Q3 2023 Market Conditions Report
by Phil Bartkowski and Tim Jed
This article is included in the Great Things: Issue 9 edition of the DPR Newsletter.
Download the full PDF report.
Our Q3 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.
Drastic decline? Unlikely. Leveling off? Yes.
The experts offer opinions and projections to reflect a multitude of directions that the economy might be headed in relation to construction projects.
The U.S. is currently experiencing a robust labor market, which should help us float through any recession across most market sectors. Construction employment alone added some 25,000 jobs in May ’23 alone. As Federal interest rates continue to rise, this could begin to impact the labor market as projects might go on hold or even canceled.
In terms of forecasting specific construction starts in 2024, Dodge Construction Network is forecasting a decline of 6%, indicating that there will be fewer projects up and running for the next few years. Contextually, we’d look at this as more of a leveling off than a dramatic downturn in the economy. It’s been steadily growing over the last 3 years and the market is simply adjusting to this new normal.
From a pricing perspective, we are generally aligned with what the experts are reporting on Consumer Pricing Index and Producer Price Index forecasts. Bid prices are high right now. We’ve experienced fewer construction material woes and dramatic spikes as compared to the last two years. Scarcity of work is not an issue right now. With so much work going on, subcontractors can be more selective and aggressive with pricing on the projects they choose.
Engineering News-Record is still forecasting continued index growth across their Construction Cost Index, Building Cost Index, and Materials Cost Index. These indexes overlaid with extreme public and private sector construction growth in the last year, forge a melting pot of growth and demand that has projects navigating cost creep as the industry deals with a heavy backlog of work.
All combined, while there may be a slight decline in construction starts, tight labor markets and raising prices will keep the net change of construction values level in the coming year.
Preparation is Key
In last quarter’s report, we talked a lot about information overload. Data is certainly valuable in helping us make decisions. From labor headcounts, to current project staffing transitions, to hiring strategies—all of these are either influencing our decision to pursue work or determining which efforts should get the most focus.
But data isn’t always straightforward. While most indicators predicted a collapse in available work heading into the pandemic, we experienced a rise in opportunities. In fact, in post-pandemic 2023, DPR is tracking over 700 opportunities—valued at $29+ billion in work—that are due to be awarded prior to the end of 2023.* This is an increase over open opportunities at the same time last year in both count of RFPs and value of the work (we are currently tracking a 12% increase in opportunities / 7% increase in contract value from 2022).
Discrepancies between predictions and actual outcomes might occur for a variety of reasons. Our markets continue to evolve rapidly due to changes in technology, regulations, etc. These changes can create new opportunities or impact existing ones, with some projects pushing out or changing scope. Market trends can also vary significantly from one region or market sector to another. While some regions or industries may experience a slowdown, others might see increased demand.
*The quantity of opportunities DPR is tracking is a reflection of the opportunities available industry-wide. DPR will not be awarded nor put in place this quantity of work.
Chart: A Look at Opportunities
Number of Opportunities (potential projects to be awarded) that DPR is tracking from January 2023 through December 2023, compared to the same time period in 2022.
Construction Volume and Future Planning
The amount of large project opportunities ($100M+) has increased. There are a significant number of these ‘mega-jobs’ popping up in the last two quarters across the country that are driving big swings regionally as we plan the work that we pursue. Large jobs require a large staff. We use opportunity data in our business planning and forecasting to determine local project staffing requirements and current project team transitions so our customers can remain confident that DPR project teams will consistently execute awarded work.
Unlike large projects that spend months—if not years—in the contractor selection phase, we are still seeing a lot of quick-turn invitations for tenant improvement opportunities. These smaller projects often have condensed timelines, pop-up quickly, and construction begins in a matter of weeks, not months. Having a special service group dedicated to these smaller projects ensures that staff is always ready to meet customer goals.
A Healthy Leveling Off
While the perceived narrative is that work is slowing down, we’ve seen material supply shortages, trade contractors too busy to bid new work, and a reduced labor force that is over-committed because of the amount of work. And our pipeline of opportunities supports what we're seeing.
Important for our customers is recognizing that the volume and scope of work will continue to demand a lot from our supply chain and labor force. To ensure limited disruptions to projects and mitigate supply chain challenges, it is crucial to take proactive measures. Here are some key actions to take:
- Early Planning and Engagement: Start planning projects well in advance and engage early. Early collaboration allows the team to assess project requirements thoroughly, identify potential bottlenecks, and develop effective strategies to mitigate supply chain and labor challenges.
