After a year in which the economy and starts slowed considerably, the coming year should provide a transition to stronger growth for construction, according to the Dodge Construction Network’s (DCN) Outlook 2024 economic report.
In 2024, total construction starts are expected to gain 7% to $1.2 trillion after growth slowed to just 1% in 2023 (and was down 2% after adjusting for inflation).
In 2024, DCN predicts U.S. economic growth will slowly begin to improve as inflation subsides and the Federal Reserve begins to lower interest rates.
During the first six months of the year, however, the nation’s economy will need to weather several potential storms, such as an extended government shutdown, potential new union strikes and higher energy prices due to the conflict between Israel and Hamas.
The economy is under pressure in 2024, but resurgence is still expected to ultimately prevail.
In 2023, residential and nonresidential construction starts softened while publicly funded infrastructure projects flourished thanks to recent federal funding efforts. In 2024, DCN expects conditions for residential and nonresidential construction to begin improving, placing them in a better position for growth — assuming the Federal Reserve is done raising interest rates and the United States avoids a recession.
While the odds favor growth, three new risks have been added to a long list of concerns: the rising probability of an extended federal government shutdown, possible new union strikes and higher energy prices created by the conflict between Israel and Hamas. Each are expected to negatively affect the economy on a small scale at the very least but also carry the risk of a more serious impact.
The Israeli-Hamas war, for example, is expected to bring West Texas crude prices to a peak of $85/bbl in the first quarter of 2024 before easing back to $77/bbl by the final quarter. If oil prices rise above the psychological threshold of $100/barrel for an extended period, however, the economy could slip into a recession.
In Washington, D.C., the new Speaker of the House, Mike Johnson, may not be willing or able to forge agreements across party lines. That would significantly raise the specter of a federal government shutdown. The most likely result is a limited, two-week government shutdown but with a distinct possibility it could last longer.
While the UAW strike ended, it had a negative impact on GDP growth. Since then, unions in other sectors have considered strikes in order to forge better wages for their members. This forecast assumes that any further labor action does not rise to the level of impacting the overall economy.
In general, if the economy can weather the storm over the next six months, the outlook becomes much clearer. In early 2024, economic growth will continue to ebb, and job growth will slow. But this downshift will take a bite out of inflation bringing the core Consumer Price Index down to 3% by mid-2024. That will allow the Fed to begin easing and the economy to recover in the latter part of the year.
Following rapid growth over the past two years, nonbuilding/ infrastructure construction will increase by a modest 7% in 2024 to $342 billion. Public works will grow 17% over the year to $270 billion, while power/utilities will pull back 17% to $72 billion.
Thanks to the $1.2 trillion Infrastructure Act (IIJA), most of public works will continue to expand in 2024 (all but dams/flood control where spending more than doubled from 2020-2023). Four of the six sub-sectors will even grow by double digits. Power will pull back after an estimated 42% gain in 2023.
In 2024, public works will continue to benefit from several federal legislative initiatives passed to help improve the nation’s aging infrastructure. That includes the trillion-dollar Infrastructure Investment and Jobs Act (IIJA). The decline in the power/utilities sector comes after three years of gains culminating in a robust 42% increase in 2023. Higher utility prices have encouraged an increase in productive capacity. In addition, tax incentives have particularly boosted renewable energy projects.
The only potential negative for the sector lies with Congress where recent chaos has prevented action on appropriations bills, delaying annual spending increases for infrastructure that were expected in October with the new fiscal year. Planned infrastructure construction dollars and projects will not disappear, but long delays could mean start dates might be pushed further out into 2024 or beyond.
Single-family construction will increase 9% to $244 billion in 2024 as the number of units improves 3% to 845,000. Multifamily starts will gain 14% in 2024 to $161 billion as the number of units grows 3% to 740,000.
The gains expected for housing in 2024 follow a tough year in 2023 when single-family starts fell 12% in units and multifamily slid 13%. The single-family housing market was plagued by rising mortgage rates in 2023, and the multifamily housing market was held back by stress on the financial system. A more upbeat outlook is expected to develop in 2024 as the economy moves past these stressors.
