Q4 2023 Market Conditions Report
by Phil Bartkowski and Tim Jed
Download the full PDF report.
Our Q4 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.
Understanding What We’re Hearing
In regular publications this year by Engineering News Record there has been a steady reporting of building costs on the rise. They indicate that on average, building costs have risen by over 3.5% since last October.
There isn’t a single answer to why. ENR reports stabilization of certain common materials like cement, asphalt, steel and rebar, while PVC and concrete block are on the rise and skilled labor costs are up by over 3.5% this year. So, it’s a bit of a grab-bag of information with no clear culprit for rising costs.
As we regularly indicate in this report, the only way to understand why the costs are escalated is to understand the detailed scope of a specific project. Taking any of these indexes and liberally applying them to forecast is not a reliable solution.
The variability by region and metropolitan area is all over the map as well. Though DPR isn’t experiencing quite a dramatic variability as ENR is indicating, these are some good indicators of where construction is booming across the Nation, and where it is not so hot.
Dodge Data and Analytics notes that over the last year when is comes to construction project starts, the Southeast is leading the pack with a 31% growth, while New England is hovering around 19% growth and the Pacific and Mountain regions retracting, -1% and -35% respectively.
According to research performed by FMI Corporation, some 15% of the construction starts are in the ‘mega-project’ category. Projects nearing or exceeding the $1B mark are continuing to pop-up in some of the more resource-friendly areas where power and water are established and cheap. Without some of these massive projects popping up, there might be near-flat status in the construction spending data over the past year, they say.
Manufacturing construction starts specifically, coming off the CHIPS Act that was set in place August of last year, has shot up by over 200%. It’s an incredible impact where funding is coming in and instigating growth across the country.
Whether semi-conductor, battery, data centers, or manufacturing facilities, these industries are really driving the market right now. A lot of the more traditional buildings such as education, office space and healthcare simply are not matching the pace of growth right now, that’s for certain. That doesn’t mean that there is no significant growth in these markets in certain geographies. Check out our Core Market sections for more insights on this topic.
CHART: A LOOK AT CONSTRUCTION STARTS
Dodge Data and Analytics reports dramatic variability in construction starts by region over the last year.
With Federal interest rates still at highs and escalation descending very slowly, it doesn’t seem that any dramatic shifts will occur in the next few months. Hearing from the officials in the Fed we will be seeing some ‘higher-for-longer’ escalated rates.
So, what does this mean for us? Well, the cost of borrowing money is high and this can stifle decisions to initiate building projects. Are we seeing a tangible change over the last year or so? Well, yes and no.
Yes, we’ve seen some projects go on hold or cancel indefinitely. That has been a more recent trend in certain sectors and geographies, yet this hasn’t been a significant cliff, at least from our vantage. What we’ve learned through these times is that if some of these projects go on hold, we have to be ready to go and go fast when they come back online!
Construction prices are up across the board and they are not dropping. Since COVID, there have been some astronomic escalation factors due to scarcity of materials, labor challenges, subcontractors being booked on other work, and a plain crazy economic environment globally. With an election year coming, it’s hard to imagine any pricing reductions coming our way. Any trend downward will be incremental leveling at best and any decrease will still be based on the past dramatic rising cost peaks we’ve seen recently.
Needing to mobilize quickly and having the current cost of construction so high has led to more dynamic engagements between owner, designer and builder that ultimately serve the project for the better. Working in a proactive team environment allows us to move faster and eliminate as many surprises as possible.
None of these parties are excited about the price of a building going up, especially our customers. It doesn’t help anyone to have a cost exceed a set budget, ever. It causes re-work for design and engineering teams, delays construction, and can be detrimental to progress in general.
Across markets and geographies, we are seeing the benefits of being engaged as early as is reasonable in a more partnership engagement, even design-build and design-assist, to align early on strategies to achieve the client’s budget and timeline.
Uptick in the annual rate of inflation in August from a July low
Increase in Construction spending over the same period in 2022
Unemployment rate fell slightly in September
Oh Tanenbaum, Oh Tanenbaum
Over the last few years, it’s been tricky to interpret what will happen as domestic and international affairs unfold. It seems that the old rules no longer apply, and world events seem to have unexpected outcomes.