- Supply Chain Optimization: Work closely with supply chain partners to optimize processes, enhance efficiency, and identify and select alternative sourcing options. Diversifying suppliers can help reduce the impact of shortages or delays from a single supplier.
- Labor Force Management: Ensure your labor force is adequately managed, and their workload is reasonable. Over-committed workers may lead to burnout and decreased productivity.
- Adaptability and Flexibility: In a dynamic environment with fluctuating demands, being adaptable and flexible is crucial. Stay prepared to adjust schedules and resource allocations as needed to respond to changes in project requirements or supply chain disruptions.
- Communication and Transparency: Keep lines of communication open. Transparently share any challenges you are facing and work collaboratively to find solutions. Effective communication can help manage expectations, align priorities and prevent misunderstandings.
- Risk Assessment and Contingency Planning: Conduct a thorough risk assessment for each project, identifying potential supply chain and labor-related risks. Develop contingency plans to address these risks should they materialize.
- Relationship Building: Establish strong relationships with reliable suppliers and trade contractors, as well as designers and contractors who understand this dynamic environment. A good working relationship can lead to more proactive management of projects and better priority allocation during times of material shortages or labor constraints.
If leveling off does anything, it is actually healthy for contractors and customers alike. It allows us to more predictably execute on customer needs with the right team aided by easing labor force and supply chain demands.
Annual rate of inflation fell 2% over the past 3 months, only 0.5% higher than it was pre-COVID (January 2020)
Construction employment was the lowest yet in 2023
A Return to Normal?
On June 8th, White House officials heralded the unclogging of supply chains.1 Port congestion has disappeared, and the inflation rate continues to improve, down to 3% in June of 2023 (a 2% fall from March and its lowest level since March of 2021).2 In fact, container freight costs from China to the U.S. West Coast are lower than they were prior to COVID.3
The economy seems to be doing well. Overall unemployment has been relatively low since March 2022 (3.6% to 3.8%),4 and for construction, May was the lowest level yet in 2023 (just 3.5%),5 which continues to drive construction wages higher.6 Homebuilder stocks are strong on news of greater-than-expected demand for new housing.7&8 Our discussions with manufacturers and material providers echo sentiments that the supply chain is healing, and while there are still issues, most lead times have normalized and pricing has stabilized. This should continue, assuming no further significant world events.
That said, there are still some things to plan for and keep an eye on to ensure predictable project delivery. In DispatchTrack’s new survey, “2023 Supply Chain Perspective,” 72% of companies stated they are still experiencing supply chain challenges9. The number of people facing moderate to severe food insecurity has grown for the 4th year in a row, increasing 34% in 2022,10 driven in part by the trade and supply chain disruptions in Ukraine and the related conflict.
And it’s not limited to our business—bourbon is in short supply due to white oak shortages used to make barrels,11 a Mexican drought created a shortage of chiles that are used to make Sriracha sauce,12 and the ‘Barbie’ movie set had used so much pink paint, it cleaned out the world supply of one paint supplier (to be fair, this issue was exacerbated by the 2021 Texas deep freeze’s effect on materials used in the paint).13
So What Should We Continue to Watch?
The Architectural Billings Index is back above 50 for May,14&15 improving after April, indicating a strengthening of design billings.
There are labor disputes between dockworkers and shipping companies that could snarl port traffic on the West Coast,16 although it was announced on June 14th that a tentative agreement has been reached.17 97% of UPS workers voted to authorize a strike, in the event an agreement is not reached by July 31, 2023.18
The recent overpass collapse on I-95 in Philadelphia will have significant impact on the truck deliveries on the East Coast as it has a daily volume of about 14,000 trucks,19 but in an impressive response, some of the lanes were reopened less than 2 weeks later, improving the situation somewhat.20
Despite union warnings, train derailments are increasing because of ‘monster trains’ that are 2 to 3 miles long21 (249 accidents and 160 derailments in 2023 as of June 12th).22
While we’ve seen significant improvement in the drought across the U.S., issues persist. There’s a lot of news around “flash droughts,” which are created by lack of water and accelerated by climate change including abnormally high temperatures, winds, and high levels of solar radiation that lead to fast evaporation rates. Though we’ve seen significant precipitation in the west over the winter and spring, much of the rain hasn’t been absorbed into the ground and has simply run off.
For example, even though there has been recent flooding in the Mississippi River, water levels are now approaching drought-like conditions,23 which could restart a slowdown of barge freight.
