US Construction Market Report 3Q 2023
Construction activity
The value of construction put in place is steadily ticking upwards. During the first seven months of the year, construction spending amounted to $1,101.5 billion, a 3.7% (seasonally adjusted) increase on the same period in 2022.
The AIA/Deltek Architecture Billings Index (ABI), which reviews construction industry confidence, stabilized for the third straight month in July, rebounding from the declines seen earlier this year.
New project work has been even stronger over this period, suggesting that design work may finally begin to increase in the short term, albeit modestly.
Encouragingly, firms with a commercial/industrial specialization reported their strongest billings growth in more than a year. However, other specialities, such as multifamily-oriented firms, reported continued declining billings.
Responses from the ABI survey show that architecture companies continue to hire, with 3,600 new positions added in the year to date and larger firms less likely to consider their businesses to be appropriately staffed.
Confidence remains in the construction sector’s short to medium-term prospects due to the federal spending commitments made through the $1.2 trillion IIJA.
Construction starts for infrastructure and civil engineering projects in the year to July are up 21% on the prior period, according to the Dodge Momentum Index. Hence, funding from the IIJA — passed by Congress in 2021 — looks to be trickling through and acting as the catalyst needed to replace some of the nation’s aging infrastructure.
Electric evolution
As electric vehicles (EVs) increasingly become the vehicle of choice for Americans, a robust charging network is vital.
Earlier this year, the Biden administration announced a series of regulations and incentives to bolster the EV industry called the Bipartisan Infrastructure Law (BIL). Central to this is a $7.5 billion fund earmarked for EV charging development. Funding is also available from the Department of Transport for state and local governments to access.
According to a report from Research and Markets, the value of the EV charging industry reached $3.15 billion in 2022. The report predicts this market will grow to $24.07 billion by 2030.
Hilton recently highlighted the extent of the demand for EV infrastructure, revealing that the second search attribute for their hotels is EV charging — leading to an agreement with Tesla to install 20,000 EV charging stations across 2,000 Hilton properties in the US, Mexico and Canada beginning next year.
Similarly, seven of the world's largest automakers (BMW, General Motors, Honda, Hyundai, Kia, Mercedes and Stellantis) announced in July that they're working together to build a new nationwide network of 30,000 EV charging stations, an effort to stoke already growing consumer demand for EVs. The first batch of their "high-powered charging" stations will be available next summer.
Airports taking off
Airport terminal construction remains active, with projects underway in major hubs like LaGuardia, Denver, San Diego and Kansas City. According to AAA booking data, international trips are up more than 200% compared to 2022 as the aviation industry recovers from the losses inflicted by the pandemic. Therefore, continued investment in American airports is crucial to keep up with the rising passenger traffic and comply with industry standards and regulations.
Similarly, port infrastructure upgrades are needed to address supply chain issues, with projects planned in New York/New Jersey, Savannah, Seattle and Houston among other areas.
Climate resilience projects
Federal support also extends to building up the nation’s resilience to natural disasters, which are becoming increasingly common. The costs of rebuilding communities can be significant — the National Oceanic and Atmospheric Association (NOAA) reports 18 disasters causing more than $1 billion in damage each in 2022.
Funding is available from various federal agencies, with a focus on prevention. Examples include the Environment Protection Agency (EPA) financing water management and wetland programs, while the NOAA provides funding for coastal zone protection.
In addition to funding, initiatives such as the Building Resilient Infrastructure and Communities program are accessible via the Federal Emergency Management Agency. This takes the form of non-financial direct technical assistance that can provide holistic hazard mitigation planning and project support.
Federal permitting delays
Despite infrastructure projects receiving large-scale investment, federal permitting delays have held up some major projects like pipelines and renewable energy facilities.
Opposition from local communities and restrictive regulations will continue to hamper projects, as factors such as poor coordination between agencies that are often understaffed make the process constantly reactive.
One proposed solution is a federal siting authority that could direct bulk transmission approvals from high resource areas.
In the meantime, soaring demand looks set to add to the bottlenecks forming at permitting authorities already inundated with applications.
Value of construction put in place
The total value of construction put in place has grown in the year to July 2023, driven by spending on construction projects rising every month this calendar year — with a small improvement of 0.7% in July to $1.97 trillion.
Despite pent-up demand in the housing market, the value of residential construction decreased 5.4% year-on-year. The recent increase in interest rates sees mortgage rates near 7%, leading to declining affordability for homebuyers while developers face the challenge of delivering homes at higher financing costs.
Conversely, non-residential projects are beginning to benefit from the vast federal funding available through the likes of the IIJA resulting in a 16.5% yearly increase.
Residential activity
Permits, a leading indicator of future starts, remain 13% below the level recorded in July of last year, indicating that housing activity remains subdued due to the unprecedented rise in interest rates.
The construction of apartments has gathered momentum in recent years. According to a report by Yardi Matrix, developers are set to bring 460,860 new rental units to the market — a 50-year high — by the end of December.
Projects approved during the pandemic’s peak have helped these delivery figures. However, with many cities across the US experiencing population growth, supply is struggling to keep up.
Illustrating the scale of the challenge, the Southern California Association of Governments projects that the population of the City of Los Angeles will grow to 4.3 million residents by 2029. This would amount to an extra 400,000 residents. Consequently, the Regional Housing Needs Assessment estimates that 456,643 new housing units would cater for this growth. To put this figure into perspective, housing production volumes seen between 2010 and 2019 would have to increase five-fold. Reaching such a target seems unlikely unless construction accelerates to hitherto unseen levels. Developers and contractors increasingly focus on pre-fabrication and industrialized construction methods to address the issue.
