Aggregates Industry Positioned For Economic Growth, Market Expansion.
By Mark S. Kuhar and Josephine Patterson
The Dodge Construction Network held its 2023 Dodge Construction Outlook, a mainstay in the construction industry for more than 80 years. The forecast predicts that total U.S. construction starts will be unchanged in 2023 at $1.08 trillion. When adjusted for inflation total construction starts will dip 3%.
“As the clouds of uncertainty mount on the fate of the economy in 2023 the construction sector has already started to feel the impact of rising interest rates,” stated Richard Branch, chief economist for Dodge Construction Network. “The Federal Reserve’s ongoing battle with inflation has raised concerns that a recession is imminent in the new year. Regardless of the label, the economy is slated to significantly slow, unemployment will edge higher, and for parts of the construction sector it will feel like a recession.
“Next year, however, will not be a repeat of what the construction sector endured during the Great Recession when the financial system collapsed,” Branch said. “Residential construction, already reeling from rising mortgage rates, will continue to contract and will be joined by nonresidential construction as the commercial sector retrenches. The funds provided to the construction industry through the Infrastructure Investment and Jobs Act (IIJA), the CHIPS and Science Act, and the Inflation Reduction Act (IRA) will counter the downturn allowing the construction to tread water. During the Great Recession, there was no place to find solace in construction activity – 2023 will be quite different.”
Nonbuilding/infrastructure projects will be supported by an infusion of public dollars through IIJA. Public works starts will gain 18% in 2023 (+12% adjusted for inflation) led by gains in streets and bridge work, while the utility/gas category will gain 8% (+2% inflation-adjusted) as the extension of the investment and production tax credits in IRA will lead to gains in utility-scale wind and solar projects.
Some other key takeaways from the 2023 forecast:
- The dollar value of single-family starts will be flat (-5% when adjusted for inflation), however, units will be down a further 6% to 891,000 units (Dodge basis) as higher mortgage rates and worsening affordability eat away at demand.
- The multifamily sector has been reaping the benefits of the affordability issues plaguing the single-family market, pushing demand for space up and vacancy rates down to record lows. The softening labor market and investment outlook will eat away at these gains in 2023. While the dollar value of multifamily starts will rise a scant 1% (-7% when adjusted for inflation), units will fall 9% to 723,000.
- Commercial starts will fall 3% in 2023 (-13% when adjusted for inflation) led by pullbacks in warehouse and office sectors. Hotel and retail starts will post tepid growth in nominal dollars, but when adjusted for inflation will also slip; but the declines will not be as dramatic as in office and warehouse. There is some positivity in the commercial space in 2023, though, as data center construction is expected to remain brisk.
- Institutional starts, meanwhile, will hold steady in 2023 (-1% inflation-adjusted) as gains in healthcare offset losses elsewhere. Traditional education starts (classrooms) have languished as slow demographic growth eats away at overall demand, however, life science buildings have flourished and will continue to do so in the new year. Healthcare starts will be the engine of growth in the institutional sector as greater demand for both outpatient clinics and hospitals is on the rise.
- Manufacturing starts have been robust since the pandemic as reshoring has led to numerous chip fabrication plants, EV battery plants, and other large facilities breaking ground. Manufacturing starts are expected to nearly triple in 2022, and while they will decline in 2023 the level of 2023 starts at $51 billion has not been seen since the beginning of Dodge’s historical starts time series in 1967. The CHIPS and IRA acts will support abnormally high levels of activity for years to come.
An estimated 719 million metric tons (Mt) of total construction aggregates was sold or used in the United States in the third quarter of 2022, an increase of 3% compared with that in the third quarter of 2021, according to Jason Christopher Willett, commodity specialist, National Minerals Information Center, U.S. Geological Survey.
The estimated production for consumption in the first nine months of 2022 was 1.87 billion metric tons (Gt), an increase of 3% compared with that in the same period of 2021.
The estimated production for consumption of construction aggregates in the third quarter of 2022 increased in six of the nine geographic divisions compared with that sold or used in the third quarter of 2021. The five leading states were, in descending order of production-for-consumption, Texas, California, Ohio, Florida and Missouri. Their combined total production for consumption was 206 Mt, a slight increase compared with that in the same period of 2021.
