Slowing economic growth will weigh heavily on residential and commercial activity; public funding to support manufacturing and infrastructure activity
Construction Starts Will Remain Unchanged In 2023
November 16, 2022 – Dodge Construction Network held its 2023 Dodge Construction Outlook on Nov. 15, 2022, a mainstay in the construction industry for over 80 years. The forecast predicts that total US construction starts will be unchanged in 2023 at $1.08 trillion. When adjusted for inflation total construction starts will dip 3%.
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“As the clouds of uncertainty mount on the fate of the economy in 2023 the construction sector has already started to feel the impact of rising interest rates,” stated Richard Branch, chief economist for Dodge Construction Network.
“The Federal Reserve’s ongoing battle with inflation has raised concerns that a recession is imminent in the new year. Regardless of the label, the economy is slated to significantly slow, unemployment will edge higher, and for parts of the construction sector it will feel like a recession.”
“Next year, however, will not be a repeat of what the construction sector endured during the Great Recession when the financial system collapsed. Residential construction, already reeling from rising mortgage rates, will continue to contract and will be joined by nonresidential construction as the commercial sector retrenches.
The funds provided to the construction industry through the Infrastructure Investment and Jobs Act (IIJA), The CHIPS and Science Act, and the Inflation Reduction Act (IRA) will counter the downturn allowing the construction to tread water. During the Great Recession, there was no place to find solace in construction activity – 2023 will be quite different.”
Some key takeaways from the 2023 forecast:
The dollar value of single family starts will be flat (-5% when adjusted for inflation), however, units will be down a further 6% to 891,000 units (Dodge basis) as higher mortgage rates and worsening affordability eat away at demand.
The multifamily sector has been reaping the benefits of the affordability issues plaguing the single family market, pushing demand for space up and vacancy rates down to record lows.
The softening labor market and investment outlook will eat away at these gains in 2023. While the dollar value of multifamily starts will rise a scant 1% (-7% when adjusted for inflation), units will fall 9% to 723,000.
Commercial starts will fall 3% in 2023 (-13% when adjusted for inflation) led by pullbacks in warehouse and office sectors.
Hotel and retail starts will post tepid growth in nominal dollars, but when adjusted for inflation will also slip; but the declines will not be as dramatic as in office and warehouse. There is some positivity in the commercial space in 2023, though, as data center construction is expected to remain brisk.
Institutional starts, meanwhile, will hold steady in 2023 (-1% inflation-adjusted) as gains in healthcare offset losses elsewhere. Traditional education starts (classrooms) have languished as slow demographic growth eats away at overall demand, however, life science buildings have flourished and will continue to do so in the new year.
Healthcare starts will be the engine of growth in the institutional sector as greater demand for both outpatient clinics and hospitals is on the rise.
Manufacturing starts have been robust since the pandemic as reshoring has led to numerous chip fabrication plants, EV battery plants, and other large facilities breaking ground.
Manufacturing starts are expected to nearly triple in 2022, and while they will decline in 2023 the level of 2023 starts at $51 billion has not been seen since the beginning of Dodge’s historical starts time series in 1967. The CHIPS and IRA acts will support abnormally high levels of activity for years to come.
Like the manufacturing sector, the nonbuilding/infrastructure grouping of projects will be supported by an infusion of public dollars through IIJA.
Public works starts will gain 18% in 2023 (+12% adjusted for inflation) led by gains in streets and bridge work, while the utility/gas category will gain 8% (+2% inflation-adjusted) as the extension of the investment and production tax credits in IRA will lead to gains in utility-scale wind and solar projects.
