Wider economy
Like much of the global economy, forecasts indicate that the US economy will likely weaken in 2023.
Whilst a recession has been forecast by the US Chamber of Commerce, among others, there are different views on the severity and length due to interpretations of recent data. Some believe that the US will avoid recession, although only narrowly, escaping with slow growth instead.
Construction activity
Construction market activity in the US is generally positive and project starts are increasing.
According to the US Census Bureau's Construction Spending report, construction spending in the US increased during 2022 with $1,792.9 billion expended — 10.2% higher than the $1,626.4 billion spent in 2021.
Whilst 2022 was a challenging year due to rising interest rates, inflation and global supply chain disruption, the construction industry maintained momentum, helped by federal investment. The value of public construction in 2022 was $363.6 billion, 4.8% above that spent in 2021.
Going forward, non-residential construction spending will likely continue to be driven by funds entering the market from the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022. The IIJA is a major infrastructure plan with $550 billion of new spending to improve the country's roads, bridges, airports and other critical infrastructure systems over five years. Many projects are also progressing through local transportation agencies.
As well as changes related to tax and healthcare, the IRA makes the single largest investment in climate and energy in American history, with a $369 billion investment in the modernization of the American energy system. The spending is designed to lower energy costs and increase cleaner energy production.
Initial assessments from the US Department of Energy find that 2030 levels of greenhouse gas emissions will be 40% lower than levels in 2005, due to IRA legislation plus other enacted policies and past actions. Further emissions savings will come from the IIJA and the CHIPS Act as well as improving standards to drive energy efficiency and pollution reduction from the transportation, power, building and industrial sectors.
The CHIPS and Science Act provides $52.7 billion for American semiconductor research, development, manufacturing and workforce development, which will drive the construction industry through 2023 and beyond with a large pipeline of advanced manufacturing projects.
Generally, committed infrastructure projects have been progressing, although the pace of progress varies depending on factors such as funding, regulations and the complexity of projects. Some have faced delays due to issues that include funding shortages, regulatory hurdles and opposition from local communities, while others have been able to move forward more quickly.
The shift in lifestyle brought about by the COVID-19 pandemic has been well-documented. It is also evident in construction activity data, with differences between the annual value of construction put in place across different sectors in 2022 compared to 2019 (pre-pandemic).
Although the total value of construction executed increased by 31.3% between 2019 and 2022, different sectors have fared in contrasting ways. Residential construction has increased by 64.9% in the period, compared to non-residential construction, which has risen by less than 10% (8.6%).
Lodging has been heavily impacted by the pandemic, due to the implementation of travel restrictions — the spend on such projects reduced by over 40%. However, with the easing of measures, travel for both business and leisure is increasing, owing particularly to the trend of spending money on experiences. As a result, growth in activity is forecast for this sector.
There has been a significant uplift in the value of manufacturing construction — increasing by 32.8%. Logistics firms and retailers have largely driven the industrial market. Unsurprisingly, the health care sector saw value growth of 15.4%.
The office market has seen significant pressure due to changing working practices during the pandemic. Spending on office construction marginally increased between 2019 and 2022 as businesses explored new workplace strategies, looking to fulfil flexible working aspirations and encourage employees to return to the office.
High-quality space is performing well, with high rents and low vacancy rates compared to older buildings, with consideration given to demolition and conversion for less environmentally efficient assets.
Data from the US Census Bureau demonstrates the impact of rising interest rates in 2022 on residential market activity. The number of new privately owned housing units authorized by building permits across the US decreased by 38% between March 2022 and the end of the year.
The potential for recession and uncertainty of a weakened economy could lead to decreased investment in construction projects, particularly with interest rates steadily rising and higher borrowing costs making it harder to secure financing for new projects. Although this could result in a decline in the number of projects, reports currently indicate a stable pattern with some mild pacing of the market, avoiding a significant contraction for the construction industry.
Materials and labor
Materials
Significant materials and products price escalation was seen in 2022, following that which occurred in 2021 as economies reopened after the COVID-19 pandemic.
Figure 7 shows the increases in producer price indices for different commodities since February 2020 (pre-pandemic). Softwood lumber had the smallest rise at a not insignificant 17%. In contrast, steel mill products increased by over 64.6%.
Russia’s invasion of Ukraine reignited cost escalation due to supply chain disruption and soaring energy prices pushing up production costs. More recently, some products and materials have seen reductions in pricing in response to a weakening global economy affecting demand and reducing input costs. However, some materials prices increased in the three months to January 2023 and pricing overall remains higher than pre-pandemic.
Producer price indices for different construction sectors all show increases above 10% in the year to January 2023, indicating the pressures faced. Consequently, bid prices have risen and Gleeds estimates that tender returns typically increased by 10–15% in 2022 compared to previous pricing.
Whilst cost escalation is not expected to be as great in 2023 as in 2022, price increases are forecast for some materials. Reducing inflation will help costs to moderate in the latter part of the year.