The five leading states combined total production for consumption in the first nine months of 2022 was 568 Mt, an increase of 7% compared with that in the same period of 2021 and represented 30% of the U.S. total.
An estimated 437 Mt of crushed stone was sold or used in the United States in the third quarter of 2022, an increase of 3% compared with that in the third quarter of 2021. The estimated production for consumption in the first nine months of 2022 was 1.14 Gt, an increase of 3% compared with that in the same period of 2021.
The estimated production for consumption of crushed stone in the third quarter of 2022 increased in five of the nine geographic divisions compared with that sold or used in the third quarter of 2021.
The five leading states were, in descending order of production for consumption, Texas, Missouri, Pennsylvania, Florida and Ohio. Their combined total production for consumption was 147 Mt, essentially unchanged compared with that in the same period of 2021.
The estimated U.S. output of construction sand and gravel sold or used in the third quarter of 2022 was 282 Mt, a slight increase compared with that in the third quarter of 2021. The estimated production for consumption in the first nine months of 2022 was 724 Mt, a slight increase compared with that in the same period of 2021.
The estimated production for consumption of construction sand and gravel in the third quarter of 2022 increased in seven of the nine geographic divisions compared with that sold or used in the third quarter of 2021.
The five leading states were, in descending order of production for consumption, California, Texas, Minnesota, Michigan and Washington. Their combined total production for consumption was 98.8 Mt, a slight increase compared with that in the same period of 2021.
According to industry consultants Burgex, aggregates production will be up slightly when all is said and done in 2022. We might see a slight dip in 2023, but increases in the two years following.
Construction spending during October 2022 was estimated at a seasonally adjusted annual rate of $1,794.9 billion, 0.3% (±1.2%) below the revised September estimate of $1,800.1 billion. The October figure is 9.2% (±1.5%) above the October 2021 estimate of $1,644.3 billion, according to the U.S. Census Bureau.
Highway construction spending dipped for the month.
During the first 10 months of this year, construction spending amounted to $1,507.8 billion, 10.8% (±1.0%) above the $1,360.8 billion for the same period in 2021.
In October, the estimated seasonally adjusted annual rate of public construction spending was $374.6 billion, 0.6% (±2.0%) above the revised September estimate of $372.5 billion. Educational construction was at a seasonally adjusted annual rate of $79.4 billion, 0.5% (±2.0%) above the revised September estimate of $79.0 billion. Highway construction was at a seasonally adjusted annual rate of $113.4 billion, 0.8% (±4.9%) below the revised September estimate of $114.3 billion.
Spending on private construction was at a seasonally adjusted annual rate of $1,420.4 billion, 0.5% (±0.7%) below the revised September estimate of $1,427.6 billion.
Residential construction was at a seasonally adjusted annual rate of $887.2 billion in October, 0.3% (±1.3%) below the revised September estimate of $890.0 billion.
Nonresidential construction was at a seasonally adjusted annual rate of $533.2 billion in October, 0.8% (±0.7%) below the revised September estimate of $537.6 billion.
“Most nonresidential contractors report full order books but are having trouble hiring enough workers to keep projects on schedule,” said Ken Simonson, Associated General Contractors of America chief economist. “Rising interest rates and costs for materials are likely to choke off some projects but there will be plenty of infrastructure, manufacturing plants and renewable energy projects next year – if contractors can find enough workers to build them.”
Association officials said labor shortages remain one of the top concerns for most construction firms. They urged Congress and the administration to allow more immigrants with construction skills to enter the industry to provide short-term relief. But they maintained that the best way to resolve workforce shortages was to boost federal funding and support for construction-focused education and training programs.
“You can’t be both for infrastructure and against boosting investments in preparing workers to build that infrastructure,” said Stephen E. Sandherr, the association’s chief executive officer. “Until federal officials narrow the five-to-one gap in federal funding for college prep versus craft career development, labor shortages will restrain the industry’s ability to rebuild the economy.”
Construction industry job openings totaled 377,000 at the end of October, which exceeded the 341,000 employees hired during the month, according to government data. The gap implies contractors wanted to hire more than twice as many people as they were able to bring on board and most likely contributed to the decline in spending put in place, Simonson said.