The Panama Canal is experiencing its worst drought in 70 years, reducing allowable boat draft (the distance between the waterline and the deepest point of the boat). On June 13th new limits were imposed to a maximum draft of 44 feet. This change was from the prior draft of 45.5 feet, which was already reduced from the standard of 50 feet, due to low water level in the canal. This new standard will reduce the volume of cargo that the largest container vessels can carry by up to 40%, and has already increased shipping costs $300 - $500 per container.
Further reductions in water levels could limit traffic the canal by up to 22% (down to 28 ships per day, versus 36 currently), and force larger ships around the southern tip of South America, which is significantly longer and less safe. Ultimately, this may cause delays and spikes in the prices of consumer and industrial goods.24
China’s Belt and Road Initiative (BRI),a global infrastructure development strategy, began in 2013 to assume a greater leadership role for global affairs in accordance with its rising power and status. As of January 2023, 151 countries signed up accounting for almost 75% of the world’s population and more than half of the world’s GDP.25 Examples of BRI include infrastructure investments in ports, skyscrapers, railroads, roads, bridges, airports, dams, coal-fired power stations, and railroad tunnels. Two recent announcements regarding ports include building a new $3 billion port in Peru,26 and Germany’s approval for China to buy a significant stake in port of Hamburg.27 Owning this infrastructure could have wide-reaching impact to China’s supply chain influence world-wide.
Due in part to the Ukrainian conflict and China’s slowdown and the aftereffects of the pandemic and related shipping disruptions, many companies are rethinking their sourcing locations.28 People are now asking if China’s explosive growth is coming to an end.
It has been a long-held belief that China would overtake the U.S. as the world’s biggest economy, but with China’s population decline,29 shrinking workforce,30 and slowing productivity,31 questions are being raised as to whether this goal is still likely. MSN.com reported that “if China doesn’t catch up to the U.S. by the middle of the 2030s, it may never do so.” In May, exports from China were down 7.5% YOY, as countries reassessed supply chains and redirected spend.32
The U.S. has also been trying to limit China’s access to key semiconductor manufacturing machinery and knowledge, which is beginning to change the chip supply chain. This past March, Japan announced plans for new restrictions on exports of chipmaking gear, and Taiwan’s is now exporting less chip making equipment to China.33 Taiwan is the world’s largest chip producer, so with recent and continued military drills by China near Taiwan,34 and China’s interest in control over Taiwan, there is a growing concern about tensions between the two nations and what the long term impact might be. With global chip demand continuing to increase (over $72 billion in 2022 - up 8.9% from 2021), these tensions become more relevant with each passing year. These pressures appear to be increasing, as China, just put measures in place to restrict certain rare earth metals that are critical in chip manufacturing, and as China accounts for about 80 percent of global production of the rare metals, this could have a significant effect on availability and cost.35
A Look at the Global Semiconductor Materials Market
Global semiconductor materials market revenue grew 8.9% from $66.8 billion in 2021 to $72.7 billion in 2022. 36
|Rest of World||$8.6||11.9%|
Since the 1990s, the United States’ share of global chip-making has dropped from 37% to 8.6%. Many companies (like Apple, AMD, Intel, nVidia and Qualcomm) design their own chips, and use TSMC (Taiwan Semiconductor Manufacturing Company – the world’s largest chip manufacturer) to make some or all their chips. Fueled by the CHIPS Act, there are now 14 companies that have either announced or broken ground on 22 new chip factories in America. That’s more than $160 billion of spending and 28,000 new American jobs, and that doesn’t take into account increased spending by other supporting industries (e.g. housing and infrastructure near each plant).37 The largest of these projects is TSMC’s factory in Arizona, reportedly valued at $40 billion, which begs the question: What will happen if China were to exert additional control over Taiwan, and/or if tensions between China and the U.S. continue to grow? Also of note, the European Union has announced a 43 billion euro ($47 billion USD) package to boost chip manufacturing in the bloc.38
Other insourcing trends include the U.S. continuing to be the world largest oil producer, and rare earth material processing reentering the U.S., including companies like Ucore39 & Phoenix Tailings.40 Rare earth materials include materials that have a large importance in strategic technologies (i.e. catalysts, magnets, magnetic resonance imaging scanners, and batteries) and play a crucial role in the production of clean energy.41 Their supply chain has been at risk due to their current mining and processing locations and corresponding geopolitical issues, so having domestic manufacturing will help safeguard those supply chains.
