Our Q2 2023 Market Conditions report summarizes current market conditions, industry trends, and mitigation strategies to make more informed business decisions in the quickly changing construction landscape.

Industry analysts like ENR, Dodge, Cumming, and AGC promote an overwhelming amount of information that indicates the worst is over. This might be true.

The pandemic was a brutal rollercoaster of cost shifts that were difficult to wrangle. We are still experiencing some major impacts, but overall, volatile situations are subsiding and this sense of leveling-off is as good as it gets for now.

When it comes to cost, lumber has balanced out. Steel is settling. But concrete has seen better days. The indexes have been all over the map the last 12-24 months in most categories. There isn’t one answer to how much of an impact this is. And what about the other 80-90% of a projects’ scope that is not lumber, concrete or steel. What about sinks? What about carpet? What about vinyl? What about ceiling tiles?

The broad picture is complex.

The data indicates that we would benefit from buying materials at scale. The data indicates that we should buy low. The data indicates that we should hold-off buying certain things.

The data says what it says. Collectively, if the design team, owner and DPR work together, we can consider the data and determine an approach together. If the target is inflexible, it will be more difficult, but not unachievable. If the team accepts the concept of wiggle room on design, cost, and time, then we can collaborate on a plan that can hit our targets.

If you’ve come to this report hoping for the answer to these questions, you may be disappointed. We believe a tailored approach is warranted. If we tell our client a number or a date, we should be willing and able to stand behind it.

General trends, graphs and percentages around construction related data are very generic and rarely directly applicable to actual projects.

For example, during the pandemic, when most indicators of future work on the horizon predicted a collapse, we experienced a rise in opportunities and a dramatic strain on key building materials. This, in turn, created such a pressure on cost that the whole industry seemed to be on an escalation red-alert.

The same is applicable right now. Sure, if you look at the major indicators (like we all do), the trend data would indicate we’ve leveled off to a near 0% month to month change according to several construction data trackers out there. But does this take into account the past several years of dramatic rise that got us to this new normal? Should we accept that and run with it?

Data can be extremely reliable, indicative, and valuable when attempting to set a target around time and money.

We do it regularly. Some of the most valuable information that we capture across the projects we build is around what we forecast versus actual outcome. Both from a time and cost perspective, we set out to build reliable and durable targets early, realizing that the first number or date is often the benchmark for all changes moving forward.

We use past data effectively. We look at industry trends and reports. We track supply chain notices and impacts. These things are a piece of the puzzle and should be leveraged.

But this is not ChatGPT. The difference is the practical, personal application of the data; how we take that information and determine how we can relate it, refute it, or use it for this project.

The art side takes as much effort as the scientific approach and the key is to marry those together in a cohesive way to paint an accurate picture. It’s conversational. It’s relational. It’s prospecting. It’s personal. It leverages practical experience to challenge the data and discover the true nature.

Data might tell you that the same building, with the same design, built on a similar site, should be the same cost and built within the same time frame. Though it might be close, it’s not guaranteed.

A period of a few months between those projects could dramatically affect the project’s duration overall due to potential supply chain disruptions. Building just one city or state away from the other project could introduce a completely new set of trade partners that are subject to an entirely different set of local market pressures and production capabilities.

The bottom line is every project is unique, but data alone doesn’t treat them that way. Setting cost and schedule targets is as tailored a process as the project itself.

Despite the recent bank failures and stock declines, optimism remains high in the construction industry.

