Our Q3 2023 Market Conditions report summarizes current market conditions, industry trends, and mitigation strategies to make more informed business decisions in the quickly changing construction landscape.

The experts offer opinions and projections to reflect a multitude of directions that the economy might be headed in relation to construction projects.

The U.S. is currently experiencing a robust labor market, which should help us float through any recession across most market sectors. Construction employment alone added some 25,000 jobs in May ’23 alone. As Federal interest rates continue to rise, this could begin to impact the labor market as projects might go on hold or even canceled.

In terms of forecasting specific construction starts in 2024, Dodge Construction Network is forecasting a decline of 6%, indicating that there will be fewer projects up and running for the next few years. Contextually, we’d look at this as more of a leveling off than a dramatic downturn in the economy. It’s been steadily growing over the last 3 years and the market is simply adjusting to this new normal.

From a pricing perspective, we are generally aligned with what the experts are reporting on Consumer Pricing Index and Producer Price Index forecasts. Bid prices are high right now. We’ve experienced fewer construction material woes and dramatic spikes as compared to the last two years. Scarcity of work is not an issue right now. With so much work going on, subcontractors can be more selective and aggressive with pricing on the projects they choose.

Engineering News-Record is still forecasting continued index growth across their Construction Cost Index, Building Cost Index, and Materials Cost Index. These indexes overlaid with extreme public and private sector construction growth in the last year, forge a melting pot of growth and demand that has projects navigating cost creep as the industry deals with a heavy backlog of work.

All combined, while there may be a slight decline in construction starts, tight labor markets and raising prices will keep the net change of construction values level in the coming year.

In last quarter’s report, we talked a lot about information overload. Data is certainly valuable in helping us make decisions. From labor headcounts, to current project staffing transitions, to hiring strategies—all of these are either influencing our decision to pursue work or determining which efforts should get the most focus.

But data isn’t always straightforward. While most indicators predicted a collapse in available work heading into the pandemic, we experienced a rise in opportunities. In fact, in post-pandemic 2023, DPR is tracking over 700 opportunities—valued at $29+ billion in work—that are due to be awarded prior to the end of 2023.* This is an increase over open opportunities at the same time last year in both count of RFPs and value of the work (we are currently tracking a 12% increase in opportunities / 7% increase in contract value from 2022).

Discrepancies between predictions and actual outcomes might occur for a variety of reasons. Our markets continue to evolve rapidly due to changes in technology, regulations, etc. These changes can create new opportunities or impact existing ones, with some projects pushing out or changing scope. Market trends can also vary significantly from one region or market sector to another. While some regions or industries may experience a slowdown, others might see increased demand.

*The quantity of opportunities DPR is tracking is a reflection of the opportunities available industry-wide. DPR will not be awarded nor put in place this quantity of work.

Chart: A Look at Opportunities

Number of Opportunities (potential projects to be awarded) that DPR is tracking from January 2023 through December 2023, compared to the same time period in 2022.

Construction Volume and Future Planning

The amount of large project opportunities ($100M+) has increased. There are a significant number of these ‘mega-jobs’ popping up in the last two quarters across the country that are driving big swings regionally as we plan the work that we pursue. Large jobs require a large staff. We use opportunity data in our business planning and forecasting to determine local project staffing requirements and current project team transitions so our customers can remain confident that DPR project teams will consistently execute awarded work.

Staying Nimble

Unlike large projects that spend months—if not years—in the contractor selection phase, we are still seeing a lot of quick-turn invitations for tenant improvement opportunities. These smaller projects often have condensed timelines, pop-up quickly, and construction begins in a matter of weeks, not months. Having a special service group dedicated to these smaller projects ensures that staff is always ready to meet customer goals.

A Healthy Leveling Off

While the perceived narrative is that work is slowing down, we’ve seen material supply shortages, trade contractors too busy to bid new work, and a reduced labor force that is over-committed because of the amount of work. And our pipeline of opportunities supports what we're seeing.

