Construction activity has remained fairly strong in the fourth quarter of the year, despite continued challenges with inflation, labor and the supply chain.
“The construction sector is ending 2022 with a lot of positive momentum. Manufacturing, infrastructure, multifamily, and commercial and institutional starts have all been robust, more than offsetting the pullback in single family starts,” says Richard Branch, chief economist at Dodge Construction Network. Through the first 11 months of the year, Dodge reports that total construction starts are 14% higher than in the same period of 2021.
Federal Funding Gives a Boost
Branch notes that funds from the Infrastructure Investment and Jobs Act, the CHIPS Act and the Inflation Reduction Act are expected to boost construction activity in the coming year. Still, he says, some sectors will struggle. “Higher interest rates and a slowing economy will weigh heavily on the residential and commercial sectors.”
Following a boom at the start of the COVID-19 pandemic, the single-family market has had a particularly tough year. Starts in the sector are down 12% through the first 11 months of 2023, according to Dodge data. Branch expects the trend will continue. “Mortgage rates will remain elevated for much of the next year, leading to further erosion,” he says. Multi-family construction had a better year, increasing 16% from the same time last year. The largest multifamily projects to break ground in the past two months were the $564-million Long Island City Center II in Long Island City, NY, and the $450-million Waldorf Astoria Hotel and Residences in Miami, reports Dodge.
In the non-residential building sector, starts are up 36% through November. “Growth in the commercial sector has been very broad-based across the hotel, office, and retail sectors while institutional starts are higher, led by life science and health care activity,” says Branch. The manufacturing sector has seen the largest boost, up more than double in the first 11 months of the year. Branch adds that several large manufacturing projects have broken ground during the past few months, notably the $3.3-billion Texas Instruments chip fabrication plant in Sherman, Texas, and the $2.0-billion GM Orion plant in Orion Township, Mich.
Total non-building construction starts rose 16% year-over-year, particularly in the street, bridge, water and sewer categories, due to the boost in federal funds. Among the largest projects to recently start construction are the $678-million Fox Squirrel solar farm in Madison County, Ohio, and the $576-million reconstruction of Interstate Highway 820 in Fort Worth, Texas.
Lumber Prices Steady
In the materials sector, lumber is expected to be relatively stable in the first half of the coming year. “Softwood lumber prices in 2023 will be far less volatile than they have been since the beginning of the pandemic,” says Luke Lillehaugen, senior economist at S&P Global. “The slowing demand environment and ample supply will shift negotiation power to buyers, though the primary goal of producers will be to manage supply so that it does not exceed demand.”
Despite little price movement expected, S&P Global’s fourth quarter forecast predicts a 31% yearly decline in the average price of softwood lumber in 2023, after a 5.4% drop in prices this year. “While the quarterly pattern of softwood lumber prices in 2023 is fairly stable, the major price decreases in the second half of 2022 mean that the average annual prices in 2023 will be far lower than they were the previous year, despite only minimal movements between quarters,” says Lillehaugen.