Our Q1 2024 Market Conditions report summarizes current market conditions, industry trends, and mitigation strategies to make more informed business decisions in the quickly changing construction landscape.

What will 2024 hold? Despite many economic forecasts by experts over the last few years predicting an economic dip, from our perspective, 2024 is looking very positive in the building industry.

Across markets, we continue to see a significant number of opportunities. In the advanced technology, manufacturing, and life science sectors, we see new projects popping up across the country. We are also tracking some newer and significant healthcare projects on the West Coast and expect to see a spike in projects across the Central and Southwest regions in the commercial market.

Overall, a lot to look forward to in 2024, from our perspective. With so much in the news about the advancements and investments in Artificial Intelligence (AI) and Machine Learning (ML) these days, we have taken a curious, yet cautious, approach to how AI and ML can play a role in construction processes. Are these chatbots and AI models truly a reliable source to gain real decision-making insights? The answer is a resounding “no.”

As is true with most things, be careful who you listen to and what you believe. AI, in theory, is exciting and has a huge potential to do many amazing things, but one thing we are not relying on right now is a machine to make construction industry predictions.

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Chatbots return generic responses to very complicated questions and ultimately state: “Make sure you don’t rely on this information to make any decisions and reach out to a true professional when seeking advice.”

Even asking basic questions about what to look out for in the construction industry for 2024, you’ll get a nonspecific response that sustainability and advancements in technology are important and that labor shortages and skill gaps are a challenge. Not wrong, but insightful? Not really.

Good news for us humans, we are still needed! It doesn’t take much to see that AI can provide us with a broad understanding of critical topics that are important for planning our projects and considering potential impacts. But it essentially points us back to the experts because real-time data and expertise is irreplaceable.

As with just about anything—especially on the Internet—we have to be cautious about how and what we use to inform ourselves. The crowd-sourced data these chatbots use for responses is so vast, even they agree that we should neither use them to make business decisions, nor rely on them to predict the future.

It’s no question that the construction industry is buzzing with this topic. You can hardly open an industry news source or investigate a construction/design technology without seeing the letters “AI.” The opportunity to leverage data is great, it’s also a vast topic that is challenging on many levels.

Projects that we build are often extremely different than one another, which presents a host of challenges when it comes to leveraging data for the purposes of AI and ML. Buildings with the same end-use will be designed by different architects and engineers, in a different part of the country and with different client specific needs. This is an industry-wide challenge we are all faced with.

A good portion of our client-base that have large portfolios of building projects on the horizon have begun to implement standardization to ensure the results they expect are more reliable and predictable. Locking down certain specifications—design-styles and engineering standards—is certainty more attainable versus treating each project as its own bespoke creation.

Without a doubt, the industry is laser-focused on this topic and the momentum is there. The promise of what’s to come is very exciting with AI and ML already being leveraged in tangible ways.

Within DPR, we have several dedicated initiatives to work with our own data to make even more reliable predictions and drive more certainty into our planning efforts.

What if we could harness our past experiences and data to achieve predictable outcomes?

AI and ML apps and tools have the potential to guide us toward this goal, providing assistance and direction in interpreting our historical data for more reliable and proactive decision-making. AI can accelerate our decision-making by providing suggestions that can lead to faster actions.

We talked about chatbots earlier. By this time, we all have tried ChatGPT. Generative AI has huge potential in construction in terms of how we can plan, manage and execute projects. Apps and chatbots powered by GPT and other Large Language Models (LLM) that are trained on construction data can be game changers in information retrieval and knowledge management for construction.

“At DPR, we are developing applications powered by Generative AI, designed to revolutionize how questions about projects, data, and documents are addressed,” explains Hrishi Maha, DPR’s AI and Data Leader. “Our aim is to significantly enhance the speed and efficiency of information retrieval and analysis. By harnessing the capabilities of Generative AI, these applications can rapidly parse through vast amounts of data and documents, delivering precise, contextually relevant answers in a fraction of the time it would take using traditional methods. This not only streamlines workflows but also empowers decision-makers with quick access to critical information, facilitating faster, more informed decision-making processes.”

As we are building AI and Generative AI powered tools and apps, one aspect we are really focusing on is governance and responsible AI. A responsible AI framework is necessary to ensure that artificial intelligence technologies are used ethically, safely, and effectively while protecting client data and people's privacy.

With the rapid evolution of AI, including breakthroughs in Generative AI and Large Language Models (LLMs), the role of technology in the construction industry is becoming increasingly sophisticated and impactful.

However, it’s crucial to acknowledge that our people remain at the heart of decision-making processes. While AI technologies offer valuable insights and can significantly expedite decision-making by presenting well-informed suggestions, the final judgment still firmly rests in human hands.