“While economists have spent much of 2022 watching interest rates march higher and fretting about recession, contractors have been working through their lofty backlog and improving America’s built environment,” said Associated Builders and Contractors (ABC) Chief Economist Anirban Basu. “Despite the rising cost of capital, elevated materials prices and equipment shortages, contractors have generally remained upbeat despite a worsening outlook, according to ABC’s Construction Confidence Index.
“These data suggest that nonresidential construction activity is weakening,” said Basu. “Spending declined in a majority of nonresidential subsectors in October, and residential spending has now fallen in each of the previous four months. The only bright spot: the 0.6% increase in publicly financed nonresidential construction spending. The infrastructure package and excess pandemic relief funds should allow the public sector to retain momentum even as the broader economy weakens.”
Total Construction Starts
Total construction starts fell 18% in November to a seasonally adjusted annual rate of $926.3 billion, according to Dodge Construction Network. During the month, nonresidential building starts lost 25%, nonbuilding shed 21%, and residential starts dropped 5%.
Highway and bridge starts fell 32%.
Year-to-date, total construction starts were 14% higher in the first 11 months of 2022 compared to the same period of 2021. Nonresidential building starts rose 36% over the year, residential starts were down 1%, and nonbuilding starts were up 16%.
“Month-to-month volatility in construction activity continues to reign supreme as uncertainty mounts over the economy in 2023,” said Richard Branch, chief economist for Dodge Construction Network. “Higher interest rates and fear of recession are first and foremost on the mind of most builders and developers, and potentially restraining starts activity. However, as some material prices head lower and more public dollars come into the market for infrastructure and manufacturing projects, the year is ending with a fair bit of momentum. Next year will be a challenge, but nothing like the sector faced during the Great Recession.”
Nonbuilding construction starts fell 21% in November to a seasonally adjusted annual rate of $218.1 billion. The only category to post a gain for the month was utility/gas which rose a mere 3%. Highway and bridge starts fell 32%, miscellaneous nonbuilding was 30% lower, and environmental public works fell 7%.
Through the first 11 months of the year, total nonbuilding starts were 16% higher than in 2021. Highway and bridge starts were 25% higher, environmental public works were 17% higher, and utility/gas plants were up 11%. Miscellaneous nonbuilding starts were 2% lower on a year-to-date basis.
The largest nonbuilding projects to break ground in November were the $678 million 577MW Fox Squirrel solar farm in Madison County, Wis., a $522 million coastal resilience project near the Brooklyn Bridge in Brooklyn, N.Y., and the $465 million 300MW White Rock wind project in Anadarko, Okla.
Nonresidential building starts fell 25% in November to a seasonally adjusted annual rate of $361.6 billion. In November commercial starts fell 33%, institutional starts were 12% lower, and manufacturing dropped 69%. Within the entire nonresidential building sector, the only categories to show a gain on a month-to-month basis were healthcare, public buildings, religious, and recreation starts.
Through the first 11 months of 2022, nonresidential building starts were 36% higher than the first 11 months of 2021. Commercial starts grew 25%, and institutional starts rose 19%. Manufacturing starts were 160% higher on a year-to-date basis.
The largest nonresidential building projects to break ground in November were the $1.1 billion Harbor-UCLA Medical Center in Torrance, Calif., the $800 million Project Velvet Meta data center in Kansas City, Mo., and the $500 million Eli Lilly manufacturing campus in Concord, N.C.
Residential building starts fell 5% in November to a seasonally adjusted annual rate of $346.5 billion. Single-family starts lost 9%, while multifamily starts gained 1%. Through the first 11 months of 2022, residential starts were 1% lower when compared to the same time frame in 2021. Multifamily starts were up 26%, while single-family housing slipped 12%.
The largest multifamily structures to break ground in November were the $345 million 601 N. Central Ave. mixed-use building in Phoenix, the $350 million YMCA of Middle Tennessee residential tower in Nashville, Tenn., and the $250 million Halletts Point (Building 3) in Astoria, N.Y.
Regionally, total construction starts in November fell in all five regions.
Overall housing starts decreased 4.2% to a seasonally adjusted annual rate of 1.43 million units in October, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
The October reading of 1.43 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts decreased 6.1% to an 855,000 seasonally adjusted annual rate. Year-to-date, single-family starts are down 7.1%. The multifamily sector, which includes apartment buildings and condos, decreased 1.2% to an annualized 570,000 pace.
