Associated General Contractors of America (AGC) reported that 81% of construction firms are struggling to fill open positions. Sectors like commercial, industrial, and infrastructure construction are particularly affected.
Labor scarcity not only hampers current activities but also affects future planning. This shortage increases competition for workers, raises wages and operational costs, delays project timelines, and reduces the ability to take on new projects. According to the U.S. Bureau of Labor Statistics, there were 375,000 job openings in the construction industry as of September 2023.
A decline in new construction starts is significantly contributing to the slowdown. Dodge Data & Analytics noted that construction starts slowed dramatically or turned negative across almost all sectors in late 2023. In August 2023, total construction starts decreased by 9% compared to the same period in 2022, with nonresidential starts down 12%, according to Dodge Data & Analytics.
Economic challenges like high interest rates and tighter credit conditions influence this reduction. Rising construction costs due to inflation further strain budgets, causing developers to delay or cancel projects.
These factors make it harder for developers to start new projects, slowing down the industry's momentum. Understanding these trends is crucial for adjusting strategies and preparing for changing market conditions.
Different sectors in the construction industry are experiencing varied trends. We'll look at the industrial construction slowdown and examine tenant demand for real estate.
Industrial construction is slowing down. Reports show that construction starts have decreased significantly as tenant demand has declined. CBRE, a leading commercial real estate services firm, reported that industrial vacancy rates have slightly increased, signaling a cooling market for industrial construction in the near future. Industrial vacancy rates rose to 5% in Q3 2023, up from 4.5% in Q2 2023, according to CBRE's latest report.
Demand for real estate, especially in commercial and industrial sectors, is weakening. High interest rates and economic uncertainties have made businesses more cautious about expanding or investing in new properties.
Reduced demand affects new construction projects, as developers adjust by scaling back or delaying plans. JLL, a global real estate services company, noted that office space absorption rates have declined, and sublease availability has increased, reflecting changing tenant preferences. Sublease space in the office market reached 250 million square feet in Q3 2023, an increase of 10% from the previous quarter, according to JLL.
With a projected slowdown through 2025, it's important to adapt proactively. We'll provide strategies for adaptation and discuss tools for informed decision-making.
Preparing for potential sales declines requires strategic planning and flexibility. Here are some steps you can take:
Plan for possible reductions in sales, including cost-cutting measures and operational adjustments. Review your finances and find areas where expenses can be reduced without affecting quality.
Consider expanding into sectors less affected by the slowdown or showing growth, such as public infrastructure or data center construction. Diversification can help reduce risks associated with downturns in specific sectors.
Focus on building strong relationships with existing clients to secure repeat business. Invest in customer service and communication to enhance client satisfaction. Investing in effective construction marketing strategies can also help enhance client satisfaction and attract new business. Leveraging AI in AEC marketing can help you tailor your strategies to better meet client needs.
Keep a close eye on expenses and maintain liquidity to handle potential financial challenges. Implement strong financial controls and consider alternative financing options if needed.
Stay updated on industry trends and economic indicators to make timely decisions. Reading construction industry insights and participating in industry associations and events can help you stay connected.
Using data can improve your decision-making during uncertain times.
Use software that provides insights into market trends, project performance, and financial metrics. Platforms like Autodesk Construction Cloud offer analytics tools designed for the construction industry, helping to enhance decision-making.
Implement a CRM system to track opportunities and client interactions efficiently. Understanding the construction CRM benefits can help you choose the right tool. Tools like CRM solutions for AE firms, Salesforce, or Procore can help manage client relationships and sales pipelines.
Use predictive analytics, including advancements in AI in construction, to anticipate market changes and adjust strategies. Software solutions like TrendMiner can assist in forecasting and planning.
Adopt tools that help with planning, budgeting, and resource management. Focus on operational efficiency and strategic adaptation.
In a slowing market, proactive strategies can help your business stay strong. We'll discuss pipeline management strategies and tools for evaluating opportunities.
Efficient pipeline management is crucial when the construction market slows down. Digital technologies can improve efficiency and help you adapt.
Companies are using tools like Building Information Modeling (BIM) and artificial intelligence to streamline processes. Integrating these technologies can help you streamline data management and manage your projects and resources more effectively.
Improving team collaboration through shared digital platforms ensures everyone stays aligned, reducing delays and inefficiencies. Utilizing features like the new Calendar View feature can help your team stay organized and on schedule.
Choosing the right projects is critical in a slowing market. Advanced tools and data analytics can provide insights into project viability.
Using AI advancements in construction CRM and advanced software allows for more accurate risk assessments. Tools offering instant analytics and customizable reports help you identify projects that fit your strengths.
Investing in technology that centralizes project information and simplifies proposal creation, such as using a construction CRM for proposals, enhances your ability to secure new projects.
Adapting to a slowing construction market requires the right tools and strategies. ProjectMark offers solutions to help you optimize your operations and stay competitive. Read our ProjectMark CRM success story featuring Cooper Jensen to see how we have helped businesses like yours. Schedule a demo today to see how we can support your business during these challenging times.
