2023 Construction Market Outlook

The construction sector is dynamic, and its success largely depends on what is happening on the economic front and consumer confidence. Let’s take a look ahead at the construction market in 2023.

On the Residential Front

High interest rates and inflation have many worried about new builds, especially with the high cost of materials and labor. However, according to the National Association of Homebuilders (NAHB), construction costs as of September 2022 have begun to slow to a 3.3% increase year over year. The NAHB also sees a silver lining to the interest rate increases by the Federal Reserve in that they have significantly decelerated the rate of cost increases we were experiencing, which, at one point, were approaching a 20% year-over-year increase. Construction costs for 2023 are expected to rise at an average rate of 2% to 4%.

The supply chain is also improving, so reduced delays in getting lumber, appliances, windows, and doors, for example, should provide contractors with better lead times to meet their project deadlines.

Still, the outlook is not all rosy. Single-family home construction, according to Dodge Data & Analytics, is expected to be rocky in the first quarter of 2023, with housing starts down 6% over last year. However, as mortgage rates begin to come down in the late first quarter and early second quarter, the sector is expected to stabilize, with the single-family market seeing gains again in late 2023.

Multi-family Housing

The multi-family housing construction market, according to Dodge Data & Analytics, has come off its best year since 1986. The sector continues to be solid, but investment dollars for multi-family housing projects will dry up as the economy slows.

Commercial Construction Market (Non-residential)

According to Dodge Data & Analytics, office and warehouse construction will be somewhat impacted in 2023, with retail and hotels two bright spots for the commercial sector. “2022 was the peak year for warehouse construction,” said Richard Branch, chief economist for Dodge Data & Analytics, at the 2023 Dodge Construction Outlook Conference in November. According to Branch, Amazon, responsible for 16% of the total warehouse market, has scaled back. MWPVL International Inc., which tracks Amazon’s real-estate footprint, confirmed that the company has either closed or abandoned plans to open 42 facilities totaling nearly 25 million square feet of usable space.

Office construction is down due to remote work, but this could change if more companies institute in-person work.

Public Works

Infrastructure and public works projects, according to Dodge Data & Analytics, are expected to see the most growth in 2023. Dams and reservoirs are expected to increase by 15%, water supply systems by 12%, and sewage and waste by 17%. Non-building/infrastructure starts have increased by 16%.

Despite recession fears, planned construction projects will continue into 2023; although, the road could be bumpy.