Materials logistics often continue to be challenging and reports are that concrete remains in short supply. There are extended lead times for transformers, generators, some mechanical equipment and semiconductors.
A survey by the Associated General Contractors of America (AGC), published in October 2022, reported that 93% of construction firms said they were experiencing material shortages and/or allocations. The research found materials availability issues affected all US regions, with only slight variations observed and challenges regardless of the market.
With the significant investment in infrastructure planned from the IIJA, the IRA and the CHIPS and Science Act of 2022, there may be further pressure on materials availability due to the level of demand.
President Biden’s State of the Union speech on 7 February 2023 addressed the critical role the “Made in America” agenda played in supporting the growth of manufacturing and new industries in the US. Following this, the Office of Management and Budget released proposed guidance to boost the use of American-made goods in infrastructure projects.
Federally funded infrastructure projects are required to use American-made iron, steel, construction materials and manufactured products to increase infrastructure investment benefits by boosting American employment and manufacturing.
Critics say that Buy America requirements may impact the buying power for infrastructure schemes and cause further cost escalation of some materials. There is also concern that the high sourcing cost could undermine the schemes' potential benefits.
The global market for commodities was also influenced by the Chinese zero-COVID policy in 2022, with lockdowns reducing resource use. As the Chinese economy reopens and targets growth through sustainable infrastructure, there is likely to be a further draw on resources, which may have a broader impact on other countries.
Encouragingly, there are signs that the construction supply chain is improving following the extensive delays, shortages and cost increases seen. However, it will look different to pre-COVID and time is needed for material issues to be fully alleviated.
Labor As mentioned earlier, the labor market remains tight, with 82,000 construction postings added between November and December 2022.
The Associated Builders and Contractors (ABC) has estimated that the construction industry will need to attract an estimated 546,000 additional workers, in addition to the normal pace of hiring in 2023 to meet the sector's labor demand.
The model developed by ABC estimates that every billion dollars of additional construction spending creates approximately 3,620 new jobs.
The ABC highlights that job openings reached the highest level on record and the industry unemployment rate of 4.6% in 2022 was the second lowest, behind 2019. There is a shortage of skilled labor as the recruitment pace has been slow.
Data referred to by the ABC shows that nearly one in four US construction workers are aged over 55, indicating additional challenges such as knowledge transfer once these workers retire or leave the sector.
Apprenticeships will play an essential role in attracting new entrants to the industry.
Labor Labor As mentioned earlier, the labor market remains tight, with 82,000 construction postings added between November and December 2022.
The Associated Builders and Contractors (ABC) has estimated that the construction industry will need to attract an estimated 546,000 additional workers, in addition to the normal pace of hiring in 2023 to meet the sector's labor demand.
The model developed by ABC estimates that every billion dollars of additional construction spending creates approximately 3,620 new jobs.
The ABC highlights that job openings reached the highest level on record and the industry unemployment rate of 4.6% in 2022 was the second lowest, behind 2019. There is a shortage of skilled labor as the recruitment pace has been slow.
Data referred to by the ABC shows that nearly one in four US construction workers are aged over 55, indicating additional challenges such as knowledge transfer once these workers retire or leave the sector.
Apprenticeships will play an essential role in attracting new entrants to the industry.
Sectors review
The strongest performing sectors are:
Infrastructure and manufacturing
With the significant investment from the IIJA, the IRA and the CHIPS and Science Act, there is a strong pipeline for constructing infrastructure and manufacturing facilities.
Data centers and mission critical
Demand remains strong due to increasing needs for computing power to support changing work and life habits through the pandemic.
Opportunities remain in other sectors:
Opportunities remain in other sectors:
Enhancing and repurposing
ESG (environmental, social and governance) and retrofitting
For instance, the shifting ways of working are changing the scope of commercial real estate engagements. Clients are downsizing their targeted commercial investments, instead focusing on better utilizing their existing space or a smaller footprint to generate more traffic to offices and more collaborative work environments.
On the other hand, commercial vacancies are at near all-time highs. Developers and owners are exploring options to utilize those spaces better — sometimes changing the usage entirely (e.g. commercial to residential), creating new opportunities.
ESG is an urgent priority for many companies and sustainability concerns drive a wave of projects. Customers are becoming sustainability-conscious, expecting developers to lower the carbon emissions of new construction. Finance and investment are also increasingly linked to ESG credentials, adding further pressure — as well as incentive — to those involved in planning, designing, constructing and operating real estate assets.
There is rising activity in retrofitting existing buildings, with particular attention paid to improving energy efficiency and decreasing energy demand. Energy-efficient retrofits can reduce operational costs and provide older buildings with a new lease of life, helping attract tenants and gain a market edge.
Infrastructure and manufacturing
With the significant investment from the IIJA and the CHIPS and Science Act, there is a strong pipeline for constructing infrastructure and manufacturing facilities.
Data centers and mission critical
Demand remains strong due to increasing needs for computing power to support changing work and life habits through the pandemic.