It will take time to see the longer-term impact of these failures, but in positive news, the inflation rate has now fallen each month since July of 2022, and the annual rate of inflation slowed to 6% from 6.4%— the lowest level since September 2021.¹

Due largely to this easing of inflation and shortage of housing, and despite decreased homebuilding sales volumes and lowered prices, homebuilder stocks are outperforming the market.² Many in the commercial construction industry remain optimistic and believe most segments will improve in 2023, with the exception of lodging, private office, and retail.³

Architectural billings dipped below 50 in November 2022, which was the first time that occurred since February 2021 (a score above 50 indicates an increase in billings, and a score below 50 indicates a decrease in billings). Although they are still below 50, they have been improving since December. The Dodge Momentum Index is echoing this sentiment, indicating anticipated increased construction spending a year out.⁴

Construction employment for 2022 was up in 40 of the 50 US states,⁶ and as of February 2023, it is up 3.2% Y/Y and hit a record high 7,918,000, with average hourly earnings up 6.1% to $33.57 craft and office nonsupervisory labor in demand and tight.⁷ 69% of firms expect to increase their headcount over the next 12 months.⁸

Even as The Washington Post reported The Girl Scouts’ “hotly anticipated new cookie sold out faster than Beyoncé tickets, and wound up on eBay for four times the price,”⁹ the Global Supply Chain Pressure Index (GSCPI) for February dropped below its historical average for the first time since August 2019.¹⁰

Even the number of impacts notices received by DPR (cost and lead time increases) has been steadily falling since September (with an expected tick-up in February, fed by annual notices).

Despite seeing overall improvement to the supply chain, certain products remain problematic with increasing lead times and manufacturers choosing not to quote materials until they are ready to manufacture them.

Semiconductors will continue to be in the discussion regarding the supply chain, and we will likely see continued lead time issues until our supply is shored up to meet the ever-growing demand. Emerging technologies will drive additional demand and time to build infrastructure will make this recovery slow.¹¹

Bloomberg reported that ocean freight is back to 2018 rates.¹⁶ The number of container ships in US coastal waters has fallen to less than half compared to this time last year, indicating a trade slowdown.¹⁷

Smaller container ships are being sold for scrap,¹⁸ even as the China State Shipbuilding Corporation made delivery on the largest container ship in the world, capable of transporting 24,116 TEU (Twenty-foot Equivalent Units).¹⁹

Due to improved snowpack and dredging, the barge traffic slowdown due to drought in the Mississippi river may be coming to an end, but it will take time for things to catch up and normalize.²⁰ The drought in other rivers, like the Rhine,²¹ and Yangtze²² have not abated, and this will cause continued slowdowns on related barge freight.

In trucking, spot rates for flatbeds are down 14.9% Y/Y, and van spot rates are down 27.0%²³ with the average break even price per mile at $2.167.²⁴ Diesel fuel has generally been declining since June 2022, but still 33% above pre-Covid levels ($2.81 v $4.25/gal as of 3/12/22),²⁵ and US crude stockpiles are being rebuilt, and were up 1.2M barrels last week, having risen the last 10 weeks.²⁶

Between January 28 and March 4 of this year, there were 5 train accidents in the US, involving multiple carriers. As we’ve reported in the past, there has been a steady decline in rail service over recent years despite increased profits.

US freight trains grew 25% in length between 2008 and 2017 (up to 3 miles in length) with 67% of trains now arriving on time, down from 85% pre-pandemic, and although the rail strike was averted last December, if there are new requirements to restrict train size or require additional safety standards, rail schedules, deliveries, or costs could be affected.

There were concrete shortages in 48 states last year and costs rose 15% in December of 2022 compared to a year earlier.²⁷ There are many reasons for this, including cement shortages and fly ash shortages (reduction coal fired power plant combustion). Drywall manufactured east of the Rocky Mountains also competes for fly ash, so drywall manufacturers are shifting back to natural gypsum in the east, but this will take several years to fully implement. The President’s announcement to strengthen the “Buy American” requirements during the State of the Union Address could complicate the supply chain for certain products (like concrete) due to the domestic limitations and shortages of raw materials.

While the easing of supply chain issues is positive, DPR has been actively working to control our destiny and prepare for the future in managing our supply chain. Our aim is to ensure a reliable supply chain that keeps our projects on track, hitting critical milestones, and minimizing the effect of outside events.

Photos: Chip Allen