Currently, AI is not at a stage where it can autonomously make decisions in the complex and nuanced realm of construction. Our skilled professionals can leverage AI as a powerful tool to enhance their expertise, ensuring that every decision is backed by both advanced technology and human wisdom.

This is what we are really cautious about. We want data to validate our plan, to inform it, not replace it. This industry is built on experience and that’s hard to program into an algorithm—it requires teams that know how to communicate the reality of business problems with those who understand the details of technical solutions.

This example is just one of many of what AI and ML can open up for us as a company, let alone the industry. Embracing AI-powered decision-making is a transformative step towards achieving truly data-driven decision-making in our processes.

By harnessing the power of AI in our decision-making framework, we are not just utilizing data; we are empowering it to guide us toward smarter, more effective outcomes. The industry is heading that way and so are we.

In January, Swensons restaurant in Ohio announced the return of its original cheese after a taste-altering cheese was adopted during COVID. Labor shortages made it difficult to allocate time for the more labor-intensive process of cutting the preferred cheese from the larger blocks from which it is made.¹ Disgruntled “Swenatics” were no doubt thrilled to return to their original cheeseburger. And have no fear, Michel Doukeris CEO of AB InBev—maker of Budweiser—reported that its locally sourced materials will ensure that there is no danger of supply chain disruptions for its beers.²

Companies are seeing supply chain disruptions ease, or are adapting to past delays. In late December, The Federal Reserve Bank of New York noted supply chain pressures are trending down from its high of 4.33 in December of 2021, citing the Global Supply Chain Pressure Index, but warned that problems may persist.³

Contractors are seeing pressures ease on our end as well, with continued lead time issues in certain mechanical, electrical, and insulation materials. But we’re also hearing continued concerns, like the report from Delta Air Lines, which cut its 2024 profit outlook because of delays of new planes, which is driving up maintenance and repair costs on older planes, up 23% in 2023 compared with 2022,⁵ due to increased costs from the persistent supply chain challenges on parts.

Supply chain pressures have been a big factor in inflation, as disruptions have been constraining availability of products, which has pushed material prices higher, fueling the inflation that struck during the pandemic. Conversely, the easing of supply chain pressures has improved the availability of product, which has eased price increases, although many products have not returned to pre-pandemic prices.

This is good news, and we continue to hear news reports of a “soft landing,” with the Fed announcing that it will cease rate increases and may lower rates in 2024. It held that “several participants assessed that healing in supply chains and labor supply was largely complete,” but added that “continued progress in reducing inflation may need to come mainly from further softening in product and labor demand, with restrictive monetary policy continuing to play a central role.”

Economists explain it this way: some of the reduced inflation was as a result of significant reduction in freight demand year over year from 2022 to 2023 by 8.5%,⁶ which has driven freight prices down. With the softening in billings in the Architectural Billings Index the second half of 2023,⁷ rate cuts would be welcome news, and could have a positive impact on construction volume.^8,9

Geopolitical conflict, now in Ukraine, the Middle East, and the Red Sea, is a factor in the supply chain. A senior U.S. official reported that as of early January, there had been 25 Houthi attacks on Merchant vessels in the Red Sea since November 18. The Red Sea is a major trade artery, making up almost one-third of global container traffic and around 12% of global goods trade.¹¹ In response, shipping companies are rerouting their loads from the Suez Canal, and instead navigating around the southern tip of Africa, around the Cape of Good Hope. This is increasing shipping time by two-plus weeks, delaying deliveries, constraining shipping supply, and increasing costs.

The Panama Canal drought has reduced ship crossings by 36% and could cost $700 Million.¹² It has continued to cause shipping delays from Asia to the East Coast of the U.S., so carriers are rerouting ships from the trans-Pacific route to the trans-Atlantic route via the Suez Canal. But as we just noted, ships are now being rerouted from the Suez Canal around the Cape of Good hope, further increasing transit times.¹³

Maersk plans on using rail transport to avoid the drought-hit Panama Canal to improve shipping times.¹⁴ What’s the bottom line? In mid-January the price premium for ocean freight as compared to the same period last year is an increase of 59%.

We are hearing mixed messages on ocean freight, with Xeneta, a shipping data company, suggesting that 2024 may be an even more difficult year for carriers in the ocean freight shipping market due to shipping contracts being renegotiated at lower rates,¹⁵ versus reports from companies like Honour Lane Shipping Ltd., estimating that the Houthi attacks in the Red Sea could last from six months to a year,¹⁶ versus Maersk CEO Vincent Clerc’s message to the Reuters Global Markets Forum January 17 that Red Sea-related disruptions should be expected for only for a few more months.¹⁷

The silver lining is that unused excess vessel capacity could help offset these challenges. In addition, in planning for the Chinese New Year which occurs throughout February, vessel capacity typically declines due to a decrease in demand. This reduction in demand is created by ocean carriers bringing in containers early, usually starting the previous October, ahead of the manufacturing plants closing in honor of the holiday.

