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Among many challenges, the rising cost of materials and labor hampered construction activity in 2023. Economists—worried about rampant inflation—even labeled some construction sectors as “ recessionary”.
In response, the Federal Reserve raised its benchmark interest rate four times. While these hikes effectively brought inflation down from its peak, higher lending standards and subsequent problems with financing construction projects worsened as the year progressed.
This affected many projects across the country over the past 12 months, particularly in privately run developments. For example, Shopoff Realty Investments halted construction of its roughly $550 million Las Vegas Dream Resort in March due to construction financing issues. In November, the Zoning Commission of Clark County, Nevada, scrapped a separate $5 billion entertainment complex in Las Vegas due to funding issues.
However, as the new year begins, it is clear that some types of construction will enjoy increased activity throughout 2024. On the other hand, some sectors continue to face challenges that are likely to persist through the next 12 months. Here are the construction sectors winners and losers in 2024:
Winner: Factories
A powerhouse since the pandemic accelerated America’s burial effort, manufacturing construction will continue its hockey-stick trajectory in 2024.
Anirban Basu, chief economist at Associated Builders and Contractors, said larger contractors should continue to benefit from a “bunch of megaprojects across the country.” Meanwhile, Didi Caldwell, president and CEO of Global Location Strategies, a Greenville, S.C.-based manufacturer services and business consulting firm, called the onshoring trend a “Once in a lifetime” event..
It starts in the sector, which includes multi-million dollar electric vehicle battery plants and 1,000-acre semiconductor factory projects, reaching $97 billion by 2023, according to the Dodge Construction Network. This is the second largest investment in one year in the last 15 years. Only 2022, which set the all-time record of $102 billion, saw higher activity.
But this year it’s on track to be even bigger. Dodge projects $112 billion in investment in the industry by 2024, a possible record amount of activity, said Richard Branch, chief economist for the Dodge Construction Network.
“The bright side of the market here is that we’re starting to see demand for chips pick up, semiconductor sales start to pick up,” Branch said. “This is a good sign after a year or so of softness in the market.”
Manufacturing construction soars to new heights
Public funds, such as the IIJA and the CHIPS Act, continue to drive startups in the sector.
Winner: Bridges and Roads
Beyond manufacturing, road construction could actually begin in 2024.
About 63%, or nearly $400 billion for more than 400,000 projectsInfrastructure funding has been announced so far since President Joe Biden signed the Jobs and Infrastructure Investment Act two years ago, Branch said.
But this does not mean that only 37% of the funds remain to stimulate construction activity. The announced funding, which is gleaned from the agency’s press releases, is preliminary and non-binding, while the awarded funding represents actual obligations, according to the White House.
“We haven’t seen this ad move through the entire allocation process, or [be] it’s still been spent,” Branch said. “One of the big assumptions we made in 2021 was that 2023 and 2024 would be the best years for growth and infrastructure. I think there’s reason to believe, though, that maybe it can be more like 2024 and 2025.”
One of the reasons is because material prices remain high. With the focus on inflation in 2022 and 2023, state and local planners may have opted to slow activity until late 2024, when they could benefit from more favorable price conditions.
“The data is still out on that one, obviously, but I wouldn’t be surprised if it pushed for stronger growth,” Branch said. “This means that at the midpoint of [2024], we should start to see an acceleration in the forecast. Essentially, what the models are doing here is just driving growth.”
This leaves plenty of room for building bridges, roads and streets. The Dodge Pegs project starts for streets and highways to grow by 23% by 2024 and another 25% growth in bridge construction, totaling about $147 billion in activity in these sectors.
Street, highway and bridge projects are moving forward
Forecasts begin in the sector to reach new heights in 2024.
Loser: Warehouses
However, not all sectors will increase activity in 2024.
High interest rates, supply chain disruptions and tight lending standards dragged down commercial construction for much of 2023. Despite rate cuts expected in 2024, Basu expressed doubts about the Federal Reserve’s ability to achieve a “soft landing” or raise rates enough to stop inflation without triggering a recession. He added that he still expects a more significant economic downturn in the future.
“I thought the recession would come in 2023,” Basu said. “For me, the question has always been, ‘Will this Federal Reserve rate-hike cycle engine end up in a recession? Yes or no?’ I continue to believe the answer is yes, I have.”
According to Dodge, starts on general commercial projects, such as retail, office, warehouse and hotel, fell about 6% in 2023. In 2024, the sector is expected to drop another 2%.
Much of this negative outlook is focused on some sectors within the commercial category.
For example, warehouse startups have entered a “structural decline,” Branch said. This slowdown comes primarily from two major warehouse builders, Amazon and Walmart, scaling back their warehouse construction plans for the foreseeable future. Amazon alone accounts for 16% of the warehouse construction market, according to Dodge.
However, there are regional variations in warehouse construction and the impact of the recalibration is not uniform across all markets. Some areas may still experience positive growth despite the overall adjustment.
“I don’t hesitate to call it an economic downturn because if you look at the fundamentals underneath, vacancy rates are near historic lows, they’re going up, but they’re still very low. There’s a lot of demand of high-tech logistics infrastructure,” Branch said. “Basically it’s just one player coming out and this realignment continues until 2024.”
Dodge expects warehouse construction starts to reach $44 billion by 2024, down 11% from the previous year. This negative forecast now marks two consecutive years of contraction, after more than 10 years of growth.
The warehouse begins to decline
Sector activity dipped after Amazon’s construction pause.
Loser: Offices
Economists maintain that traditional office construction is unlikely to return activity levels before the pandemic soon, and maybe never.
In fact, speculative office construction, which means building office space before securing a lease, continues to account for less of overall office construction work. Previously accounting for about 65% of the work by dollar value, these types of projects are now much less common compared to alteration-type projects.
Alterations, which include remodeling, renovating or rearranging existing space, now account for about half of all office construction activity, Branch said. This indicates a bleak outlook for new office construction.
Traditional office construction starts will fall 6% in 2024, Dodge forecasts. Without alteration projects to support these levels of activity, office construction forecasts would likely be even worse, Branch added.
Traditional office construction is starting to decline further
It is likely that activity in the sector will not return to pre-pandemic levels.