Opportunities remain in other sectors:
Enhancing and repurposing
For instance, the shifting ways of working are changing the scope of commercial real estate engagements. Clients are downsizing their targeted commercial investments, instead focusing on better utilizing their existing space or a smaller footprint to generate more traffic to offices and more collaborative work environments.
On the other hand, commercial vacancies are at near all-time highs. Developers and owners are exploring options to utilize those spaces better — sometimes changing the usage entirely (e.g. commercial to residential), creating new opportunities.
ESG (environmental, social and governance) and retrofitting
ESG is an urgent priority for many companies and sustainability concerns drive a wave of projects. Customers are becoming sustainability-conscious, expecting developers to lower the carbon emissions of new construction. Finance and investment are also increasingly linked to ESG credentials, adding further pressure — as well as incentive — to those involved in planning, designing, constructing and operating real estate assets.
There is rising activity in retrofitting existing buildings, with particular attention paid to improving energy efficiency and decreasing energy demand. Energy-efficient retrofits can reduce operational costs and provide older buildings with a new lease of life, helping attract tenants and gain a market edge.
Trends and opportunities
With many headwinds facing construction — including labor challenges, cost escalation, viability pressures and wider economic factors — digital technologies are important to help boost efficiency, productivity and provide better outcomes. Digital transformation of construction systems and processes is gaining steam as industry stakeholders seek opportunities to increase value added.
Some examples include:
Embracing data and insights
Data and insights can help to improve performance and productivity.
Data analytics can flag potential risks or issues to enable better decision-making. Looking at real-time project data as well as using that from historical projects, can help identify risks and opportunities to improve performance.
Analyzing operational data can help to understand the use of buildings to make improvements for future projects. There are examples of data from the residential sector, where accommodation monitoring helps to show demand at different times of the day, meaning the right mechanical and electrical services with the correct capacity can be included in future projects. The analysis can also enable tweaks to systems to improve energy efficiency whilst meeting requirements.
Utilizing generative design techniques
Generative design uses computation to augment the designer’s ability. It helps practitioners to explore, optimize and make informed decisions to complex design problems. It will become more powerful as artificial intelligence and machine learning keep developing.
Autodesk explains that, ultimately, machine learning will enable the user to state outcomes with the system returning results based on historical data — it gives the example of laying out internal doors for a hospital egress.
Using generative design processes helps make design time more efficient and focused. Another benefit of machine learning is that it can highlight mistakes or omissions in a design.
Optimizing design for off-site and modular construction
Adopting off-site or modular construction on a project, where appropriate, helps realize quality and performance benefits. It can also help to reduce waste and make better use of resources.
Typical characteristics of projects that tend to suit off-site or modular construction include remote sites or those in highly dense urban areas with access difficulties and high labor cost/availability issues.
There are also benefits for projects that have a short window for construction, as preparation and planning are undertaken upfront, with the assembly and execution undertaken in a short period.
Utilizing robotics and digital tools
Labor and skills shortages are identified as critical issues for the construction industry. As well as attracting and retaining more diverse talent, there is also a case for robotics to help reduce onsite labour requirements and improve efficiency.
Robotics can also enhance health and safety, with robot technologies developed for operation in extreme and challenging environments, such as the nuclear power and offshore energy industries.
There is also a place for digital tools to help plan and monitor projects. Our Visualise product is deployed on a $900 million programme to deliver 75 schools in Peru. Each site is documented with 360° photos using cloud software to stitch together the images and pin them to approved floor plans. This creates a virtual site record, which is available to view by the project team in 15 minutes — meaning near real-time construction updates can be accessed, improving monitoring of both cost and progress and efficiently using resource time.
Visualise is being used on projects worldwide, proving invaluable in claims situations for verifying progress at any point in time and providing a clear, indisputable record. This has made for a less adversarial position and has helped improve project collaboration.
Get in touch
Res Orgut
Executive Consultant
Chris Williams
President of Americas
View more reports below
Research team contacts
James Garner
Senior Director, Global Head of Insights and Analytics
Edna Benavides
Insights and Analytics Manager, EMEA
Nicola Sharkey
Project Director, UK Insights and Research Lead, UK
Padmini G
Market Research and Client Engagement Manager, India
Res Orgut
Executive Consultant, USA
Sherif Sweillam
Director of Business Development, Egypt
Research team contacts
Edna Benavides
Senior Cost Manager, Insights and Analytics Manager, EMEA
James Garner
Senior Director, Global Head of Insights and Analytics
Nicola Sharkey
Project Director, UK Insights and Research Lead
Padmini G
Market research and client engagement manager, India
Res Orgut
Executive Consultant, USA
Sherif Sweillam
Director of Business Development, Egypt
Legal disclaimer: This report was prepared by Gleeds and is for general information only. Neither Gleeds nor any of their partners, directors, employees or other persons acting on their behalf makes any warranty, express or implied nor assumes any liability with respect to the use of the information or methods contained in this paper to any person or party. This document is subject to copyright and must not be reproduced.
The report was prepared in February 2023 and published 1 March 2023.