Our Commitment to Our Customers
So even though we continue to experience supply issues for certain items like transformers, switchgear, chillers, air handlers, and medium voltage copper wire, slag, sand, and fly ash, there are many positive indicators, and with the recent news on inflation, we are encouraged.
Our collaborative spirit and mindset ensure that we are working across our Family of Companies to get the best results from our teams, suppliers, and supply chain. We leverage the parts of the business that make sense to help us become more vertically integrated and control our destiny.
We’ve had early successes piloting programs to transport materials used by our self-perform teams, and continue to expand our logistic capabilities to ensure on time delivery—in fact, we’ve surpassed 200 deliveries.
We are actively looking for international options that make sense to help us overcome long lead times, and we’ve expanded our supplier relationships to 187 highly strategic collaborative manufacturer relationships, with a total of nearly 2,600 companies in our supplier network.
Biggest Impacts Since Last Quarter
These impacts are based on actual communications received from our suppliers and distributors, and may be different than the Market Conditions Dashboard, as this information is based on specific products compared to the general data in the Market Conditions Dashboard.
Increase of 0% to 2%
0 - 1 week lead time
|Spot market rates continue to decrease as capacity exceeds demand. National Flatbed rates have dropped from the high-water mark of $3.45 per truck mile in June 2022 to $2.64 per truck mile in May 2023, a 23% price drop. This has caused smaller trucking companies to leave the market. It is anticipated that the market will bottom out and may begin to rise.||Continue to look at the spot market to bid the best rates for loads.|
Decrease of 2%
Less consumer spending, coupled inflationary pressures and lingering COVID issue has caused Ocean freight from Asia to US to drop 2%.
|Continue to look at the spot market to bid the best rates for ocean freight.|
|Concrete and Ready Mix:
12% increase and regionally
|Sustained strong demand coupled with continued high transportation, energy, and labor cost||Schedule pours in advance and engage with batch plants to plan schedules|
|Chillers, Air Handlers:
|High demand and component shortages from overseas driving long lead times||Early procurement advised; lead times may deteriorate further|
|Steel flat steel prices experienced a dramatic increase in Q1 of around 60% and since has leveled out after a 15% decline in the past 2 mo. The near-term prices should be sustained at the current levels for both domestic and international. The lite framing market pricing will move in line with cold rolled coil pricing as it represents 80-85% of the finished material cost. If imports don’t improve, we could see additional domestic mill price increases.||Early procurement advised for short term needs 6-10 months.|
|High demand and component shortages from overseas driving long lead times||Early procurement advised; lead times may deteriorate|
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.
It’s never been more critical to maintain supplier relationships, ensuring we select the best suppliers for the successful delivery of our projects. We recently supported a large bid involving a single-source plastic extrusion manufacturer with no alternate competitive suppliers. Through industry research of U.S. importers, we qualified several additional suppliers who offered substantial cost savings (>$1MM) and provided a more environmentally friendly product. Why this matters: Maintaining supplier relationships is crucial for project success. Finding alternative suppliers with cost savings and environmental benefits is essential, especially when dealing with challenging or risky single-source manufacturers.
As material availability continues to fluctuate, the ability to source alternatives quickly is essential. A project in California needed special screws which were challenging to source and were in short supply. Our steel experts reached out to their suppliers and leveraged their relationships to source and fulfill the necessary product, allowing the project to proceed with the applicable work. Why this matters: Providing alternatives allows projects to proceed with the applicable work as scheduled.
Expanded Logistics Program
Using our new in-house logistics service, we have improved control over transportation scheduling and on-time deliveries. Our services include shipping, receiving, importing, custom services, and LTL (Less-than-Truckload), material relocation, and forward stock (near site) capabilities for our customers and front-line teams. This will help us to continue to be a great builder and ensure we control our destiny. As of July 14th, we’ve delivered 205 loads. Why this matters: Assisting our frontline teams with material storage and delivery ensures teams have what they need when they need it, at a predictable cost.
Innovating for Quality & Efficiency
Over the past 18 months, we’ve run a pilot program to evaluate and rate several risk factors—ability to manufacture and deliver quality parts on time consistently—for 175 of our material suppliers. This has allowed us to better understand potential threats in our supply chain, and enabled us to have proactive backup plans in place. Why this matters: This will enable us to mitigate supply chain risks effectively and efficiently, ensure the material suppliers are able to consistently deliver quality parts on time which will have a direct impact on customer satisfaction.