Important for our customers is recognizing that the volume and scope of work will continue to demand a lot from our supply chain and labor force. To ensure limited disruptions to projects and mitigate supply chain challenges, it is crucial to take proactive measures. Here are some key actions to take:

If leveling off does anything, it is actually healthy for contractors and customers alike. It allows us to more predictably execute on customer needs with the right team aided by easing labor force and supply chain demands.

On June 8th, White House officials heralded the unclogging of supply chains.¹ Port congestion has disappeared, and the inflation rate continues to improve, down to 3% in June of 2023 (a 2% fall from March and its lowest level since March of 2021).² In fact, container freight costs from China to the U.S. West Coast are lower than they were prior to COVID.³

The economy seems to be doing well. Overall unemployment has been relatively low since March 2022 (3.6% to 3.8%),⁴ and for construction, May was the lowest level yet in 2023 (just 3.5%),⁵ which continues to drive construction wages higher.⁶ Homebuilder stocks are strong on news of greater-than-expected demand for new housing.^7&8 Our discussions with manufacturers and material providers echo sentiments that the supply chain is healing, and while there are still issues, most lead times have normalized and pricing has stabilized. This should continue, assuming no further significant world events.

That said, there are still some things to plan for and keep an eye on to ensure predictable project delivery. In DispatchTrack’s new survey, “2023 Supply Chain Perspective,” 72% of companies stated they are still experiencing supply chain challenges⁹. The number of people facing moderate to severe food insecurity has grown for the 4th year in a row, increasing 34% in 2022,¹⁰ driven in part by the trade and supply chain disruptions in Ukraine and the related conflict.

And it’s not limited to our business—bourbon is in short supply due to white oak shortages used to make barrels,¹¹ a Mexican drought created a shortage of chiles that are used to make Sriracha sauce,¹² and the ‘Barbie’ movie set had used so much pink paint, it cleaned out the world supply of one paint supplier (to be fair, this issue was exacerbated by the 2021 Texas deep freeze’s effect on materials used in the paint).¹³

While we’ve seen significant improvement in the drought across the U.S., issues persist. There’s a lot of news around “flash droughts,” which are created by lack of water and accelerated by climate change including abnormally high temperatures, winds, and high levels of solar radiation that lead to fast evaporation rates. Though we’ve seen significant precipitation in the west over the winter and spring, much of the rain hasn’t been absorbed into the ground and has simply run off.

For example, even though there has been recent flooding in the Mississippi River, water levels are now approaching drought-like conditions,²³ which could restart a slowdown of barge freight.

The Panama Canal is experiencing its worst drought in 70 years, reducing allowable boat draft (the distance between the waterline and the deepest point of the boat). On June 13th new limits were imposed to a maximum draft of 44 feet. This change was from the prior draft of 45.5 feet, which was already reduced from the standard of 50 feet, due to low water level in the canal. This new standard will reduce the volume of cargo that the largest container vessels can carry by up to 40%, and has already increased shipping costs $300 - $500 per container.

Further reductions in water levels could limit traffic the canal by up to 22% (down to 28 ships per day, versus 36 currently), and force larger ships around the southern tip of South America, which is significantly longer and less safe. Ultimately, this may cause delays and spikes in the prices of consumer and industrial goods.²⁴

China’s Belt and Road Initiative (BRI),a global infrastructure development strategy, began in 2013 to assume a greater leadership role for global affairs in accordance with its rising power and status. As of January 2023, 151 countries signed up accounting for almost 75% of the world’s population and more than half of the world’s GDP.²⁵ Examples of BRI include infrastructure investments in ports, skyscrapers, railroads, roads, bridges, airports, dams, coal-fired power stations, and railroad tunnels. Two recent announcements regarding ports include building a new $3 billion port in Peru,²⁶ and Germany’s approval for China to buy a significant stake in port of Hamburg.²⁷ Owning this infrastructure could have wide-reaching impact to China’s supply chain influence world-wide.

