New reports see mixed bag for construction economy

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By Brian Johnson
BridgeTower Media Newswires

Demand for construction loans is down as the industry in the Twin Cities and beyond struggles with rising interest rates and tighter lending standards, but total construction spending is up from last year thanks largely to federal money, according to new reports.

In its Midyear Construction Trends report, released earlier this month, commercial real estate and investment management company Jones Lang LaSalle (JLL) said financing constraints “have driven a rapid decline in construction starts over the last quarter. … As interest rates are expected to peak near year-end 2023, construction starts will continue slowing well into 2024.”

On the positive side, as supply chains stabilize, building material costs are growing at a slower rate. Among the building material types tracked by JLL, only two are expected to grow by double-digits year-over-year and the average expected overall growth of 4% is well below last year, the report says.

In total, JLL expects construction spending in 2023 to be up 6% from last year “due largely to the federal boost” in spending on manufacturing and infrastructure projects.

Tim Worke, CEO of the Associated General Contractors of Minnesota, said in an email that the JLL report is in line with his understanding of the market.

“The generalized outcomes and outlooks seem to comport with what I am hearing about stabilizing materials availability and pricing, tight labor markets and prospective construction services demands that are being challenged by the increasing costs of financing and the persistent presence of high inflation, etc.,” Worke said. “Generally, there does not seem to be anything here that stands out to me or surprises me.”

AGC-Minnesota plans to release its annual Construction Industry Assessment report around Dec. 1.

A separate report released last week by Marcom Construction Services also cited manufacturing-related construction as a bright spot.

The U.S. construction industry “retained momentum through the first half of the year despite ongoing headwinds in the form of labor shortages, high borrowing costs, and tight credit conditions,” according to The Marcum Commercial Construction Index for the second quarter of 2023. “While certain segments, like manufacturing-related construction, have continued to surge, spending in other segments has moderated as the economy slows.”

“Manufacturing-related construction — propelled by the Inflation Reduction Act, the CHIPS Act, and the reshoring movement — continues to rise at an astonishing pace, up by more than 100% since the start of 2022,” Anirban Basu, Marcum’s chief construction economist, said in a statement. “Because of the size, scale, and anticipated duration of many of these projects, not to mention the rate at which they’re being announced, manufacturing-related construction spending should remain elevated through the remainder of 2023.”

On the materials front, Basu said the “pandemic-induced period of rapid construction input cost increases is firmly in the rearview mirror at this point. Input costs were unchanged in June 2023 and are nearly 5% less expensive than in June 2022, according to the Producer Price Index.”

Though the construction industry and the broader economy have “held up better than anticipated” in the first half of the year, “high borrowing costs and weakness in the commercial real estate sector may reduce construction volumes in the coming months,” the Marcum report cautions.

“Warning signs and historical trends of a downturn are out there and have been for a little while. The construction industry, always the first to feel the pinch and last to be relieved of it, saw some minor downturns this June. Jobs are plenty, and unemployment is low, but nonresidential spending hasn’t grown over the past year, and that includes the increases we saw in governmental and infrastructure spending,” said Joseph Natarelli, Marcum’s national construction leader.