The construction industry saw a strong rebound from COVID and showed strong performance throughout 2023. This was bolstered largely on the strong growth in U.S. gross domestic product in both Q3 and Q4 of 2023. Also, raw materials saw improvements in both prices and availability, which was a major factor for construction companies rebounding from the COVID impacts. This should not be a shock to anyone in the industry, but the labor supply and labor costs continue to be a major issue. Rising labor costs and a short supply of skilled workers have contributed to a tight labor market, and construction companies are having to pay larger wages to attract and retain employees.
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There are mixed expectations for 2024 with some forecasting a slight recession in the second half of the year, while others are predicting moderate growth. There are four main drivers of growth that impact the construction industry:
Both non-residential construction and supply chain show signs of retreat, bringing worry to economists and supporting the possibility of a slight recession. The decline in non-residential construction is largely impacted by the fact that many of the major projects that resulted in the growth in GDP in Q3 and Q4 of 2023 have been completed and fewer significant projects of that magnitude have replaced them.
The higher interest rates have also impacted on the situation as these rates have driven up the cost of capital and resulted in problems for developers to finance these large projects. There is hope that towards the back half of 2024, there will be a reduction in the interest rates to mitigate this some.
The supply chain, while much better than this time two years ago, or even last year, continues to show signs of a drop, largely due to construction companies flushing through the inventory that they built up as a reaction to the difficulties of obtaining raw materials post COVID and not seeing the need to immediately replenish these inventory levels.
Even with the noted challenges in the non-residential construction sector, the overall view remains favorable. While some sectors of non-residential construction, such as office buildings and traditional retail sites will see a gradual slowdown, other sectors like infrastructure construction, manufacturing facilities, and technology/robotics are expected to have solid growth because of the government spending to assist with the reshoring of manufacturing facilities and the government infrastructure bill.
Healthcare is also showing signs of continued growth largely as a result of the push of decentralization and the demand for smaller facilities located in communities closer to where people live (suburbs and exurbs) as well as technological upgrades.
The construction industry in Texas is among the best in the nation for the state. This is largely due to the fact that the Dallas/Fort Worth metroplex continues to be the hottest construction market in the nation for the second year in a row. Austin, San Antonio, Corpus Christi, and Killeen/Temple also represent the state in the top 100 major metropolitan US cities in terms of growth of construction activity.
Check out our LGT Financial Advisors' 2023 Market update.
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