Due in part to the Ukrainian conflict and China’s slowdown and the aftereffects of the pandemic and related shipping disruptions, many companies are rethinking their sourcing locations.²⁸ People are now asking if China’s explosive growth is coming to an end.

It has been a long-held belief that China would overtake the U.S. as the world’s biggest economy, but with China’s population decline,²⁹ shrinking workforce,³⁰ and slowing productivity,³¹ questions are being raised as to whether this goal is still likely. MSN.com reported that “if China doesn’t catch up to the U.S. by the middle of the 2030s, it may never do so.” In May, exports from China were down 7.5% YOY, as countries reassessed supply chains and redirected spend.³²

The U.S. has also been trying to limit China’s access to key semiconductor manufacturing machinery and knowledge, which is beginning to change the chip supply chain. This past March, Japan announced plans for new restrictions on exports of chipmaking gear, and Taiwan’s is now exporting less chip making equipment to China.³³ Taiwan is the world’s largest chip producer, so with recent and continued military drills by China near Taiwan,³⁴ and China’s interest in control over Taiwan, there is a growing concern about tensions between the two nations and what the long term impact might be. With global chip demand continuing to increase (over $72 billion in 2022 - up 8.9% from 2021), these tensions become more relevant with each passing year. These pressures appear to be increasing, as China, just put measures in place to restrict certain rare earth metals that are critical in chip manufacturing, and as China accounts for about 80 percent of global production of the rare metals, this could have a significant effect on availability and cost.³⁵

Since the 1990s, the United States’ share of global chip-making has dropped from 37% to 8.6%. Many companies (like Apple, AMD, Intel, nVidia and Qualcomm) design their own chips, and use TSMC (Taiwan Semiconductor Manufacturing Company – the world’s largest chip manufacturer) to make some or all their chips. Fueled by the CHIPS Act, there are now 14 companies that have either announced or broken ground on 22 new chip factories in America. That’s more than $160 billion of spending and 28,000 new American jobs, and that doesn’t take into account increased spending by other supporting industries (e.g. housing and infrastructure near each plant).³⁷ The largest of these projects is TSMC’s factory in Arizona, reportedly valued at $40 billion, which begs the question: What will happen if China were to exert additional control over Taiwan, and/or if tensions between China and the U.S. continue to grow? Also of note, the European Union has announced a 43 billion euro ($47 billion USD) package to boost chip manufacturing in the bloc.³⁸

Other insourcing trends include the U.S. continuing to be the world largest oil producer, and rare earth material processing reentering the U.S., including companies like Ucore³⁹ & Phoenix Tailings.⁴⁰ Rare earth materials include materials that have a large importance in strategic technologies (i.e. catalysts, magnets, magnetic resonance imaging scanners, and batteries) and play a crucial role in the production of clean energy.⁴¹ Their supply chain has been at risk due to their current mining and processing locations and corresponding geopolitical issues, so having domestic manufacturing will help safeguard those supply chains.

So even though we continue to experience supply issues for certain items like transformers, switchgear, chillers, air handlers, and medium voltage copper wire, slag, sand, and fly ash, there are many positive indicators, and with the recent news on inflation, we are encouraged.

Our collaborative spirit and mindset ensure that we are working across our Family of Companies to get the best results from our teams, suppliers, and supply chain. We leverage the parts of the business that make sense to help us become more vertically integrated and control our destiny.

We’ve had early successes piloting programs to transport materials used by our self-perform teams, and continue to expand our logistic capabilities to ensure on time delivery—in fact, we’ve surpassed 200 deliveries.

We are actively looking for international options that make sense to help us overcome long lead times, and we’ve expanded our supplier relationships to 187 highly strategic collaborative manufacturer relationships, with a total of nearly 2,600 companies in our supplier network.

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