Our Q4 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.

In regular publications this year by Engineering News Record there has been a steady reporting of building costs on the rise. They indicate that on average, building costs have risen by over 3.5% since last October.

There isn’t a single answer to why. ENR reports stabilization of certain common materials like cement, asphalt, steel and rebar, while PVC and concrete block are on the rise and skilled labor costs are up by over 3.5% this year. So, it’s a bit of a grab-bag of information with no clear culprit for rising costs.

As we regularly indicate in this report, the only way to understand why the costs are escalated is to understand the detailed scope of a specific project. Taking any of these indexes and liberally applying them to forecast is not a reliable solution.

The variability by region and metropolitan area is all over the map as well. Though DPR isn’t experiencing quite a dramatic variability as ENR is indicating, these are some good indicators of where construction is booming across the Nation, and where it is not so hot.

Dodge Data and Analytics notes that over the last year when is comes to construction project starts, the Southeast is leading the pack with a 31% growth, while New England is hovering around 19% growth and the Pacific and Mountain regions retracting, -1% and -35% respectively.

According to research performed by FMI Corporation, some 15% of the construction starts are in the ‘mega-project’ category. Projects nearing or exceeding the $1B mark are continuing to pop-up in some of the more resource-friendly areas where power and water are established and cheap. Without some of these massive projects popping up, there might be near-flat status in the construction spending data over the past year, they say.

Manufacturing construction starts specifically, coming off the CHIPS Act that was set in place August of last year, has shot up by over 200%. It’s an incredible impact where funding is coming in and instigating growth across the country.

Whether semi-conductor, battery, data centers, or manufacturing facilities, these industries are really driving the market right now. A lot of the more traditional buildings such as education, office space and healthcare simply are not matching the pace of growth right now, that’s for certain. That doesn’t mean that there is no significant growth in these markets in certain geographies. Check out our Core Market sections for more insights on this topic.

With Federal interest rates still at highs and escalation descending very slowly, it doesn’t seem that any dramatic shifts will occur in the next few months. Hearing from the officials in the Fed we will be seeing some ‘higher-for-longer’ escalated rates.

So, what does this mean for us? Well, the cost of borrowing money is high and this can stifle decisions to initiate building projects. Are we seeing a tangible change over the last year or so? Well, yes and no.

Yes, we’ve seen some projects go on hold or cancel indefinitely. That has been a more recent trend in certain sectors and geographies, yet this hasn’t been a significant cliff, at least from our vantage. What we’ve learned through these times is that if some of these projects go on hold, we have to be ready to go and go fast when they come back online!

Construction prices are up across the board and they are not dropping. Since COVID, there have been some astronomic escalation factors due to scarcity of materials, labor challenges, subcontractors being booked on other work, and a plain crazy economic environment globally. With an election year coming, it’s hard to imagine any pricing reductions coming our way. Any trend downward will be incremental leveling at best and any decrease will still be based on the past dramatic rising cost peaks we’ve seen recently.

Needing to mobilize quickly and having the current cost of construction so high has led to more dynamic engagements between owner, designer and builder that ultimately serve the project for the better. Working in a proactive team environment allows us to move faster and eliminate as many surprises as possible.

None of these parties are excited about the price of a building going up, especially our customers. It doesn’t help anyone to have a cost exceed a set budget, ever. It causes re-work for design and engineering teams, delays construction, and can be detrimental to progress in general.

Across markets and geographies, we are seeing the benefits of being engaged as early as is reasonable in a more partnership engagement, even design-build and design-assist, to align early on strategies to achieve the client’s budget and timeline.

Over the last few years, it’s been tricky to interpret what will happen as domestic and international affairs unfold. It seems that the old rules no longer apply, and world events seem to have unexpected outcomes.

Despite signs of an economic slowdown in the US, current spending in the construction market was 4.2% above the same period in 2022,¹ ENR’s Building Cost Index History for September 2023 is at an all-time high,² the demand for skilled workers continues to challenge the industry,³ and the US Labor Department reported that 336,000 jobs were added to in September, with the unemployment rate at only 3.8%.⁴

Although the writer’s strike in Hollywood is over, the actors union, SAG-AFTRA, remains on strike.⁵ There is an expansion of the United Automobile Workers union strike,⁶ and the expiring contracts for Kaiser Permanente led to a three-day strike on October 4th for 75,000 employees.⁷ In fact, The CBS Evening News reported that there are currently 378,000 people striking in the U.S., compared to 40,200 on the same date in 2021.⁸ Meanwhile, in the construction industry, architectural billings dropped below average in August.⁹ You’d think that these factors would lower spending, demand, and pricing, but we saw an uptick in the Inflation Rate to 3.67% in August,¹⁰ up from a low of 2.97% in July.¹¹