Leveraging Supplier Relationships
Our industry continues to struggle with delivery of equipment on time and lead times on new orders have remained long, impacting project schedules and causing delays. We have successfully mitigated some of these delays by leveraging our relationships with our suppliers, and by identifying and reassigning equipment fabrication slots on multiple projects to mitigate delays. Why this matters: DPR is taking a creative solution towards leveraging our overall portfolio to reallocate un-needed equipment between projects to eliminate schedule impacts.
Switchgear is still experiencing extremely long lead times, which has caused schedule concerns for multiple projects. Our teams have developed alternative solutions by procuring from previously canceled project fabrication slots. In one example, OES (part of DPR’s Family of Companies) coordinated with the project team for a canceled project and negotiated the desired equipment with the manufacturer. We then procured the material, and arranged the logistics to ensure safe, on-time, and high-quality delivery to the project site. DPR’s electrical group, EIG, engaged with the manufacturer to inspect the gear and get an extended warranty for the owner. By utilizing our Family of Companies collaboratively and effectively, we reduced lead times by months, keeping the project on schedule. Why this matters: We are able to think outside the box and create new strategies for procuring gear and maintaining on-time schedules. By doing this, DPR is known as the reliable source for early procurement on projects—so much so that other contractors now reach out for assistance in material procurement.
Past data reflects the movement of PPI indices, as provided by the US Bureau of Labor and Statistics and is captured and updated monthly.
Future forecast data is gathered through DPR’s Supplier Relationship Management Program in coordination with leading industry manufacturers and suppliers. Forecasted data is captured and modeled quarterly as an average of several surveys to multiple suppliers within the trade.
Information in this report is compiled from third-party reporting that is available to the public. It is not owned by DPR Construction.
United States Census Bureau
United States Department of Labor
United States Energy Information Administration
United States Chamber of Commerce
United States Bureau of Labor Statistics
Engineering News Record
American Institute of Architects
1 White House hails the end of the supply chain nightmare (msn.com)
2 Current US Inflation Rates: 2000-2023 (usinflationcalculator.com)
4 CPS Home : U.S. Bureau of Labor Statistics (bls.gov)
5 Bureau of Labor Statistics Data (bls.gov)
6AGC Data Digest, Vol. 23, No. 19, May 23-30,2023 – Ken Simonson
7 Homebuilder D.R. Horton surges as ‘encouraging’ housing market boosts results [Video] (aol.com)
8 Lennar reports strong second quarter as ‘demand has accelerated’ (invezz.com)
9 Seven in Ten Supply Chain Professionals Still Experience Significant Challenges | SupplyChainBrain
11 Your Favorite Bourbon Could Be Facing A Shortage Soon (msn.com)
13 ‘Barbie’ movie caused pink paint shortage, production team says (wapt.com)
14 ABI April 2023: Business conditions soften again at architecture firms - AIA
15 An index score of 50 represents no change in firm billings from the previous month, a score above 50 indicates an increase in firm billings from the previous month, and a score below 50 indicates a decline in firm billings from the previous month.
18 Biden faces prospect of UPS strike while consolidating union support (msn.com)
19 American Trucking Association says I-95 collapse in Philadelphia will ‘likely’ have significant impact on supply chain - 6abc Philadelphia
20 Interstate 95 reopens to some traffic less than two weeks after deadly collapse in Philadelphia (cnbc.com)
23 Mississippi River water levels approaching drought-like conditions after recent flooding | Dubuque | kwwl.com
24 Drought-hit Panama Canal introducing draught limits for ships - Supply Management (cips.org)
25 Belt and Road Initiative - Wikipedia
26 China building a new port and industrial hub in Peru, US$ 3bn investment, 55kms north of Lima — MercoPress
27 Germany approves China’s Cosco taking stake in Hamburg port terminal | Nasdaq
29 China’s Population Decline Is Not Yet A Crisis. Beijing’s Response Could Make It One | Council on Foreign Relations (cfr.org)
30 China population: workforce to drop by 35 million over next five years as demographic pressure grows | South China Morning Post (scmp.com)
31 China economy: Productivity is next growth engine, says World Bank report (cnbc.com)
32 China’s economy is slowing down. Is it permanent? (msn.com)
34 How China invading Taiwan would impact the microchip industry and the world (msn.com)
35 China to restrict chip exports as US weighs new curbs | Technology | Al Jazeera
36 Global Semiconductor Materials Market Revenue Reaches Record $73 Billion in 2022, SEMI Reports (yahoo.com)
41 Critical Materials Factsheet | Center for Sustainable Systems (umich.edu)
Photos: Danny Sandler
National Preconstruction Leader
Posted on July 26, 2023