It takes 400 tons of aggregates to construct the average modern home, according to the National Stone, Sand & Gravel Association.
“Mirroring ongoing falloffs in builder sentiment, builders are slowing construction as demand retreats due to high mortgage rates, stubbornly elevated construction costs and declines for housing affordability,” said Jerry Konter, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Savannah, Ga.
“This will be the first year since 2011 to post a calendar year decline for single-family starts,” said NAHB Chief Economist Robert Dietz. “We are forecasting additional declines for single-family construction in 2023, which means economic slowing will expand from the residential construction market into the rest of the economy.”
On a regional and year-to-date basis, combined single-family and multifamily starts are 2.9% higher in the Northeast, 1.5% lower in the Midwest, 2.6% higher in the South and 5.1% lower in the West.
Overall permits decreased 2.4% to a 1.53 million unit annualized rate in October. Single-family permits decreased 3.6% to an 839,000 unit rate. Multifamily permits decreased 1.0% to an annualized 687,000 pace.
Looking at regional permit data on a year-to-date basis, permits are 2.8% lower in the Northeast, 0.2% higher in the Midwest, 1.1% higher in the South and 4.0% lower in the West.
The Dodge Momentum Index (DMI), issued by Dodge Construction Network, increased 3.8% (2000=100) in November to 207.2 from the revised October reading of 199.6. During the month, the DMI continued its steady ascent, with the commercial component rising 4.3%, and the institutional component ticking up 2.7%.
Commercial planning experienced a healthy increase in hotel and data center projects and modest growth in stores and office projects. While education and healthcare projects slowed in November, the institutional component remained net-positive alongside a robust increase in planning projects for government administrative buildings and religious facilities. On a year-over-year basis, the DMI was 25% higher than in November 2021, the commercial component was up 28%, and institutional planning was 21% higher.
A total of 21 projects with a value of $100 million or more entered planning in November. The leading commercial projects included two $500 million segments of a Facebook data center in Sandston, Va., and the $400 million Sunset Industrial Park warehouse in Sunset Park, N.Y. The leading institutional projects comprised of the $185 million Hollywood Casino relocation in Joliet, Ill., and the $160 million Smith County courthouse in Tyler, Texas.
“The Momentum Index continued to rise in November, conveying hopefulness from owners and developers that the construction sector will endure the possible economic slowdown next year,” said Sarah Martin, senior economist for Dodge Construction Network. “The rate of increase in the DMI, however, has steadied over the month. Labor and supply shortages, high material costs and high interest rates could temper planning activity over the next 12 months to a more modest pace.”
The DMI is a monthly measure of the initial report for nonresidential building projects in planning, shown to lead construction spending for nonresidential buildings by a full year.
According to the U.S. Geological Survey, portland (including blended) cement consumption increased by 4% in the third quarter of 2022 compared with that of the third quarter of 2021. Consumption in the first nine months of 2022 increased by 4% compared with that in the same period of 2021.
But gains such as those may not last. The Portland Cement Association (PCA) released its fall cement consumption forecast for the United States, which projects a near-term demand decline of 3.5% for 2023 – the first decline in 13 years.
Thankfully, the softening of consumption is expected to be short-lived, with growth returning in 2024 (4.3%) and beyond (2025, 3.6% and 2026, 3.8%).
“Due to inflation and rising interest rates, economic growth is expected to remain sluggish through mid-2023 with unemployment reaching 4.7%,” said Edward J. Sullivan, PCA chief economist and senior vice president. “Inflation is expected to remain high, leading to further monetary policy tightening through this year and into early next.”
Residential cement consumption accounted for nearly 80% of growth in the demand for cement in 2021. This year, rising mortgage rates coupled with double-digit gains in home prices has resulted in a weakening in housing starts – a nearly 13% decline is expected in 2023.
Nonresidential construction is also expected to weaken as several sectors have not recovered from Covid-induced downturns. “Easing economic conditions typically result in higher vacancy rates and soft leasing rates,” explained Sullivan. “In the context of net operating conditions expected for 2023, nonresidential construction will likely add to the declines originating from the residential sector.”
While the national infrastructure program will provide some relief in private sector construction, its near-term influence is likely to be modest given the time required between spending allocations and actual pouring of cement.
In 2024, PCA expects a modest recovery as interest rates begin to ease and more significant impact is felt from the infrastructure bill.