Imported goods may be affected by the ongoing US Government budget process. On September 30th, the US Government avoided a shutdown and passed a short-term spending bill that will keep the US Government operating through November 17.¹² A shutdown would impact import-related services, which could affect a wide range of products made outside the US, or that contain components or parts made outside the US.¹³

But as 2023 comes to a close, we are encouraged, as our suppliers are predicting stabilizing prices and improved lead times, with the outliers being generators, switchgear, transformers, elevators, and other miscellaneous mechanical equipment. This, coupled with the fact that there seems to be fewer news articles about supply chain disruptions, suggests things are settling down. A year ago, we were even seeing supply chain issues for Christmas trees, but this year buying a tree should feel like the old days, pre-COVID, with ample available supply.¹⁴

However, it’s not quite all back to normal just yet. In August, the Harvard Business Review noted that we are seeing shortages of skilled supply chain professionals, “from sourcing to production, logistics, and delivery of goods and services,” with supply executives reporting that their biggest challenge is hiring and retaining qualified supply chain related workers. Even with technology advancements, it is not enough to overcome the shortfall, and rebuilding the supply chains will require a combination people and technologies.¹⁵

Semiconductors (aka “chips”) continue to be an area of focus, because of how prevalent they are in everyday products. Even some air fresheners contain chips, so we are paying close attention to developments across the globe that could impact lead times due to semiconductor availability.

Tensions between China and Taiwan continue to rise, as demonstrated by recent events such as Chinese fighter jets crossing into Taiwan’s airspace in August,¹⁶ and the unveiling of Taiwan’s first domestically made submarine.¹⁷ Concerns persist that these tensions could cause instability in semiconductor supply, as Taiwan is the world’s largest chip producer. The friction is not limited to China and Taiwan, as pressures are building between China and western countries as well, which has led to measures being imposed limiting China’s ability to buy semiconductor manufacturing technology from international sources, so China has shifted strategies to build those capabilities domestically.¹⁸

China is actively working to become independent from international supply chains. It is working to sever international dependencies in chips, automotive, EV, and other products manufacturing these items in-house with companies like CATL, a Chinese battery manufacturer, which is setting up new plants throughout Europe and Asia. In related news, Japanese media reported that a Japanese company sold its shares in a China-based EV maker under pressure from the Chinese government.¹⁹

Providing 70% of all rare earth-mined alloys, China is the largest producer globally.²⁰ There are 17 rare earth elements, used for things like magnets, batteries, steel alloys, and many everyday products such as phones, bulbs, LED lights, hard disks, monitors, and the list goes on.²¹ China is considering bans on rare earth exports, and beginning August 1, placed export restrictions on two rare earth metals used in chip production. These two metals are not available domestically in the US and, in fact, 94% of global supply currently comes from China.²²

These factors could significantly impact availability of goods produced outside the US, but solutions are on the way, including numerous domestic chip manufacturing facilities under construction in the US, which should eventually help to assure availability. Further, the U.S. State Department began partnering with the Government of Vietnam to explore opportunities to grow and diversify the global semiconductor ecosystem under the International Technology Security and Innovation (ITSI) Fund, created by the CHIPS Act of 2022. This partnership will help create a more resilient, secure, and sustainable global semiconductor supply chain.²³ And for rare earth metals, Congress has introduced the bill, HR 2849, which will help to establish rare-earth magnet production within the US by offering tax credits for domestic mining and manufacturing.^{24 25} In addition, on September 25th, it was reported that Vietnam, which has the second-largest rare-earth deposits, plans to restart its biggest rare-earths mine next year with the help of Western allies, including the US.²⁶

Companies are learning and adapting. The “Covid and semiconductor crises have ‘pushed logistics industry forward’” stated Renee Wawrzynski, executive director, Global Logistics at GM. She went on to say that pre-pandemic, GM didn’t have complete visibility of its entire tiered supply base, but “we have that data now, so we’re going to be better moving forward.”⁴⁰

We, too, are learning and adapting. Through leveraging our full family of companies and capabilities in direct sourcing and supplier relationship management, warehousing, logistics, and quality control, we’ve overcome many challenges in navigating the disruptions of the past three years. Our ability to capture, track, and forecast impacts, and our connections with leadership among many top-tier material manufacturers, helps us to control our destiny and deliver projects on time at the highest quality, working collaboratively with our customers for the best possible outcome.

While the easing of supply chain issues is positive, 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 and Brittany Fontana