As inflation subsides, the Federal Reserve will begin lowering interest rates. In the first half 2024, mortgage rates likely will remain stable at slightly north of 7%. Once the Fed begins to ease, falling rates in the latter half of the year will boost single family starts. The improving economy will also be critical for multifamily housing. Economic growth will stabilize financial markets and – given the nation’s exceptionally low rental vacancy rates – developers are likely to respond with plans for new projects.
For both single- and multifamily housing, the labor market’s impressive strength in the face of multiple obstacles will continue to be a driving force behind starts and absorption. In the bigger picture, the housing stock remains roughly 3.3 million units short of what is needed to bring the housing market back into balance (satisfying demographic growth). That alone will be a major impetus for growth over the coming year and beyond.
Commercial construction will continue to see a modest decline during 2024 as starts drop 2% to $153 billion and square footage slides a more substantial 10% to 843 million sq. ft.
A more mixed outlook, however, is evident within the different commercial construction sectors. In dollar value, warehouses, offices and parking garages will weigh on starts, while retail stores and hotels will begin to grow in 2024.
Commercial construction has borne the brunt of the Federal Reserve’s tighter monetary policies, but structural changes occurring within several commercial markets have magnified the problem. For example, significant increases in working from home have negatively affected office construction, and Amazon’s moratorium on new warehouse construction has negatively impacted warehouses.
Commercial construction starts will lose another 2% in dollar value during 2024, but this is largely due to a sharp reduction in the value of warehouse starts (-11%) as well as a slight reduction in offices and parking facilities. In fact, removing warehouse starts from the commercial total would result in a 2% increase in 2024 as retail and hotel starts begin to rise. Office starts are expected to fall 2% in 2024 as traditional office work remains weak and CRE loan balances begin to come due. If not for data centers, the office market would show an even larger contraction.
Manufacturing construction starts continue to grow with the onshoring of production improving supply chains and significant new federal funding assisting those efforts. In 2024, starts will again outperform most other sectors with a 16% increase in dollar value and a 10% gain in square footage.
Growth, however, was limited by construction labor shortages in 2023, which delayed the start of several major projects. It is not yet clear if those projects will start in 2024 or slip beyond year’s end.
Both The CHIPS Act, favoring onshoring and improvements to facilities in the semiconductor industry, and the Inflation Reduction Act, providing funding to improve supply chains and bolster investment in domestic manufacturing, have poured billions of dollars into assisting manufacturers in building new facilities within the U.S. Since 2020, starts have grown from 63 million square feet to more than 156 million sq. ft. in 2023. Continued growth is expected in 2024.
Construction labor shortages, however, may be one factor impeding growth. Several large projects expected to start in 2023 were delayed. Reasons for these delays are numerous, but labor shortages are a common refrain.
While federal government funding should continue to positively influence manufacturing starts, construction labor shortages could have a negative influence on starts. Nearly two-thirds
of all manufacturing projects that broke ground in 2023 had hard construction costs of $550 million or more. These megaprojects have placed additional pressure on an already fragile market for construction labor and could result in further project delays and cancellations over the coming year.
Institutional building starts are expected to continue a modest recovery in 2024 with sq. footage gaining 2% to 339 million sq. ft. and dollar value growing 3% to $194 billion.
Most institutional sectors will grow in 2024 except for square footage in education buildings and dollar value in transportation buildings.
Because much of institutional construction is funded by public revenues that tend to lag the overall business cycle, they are relatively immune to rapid macroeconomic changes. This means that institutional starts typically respond more slowly than other sectors to changes in market conditions and modestly move up and down. That has been true in the current cycle as well. In 2024, for example, starts will inch forward but barely keep up with inflation.
Notably, none of the major sectors within institutional building will stand out in 2024. Life sciences and laboratories (within the education category in the Dodge data) will perform well but will only offset softer areas of the education sector, such as traditional K-12 and college construction, which will be impeded by relatively slow growth in enrollments. The dollar value of transportation buildings will also remain soft, which is due less to economic conditions than to strong surges in 2021 and 2022 as several massive airports underwent renovations.