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“For the residential [construction] market, 2022 has been a year of tumult, and that tumult extends into 2023,” he says.
An anomaly that is unique in the construction industry as it stands in early 2023 is the construction backlog is historically long. The ABC reported the backlog was 9.2 months as of November 2022, the longest since the second quarter of 2019. That number remained the same in December 2022.
While the appetite among businesses and housing builders to plan new construction could be dampened by interest rate hikes and fears of recession, Basu says many construction firms could be insulated from a serious downturn in activity in 2023 by the construction backlog. However, 2024 and 2025 could be different stories.
“I would think that for many contractors, the more problematic years will be … 2024 and 2025 because there’s this lag between what the broader economy is doing and what construction is doing,” he says. “So, even if the economy falls apart today, contractors will remain busy.
“It’s possible … the construction backlog will be burned off around the same time that the construction industry is feeling the full effect of the Federal Reserve’s interest rate hikes during 2022 and early 2023,” he adds.
The rental and owner-occupied segments of the residential market are likely to head in opposite directions in 2023, Basu says.
On the owner-occupied side, construction was strong in 2021 and at the beginning of 2022, but the latter half of 2022 wound up being a “really horrific period,” he says.
In spring 2021, inflation began to ramp up, but Basu says the Federal Reserve believed it would not last long, which was not the case.
“Inflation actually, rather than being transitory, accelerated into 2022. And now, having fallen behind … the monetary policymaking curve, [The Federal Reserve] quickly reversed course, and that [began] roughly in March, as they began to raise interest rates,” he says.
As a result of higher interest rates and mortgage rates, Basu says the cost of home ownership is increasing, which is driving people who might otherwise want to buy a home to rent instead. As these relatively well-heeled prospective homebuyers enter the rental market, overall shelter costs continually are increasing.
“The multifamily market should be quite strong in 2023 because, all things being equal, higher mortgage rates are good for the rental market,” he says. “That should portend good things for those contractors that are involved in constructing multifamily [residences].”
Overall, the owner-occupied construction market might slow in 2023, while the rental sector should be “decent,” Basu says. However, he notes the Federal Reserve’s interest rate hikes might tip the economy toward recession later this year, which could ultimately hurt the construction market in rental housing.
While January’s jobs report was strong historically, he says effects of interest rate hikes often take 12 to 18 months to be felt in the economy. Those hikes began in March 2022 and have continued since then.
“The full effect of [rising interest rates] may not be felt until later [this] year,” he says. “But, of course, in the interim, the Federal Reserve has continued to ramp rates higher.”
Since March 2022, the Federal Reserve has increased the key federal funds rate from 0.25 percent to 4.75 percent, with the most recent 0.25 percent rate hike at press time occurring this February.
If the rate hikes lead to a recession during the second half of 2023 or in 2024, it could slow job growth and hurt the rental housing market, which is typically strong when job and wage growth are strong, Basu says.
“When somebody gets a job, they have the wherewithal to strike out on their own and rent their first apartment, or they move to a better apartment,” he says.
Commercial building: A mixed bag
While demand for office and retail construction likely will be weak, Basu says new manufacturing, health care, data center and distribution center construction demand will be strong this year.
Driven by the growing trend toward remote work, office vacancy rates are increasing, but official rates could be artificially low.
“Those vacancy rates are often misleading,” he explains. “A lot of additional spaces are vacated because people are working remotely, but the space is not deemed vacant because it’s still leased.”
As those leases expire, Basu says the actual vacancy rate will increase, which could hurt demand for new office construction.
As shopping continues to move online, Basu says he expects lower demand for retail construction. Instead, he expects a rising demand for the construction of new fulfillment centers, which he calls the “backbone of the e-commerce economy.”
Chaotic supply chains also could drive construction as more firms decide to manufacture in the United States. “You can see that more CEOs are deciding to reshore production back to the United States,” Basu says.
Microchip manufacturing, in particular, is an area driving construction. Basu cites Taiwan Semiconductor Manufacturing Co.’s (TSMC’s) plans to build chip plants in Phoenix; Micron Technologies’ plans to construct a $100 billion semiconductor facility near Syracuse, New York; and Intel’s plans to build manufacturing facilities in Ohio as examples of companies investing to manufacture domestically rather than overseas.
“This reshoring and nearshoring story is real and will fuel a fair amount of manufacturing construction in 2023,” he says.
TSMC says its construction plans in Arizona will create jobs for “over 10,000 construction workers” as part of the $40 billion investment. Meanwhile, Intel says it will create 7,000 construction jobs associated with its Columbus, Ohio, plans, which could total a $100 billion investment over the next decade.
While privately funded construction likely will be a mixed bag for construction firms, those specializing in public infrastructure projects, such as roads, bridges and other public facilities, can look forward to a “brilliant” 2023, Basu says.
That rosy outlook for public infrastructure largely will be driven by the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, which commit money to green energy and infrastructure.
“We know there’s a lot of money for infrastructure, and we expect them to be busy for years to come,” he says.
Demolition and economic transformation
The changes in the way we do business from the rise of remote work to online shopping are creating opportunities for construction firms but even better ones for demolition firms, Basu says.
“The single-biggest opportunity is the pace of economic transformation and how that has created opportunities for some forms of real estate while really destroying opportunities for others,” he says. “That economic transformation can lead to a lot of repositioning of property, a lot of repositioning of real estate going forward, and that’s great for demolition. Often, you need to change the physical structure of a piece of property in order for it to accommodate the next use. That’s the reason economic transformation is the greatest opportunity for endless contractors, and change continues to be in the air.”
Workforce challenges remain
While the construction industry has had trouble attracting young employees for years, Basu says the COVID-19 pandemic exacerbated the problem.
“The pandemic has worsened the situation by inducing many of our best construction workers, who often happen to be our oldest construction workers, to retire from the industry or retire [in general],” he says.
Basu also says the danger posed by the pandemic angered some workers who saw estimators and supervisors working from home while they still had to work at job sites.
To combat this trend, construction firms are working hard to attract younger workers through apprenticeship programs, but awareness is an ongoing problem.
“Young people do not even consider the skilled trades as pathways because they have been told the only real pathway to prosperity is a four-year college [degree],” Basu says.
Increasing wages in service sectors also are a challenge.
“When McDonald’s pays $20 an hour and Amazon does something similar, all those entry-level construction jobs are no longer competitive in terms of compensations,” he says.
Technological advances
It’s no secret that construction and demolition jobs can be dangerous and often expose workers to the elements.
Those factors, Basu says, could prompt some firms to seek robotic solutions to tasks that could place workers at risk.
“It’s better to subject a robot … to the hazards than a human being,” he says.
Many firms already use robots for working in tight, hard-to-reach spaces, but Basu says he believes more companies will turn to those systems in the future for safety and workforce reasons.
Another advancement in technology is the use of three-dimensional modeling to help design implosions.
“What I’m thinking about is, for instance, building implosion models that increasingly are able to predict what’s going to happen or other byproducts of demolition, based on environmental conditions,” he says.
Basu says some systems might be able to predict how rain, sun, wind or even barometric pressure could affect the dynamics involved in an implosion.
On the construction side, Basu says modular construction could become more common.
“I suspect that … along the leading edge of innovation will be a greater amount of prefabrication and modularization, or more construction using a manufacturing model,” he says.
How quickly that change might take hold is debatable, Basu says.
“If one is manufacturing structures indoors, that creates a controlled environment for work that creates the opportunity for less variability,” he says.
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