Construction Starts Falling Rapidly Amid Financing Constraints

The state of the construction industry halfway through 2023 is mostly positive due to more normalcy in pricing for material goods and overall demand – especially from publicly funded projects – but hiring and wages remain a challenge and the sector overall is slowing, according to a new report from JLL.

JLL said construction starts fell rapidly in Q2 as financing constraints weighed on what is a hot-turned-cold market.

The positives are strong infrastructure and nonbuilding demand, which stabilized construction backlogs and architectural billings in the first half of this year, “offering resilience against a softening market,” JLL said.

The report forecasts that construction starts will continue slowing well into 2024 as construction activity “will follow very different trajectories by sector, with specialization and complexity management playing vital roles in contractor and regional success.”

It also forecasts that total construction spending should be up by approximately 6% year-over-year due largely to the federal boost.

Not to be ignored is that overall industry sentiment remains positive as consumer spending and the labor market continue to outperform forecasts.

JLL said that talent retention strategies are needed today more than ever as job openings remain high and the industry’s unemployment rate is unusually low (reaching roughly the national average). 

Wages are up 17% since January 2020 nationally and, with just 4% unemployment and 374,000 job openings, tackling the current pipeline is still top of mind. 

“Even with starts slowing, we expect wages to trend upwards in the next months to 5% to 7% total year-over-year growth,” according to the report.

On the materials costs front, finished goods prices continue to rise above historical levels and lead times remained high during the first half of 2023.

Mechanical, electrical, and plumbing are not keeping up with the increasing demand for data centers and electrification.

Overall, JLL said inventories and predictability have normalized, but price movements are above historical levels for steel, concrete, glass, and plastic products.

Firms have been able to contain total costs with margins under less pressure from materials. Total costs have stabilized and recorded the slowest period of growth (and the first declines) over the first half since the immediate aftermath of COVID-19 being declared a global emergency.

Based on the midyear data, the JLL forecasts for value put in place “continue to align with our expectations. Starts in building construction have experienced significant decline, resulting in a forecast for active build construction to contract by a fifth for the start of 2024.”

Furthermore, nonbuilding construction and select building sectors will keep the industry healthy.