In trucking, national flatbed rates between January 2023 through January 2024 have decreased 11%,¹⁸ and we are seeing a commitment to electric vehicles. The largest makers of engines and trucks, U.S. diesel engine maker Cummins, and the truck builders Daimler Truck and Paccar, are planning a joint venture to build a $2 billion battery factory in Mississippi to produce batteries for commercial trucks, expected to begin production by 2027.¹⁹ There are a lot of follow-on considerations for this, which have been highlighted in prior DPR Market Conditions reports, including the need to upgrade grid capacity and add charging stations. The resulting impact could be constrained supply on certain electrical products including transformers and copper, increasing price and lead times on these materials.

In planning for 2024, it’s important to lean in, and to watch for cues of potential issues so we can adapt, adjust, and overcome.

Everstream Analytics has projected its top five supply chain impacts due to logistics.²⁰ They are:

Although there are no specific outcomes yet, the U.S. Transportation and Infrastructure Committee is trying to tackle the potential issues and looking for solutions across freight sectors. In a hearing on January 17, Rep. David Rouzer led his caucus’ call for the administration to work to guarantee the safe arrival of goods at U.S. ports. He added, “And closer to home, the migrant crisis at our southern border has led to repeated closures of rail border crossings. As a result, rail operations were suspended — halting the movement of critical goods between the United States and Mexico in order to process the influx of migrant crossings.”²¹

In steel, we have seen some easing of pricing. Structural shapes and plate have remained flat and are expected to continue to be flat through Q1. Much of the past price fluctuations have been a result of decreased construction starts and output of constriction by mills, to maintain strong market pricing power. The steel market is very large with relatively few players. In most cases, this gives mills the ability to control pricing through reduced production outputs. With the sensitivity to global economics throughout world markets, including wars, natural disasters, and other unforeseen events, this can have major supply and pricing impacts.

In insulation, we have seen a continued increase in lead times with new lead times reaching 8-10 months for mineral wool and fiberglass back on allocation. This is predominantly driven by plants down for maintenance, labor strike in Canada (already resolved), and strong backlog with limited production capacity.

In MEP, we’ve seen improvements to overall lead times across most equipment, but some remain long like generators, AHUs, transformers, etc... We’ve also seen strong pressure to continue price escalations from manufacturers.

TSMC’s (Taiwan Semiconductor Manufacturing Co.), the world’s largest chipmaker, and producer for about 90% of the world’s advanced chips, outlined global expansion plans, driving its stock price higher in mid-January, noting that the supply chain should be rebalanced by the end of 2024, with the possibility for significant improvement in 2025.²² The chipmaker projected a bright outlook for 2024, citing AI demand, with the company expecting revenues to grow by up to 25%, with new factories planned in Japan and Germany, and expansion in Taiwan and Arizona.²³

TSMC’s news is juxtaposed with news of delays of the $12 billion plant being built in Arizona, citing a shortage of skilled workers in the U.S., and a struggle to adapt to the United States’ culture and labor force. TSMC is planning a 2nd plant in Arizona, which was scheduled to start production in 2026 is now projected for 2027 or 2028, up to two years late.²⁴ In August 2022, The U.S. “CHIPS and Science Act” was put in place to help boost domestic research and manufacturing of semiconductors, but Jensen Huang, the CEO of U.S. chipmaker Nvidia, said: “We are somewhere between a decade and two decades away from supply chain independence.”²⁵

We are uncertain how these factors, and the geopolitical issues between China and Taiwan, might complicate the Taiwanese chipmaker’s plans. Chinese leaders consider Taiwan a breakaway province, but Taiwan has maintained independence—as TSMC, located in Taiwan and being the key chip producer to the world, has provided Taiwan a defense (sometimes referred to as the “silicon shield”). This has been critical in keeping Taiwan sovereign and maintaining continued U.S. support.

Will increasing U.S. domestic production potentially soften U.S. support for Taiwan and weaken its position in maintaining independence? Time will tell, but it seems clear that the semiconductor issues are not yet over.

DPR has been actively working to control our destiny and prepare for the future in managing our supply chain. Our aim is to ensure a reliable supply chain that keeps our projects on track, hitting critical milestones, and minimizing the effect of outside events.

Photos: Danny Sandler