Construction Starts Up in October, ‘Too Early’ to Call it a Trend

Article originally posted on Globe St. on November 21, 2022

Dodge Report Shows Reversal From September’s Downward Move.

It was a strong month for construction starts in October, reversing a down month prior, according to Dodge Construction Network.

October’s gain is a further sign that the construction sector continues to “weather the storm” of higher interest rates, Richard Branch, chief economist for Dodge Construction Network, said in prepared remarks.

Total construction starts rose 8% in October to a seasonally adjusted annual rate of $1.12 trillion; nonresidential building starts gained 9%; and nonbuilding starts rose 26%.

Residential starts fell by 3%.

Jeff Taylor, managing director, Digital Risk, said the primary takeaway from October’s home construction data is that there is a record 1.72m housing units under construction (928k multi-family units and 794k single family units).

Meanwhile, listings (of new and existing homes) are up 45% year-over-year, per

“This market dynamic puts buyers in a stronger negotiating position with sellers,” Taylor said. “Buyers also got their first rate declines of 2022 this past week as a softer October consumer inflation report caused rates to drop from more than 7% to around 6.5%.”

Year-to-date, total construction was 16% higher in the first 10 months of 2022 compared to the same period of 2021. Nonresidential building starts rose 37% over the year, residential starts remained flat, and nonbuilding starts were up 17%.

Noteworthy from Dodge was that nonbuilding construction starts rose 26% in October to a seasonally adjusted annual rate of $277.7 billion. Highway and bridge starts rose 57%, while utility/gas plants increased 19%, and environmental public works were 13% higher.

Rise in Non-Residential Starts is ‘Positive’ Sign

Turner Burton, president at Hoar Construction, tells that although rising interest rates and continued pricing issues are putting the squeeze on some projects, he’s still seeing strong fundamentals in key markets, particularly metro areas in the Sunbelt that are best prepared to weather a recession.

“Steady, consistent job growth in places with diversified economies such as Nashville, Austin, Charlotte and Raleigh-Durham, are helping to offset slowdowns that are occurring in other parts of the country.

“It’s too early to say whether this is the beginning of a longer-term trend nationally as we may likely see more ups and downs in the months to come, however, the fact that nonresidential building starts are up significantly year-over-year is a positive sign for the industry. The extent of any slowdown that may occur will ultimately depend on where you live.”

Ken Simonson, Chief Economist, The Associated General Contractors of America, tells that the surge in nonresidential building starts is consistent with the large number of jumbo-sized automotive and semiconductor manufacturing plants that have broken ground in recent months.

“Some of the increase in nonbuilding starts may reflect funds promised by the enactment a year ago of the Infrastructure Investment and Jobs Act. The decline in residential starts fits with the big jump in home mortgage rates; further declines in homebuilding are very likely.

Fueled by Federal Legislation

Brian Gallagher, Vice President, Corporate Development, Graycor, tells that, despite the volatility, the industry seems to be weathering several storms.

“While construction inflation and rising interest rates are creating headwinds, we are seeing continued activity in several sectors,” Gallagher said.

“Non-residential construction starts are being driven by investments in semiconductors, electric vehicles, data centers, manufacturing, clean energy, and public infrastructure.

“Much of this capital investment is in part fueled by federal legislation and funding mechanisms and remains resilient to economic pressures brought about by inflation and interest rates.

“Overall, most contractors are currently operating at capacity with solid backlogs through early 2024. The commercial, institutional and residential sectors are beginning to show some signs of weakening and this is evidenced by a slight decline in contractors’ backlogs in these sectors.”

The AIA’s Architecture Billings Index (ABI), released this week, showed the first decline in billings since January 2021.

“That could be an indication of softening demand,” Gallagher said. “Most contractors I talk with are cautiously optimistic about the construction economy going into 2023.”

Companies Finally Making Leasing Decisions

Steve Boulukos, President, COO J.C. Anderson, tells that the amount of activity in the market over the last three quarters of this year is primarily being driven by the fact companies and major corporations were mostly idle in making decisions on leases.

“Companies were waiting as long as they could prior to deciding on what they wanted to do with their current deals and future planning that require a longer-term financial commitment in an uncertain economic and real estate market,” Boulukos said.

“Basically, the spike we have been seeing is in many ways a result of companies no longer being able to delay their decisions.

“Although there has been an upward trend with more people returning to the office, the reality is that office occupancy rates in the Chicagoland area are only 50 percent of what they were pre-pandemic.

“As major corporations begin to announce workforce reductions, anxiety about what the second half of 2023 will look like across the construction industry are growing.”

Confusing and Contradictory Metrics

Justin Brown, president and CEO, Skender, said he is seeing confusing and contradictory metrics that make market conditions challenging to interpret for their impact beyond 2023 and 2024.

“Despite recession warnings and cautionary economic data, we have built a record-setting 2023 backlog. Smart builders, like Skender, are helping clients mitigate economic and supply chain risks, Brown said.

“Still, generally low confidence in the supply chain and the potential for recession and its unknown impact on the business make the future difficult to predict.”

He said, consistent with the recent data, 2023 is projected to be Skender’s highest revenue year ever, with 2024 equal to or greater than that.

“Stock market declines and rising interest rates may prevent some clients from building in the near term,” Brown said. “With the long lead times required in construction, a recession in 2023 or early 2024 likely wouldn’t be felt in the industry until late 2024 or 2025.”