Despite signs of an economic slowdown in the US, current spending in the construction market was 4.2% above the same period in 2022,1 ENR’s Building Cost Index History for September 2023 is at an all-time high,2 the demand for skilled workers continues to challenge the industry,3 and the US Labor Department reported that 336,000 jobs were added to in September, with the unemployment rate at only 3.8%.4
Although the writer’s strike in Hollywood is over, the actors union, SAG-AFTRA, remains on strike.5 There is an expansion of the United Automobile Workers union strike,6 and the expiring contracts for Kaiser Permanente led to a three-day strike on October 4th for 75,000 employees.7 In fact, The CBS Evening News reported that there are currently 378,000 people striking in the U.S., compared to 40,200 on the same date in 2021.8 Meanwhile, in the construction industry, architectural billings dropped below average in August.9 You’d think that these factors would lower spending, demand, and pricing, but we saw an uptick in the Inflation Rate to 3.67% in August,10 up from a low of 2.97% in July.11
Imported goods may be affected by the ongoing US Government budget process. On September 30th, the US Government avoided a shutdown and passed a short-term spending bill that will keep the US Government operating through November 17.12 A shutdown would impact import-related services, which could affect a wide range of products made outside the US, or that contain components or parts made outside the US.13
But as 2023 comes to a close, we are encouraged, as our suppliers are predicting stabilizing prices and improved lead times, with the outliers being generators, switchgear, transformers, elevators, and other miscellaneous mechanical equipment. This, coupled with the fact that there seems to be fewer news articles about supply chain disruptions, suggests things are settling down. A year ago, we were even seeing supply chain issues for Christmas trees, but this year buying a tree should feel like the old days, pre-COVID, with ample available supply.14
However, it’s not quite all back to normal just yet. In August, the Harvard Business Review noted that we are seeing shortages of skilled supply chain professionals, “from sourcing to production, logistics, and delivery of goods and services,” with supply executives reporting that their biggest challenge is hiring and retaining qualified supply chain related workers. Even with technology advancements, it is not enough to overcome the shortfall, and rebuilding the supply chains will require a combination people and technologies.15
Care for Some Rare Metals with Your Chips?
Semiconductors (aka “chips”) continue to be an area of focus, because of how prevalent they are in everyday products. Even some air fresheners contain chips, so we are paying close attention to developments across the globe that could impact lead times due to semiconductor availability.
Tensions between China and Taiwan continue to rise, as demonstrated by recent events such as Chinese fighter jets crossing into Taiwan’s airspace in August,16 and the unveiling of Taiwan’s first domestically made submarine.17 Concerns persist that these tensions could cause instability in semiconductor supply, as Taiwan is the world’s largest chip producer. The friction is not limited to China and Taiwan, as pressures are building between China and western countries as well, which has led to measures being imposed limiting China’s ability to buy semiconductor manufacturing technology from international sources, so China has shifted strategies to build those capabilities domestically.18
China is actively working to become independent from international supply chains. It is working to sever international dependencies in chips, automotive, EV, and other products manufacturing these items in-house with companies like CATL, a Chinese battery manufacturer, which is setting up new plants throughout Europe and Asia. In related news, Japanese media reported that a Japanese company sold its shares in a China-based EV maker under pressure from the Chinese government.19
Providing 70% of all rare earth-mined alloys, China is the largest producer globally.20 There are 17 rare earth elements, used for things like magnets, batteries, steel alloys, and many everyday products such as phones, bulbs, LED lights, hard disks, monitors, and the list goes on.21 China is considering bans on rare earth exports, and beginning August 1, placed export restrictions on two rare earth metals used in chip production. These two metals are not available domestically in the US and, in fact, 94% of global supply currently comes from China.22
Source: US Geological Survey, 2023
These factors could significantly impact availability of goods produced outside the US, but solutions are on the way, including numerous domestic chip manufacturing facilities under construction in the US, which should eventually help to assure availability. Further, the U.S. State Department began partnering with the Government of Vietnam to explore opportunities to grow and diversify the global semiconductor ecosystem under the International Technology Security and Innovation (ITSI) Fund, created by the CHIPS Act of 2022. This partnership will help create a more resilient, secure, and sustainable global semiconductor supply chain.23 And for rare earth metals, Congress has introduced the bill, HR 2849, which will help to establish rare-earth magnet production within the US by offering tax credits for domestic mining and manufacturing.24 25 In addition, on September 25th, it was reported that Vietnam, which has the second-largest rare-earth deposits, plans to restart its biggest rare-earths mine next year with the help of Western allies, including the US.26
Flooding on Land, Drought in Waterways
We’ve been hearing about excessive heat and rainfall in the news. New York, Hong Kong, China, Taiwan, Libya, Brazil, and even the Burning Man festival in Nevada have all experienced record rain and catastrophic flooding in the last few months.27 Conversely, we are also hearing about droughts in rivers around the world, including in many of the same locations that have had the record rainfall, in major waterways used for freight like the Rhine in Europe, 28 The Yangtze in China,29 the Amazon in Brazil,30 The Panama Canal, and The Mississippi River. These droughts are a growing concern, as 90% of products moving around the world via oceans and waterways.31
The drought of the Mississippi River has put New Orleans drinking water at risk. In fact, the extent of the drought and the shortage of water flowing out of the Mississippi to overcome the influx of salt water is so severe that salt water has encroached more than 30 miles upstream from the Gulf of Mexico. 34 Materials that are shipped on the Mississippi are being slowed. The size of the barge shipments has been reduced up to 38% in tow size, mostly due to the number of barges that can be tied together widthwise, and there have been vessels grounded in the river. The delays in transit could be anywhere from 48 to 72 hours and loading barges in St. Louis and on the Illinois River have been reduced by 15%.35
Meanwhile, in ocean freight, container shipping rates continue to drop. Trans-Pacific spot rates have fallen by double digits over past month. On September 26th FreightWaves reported that: Asia-US West Coast prices are 40% lower than the same time last year, and Asia-US East Coast prices are 62% lower than the same time last year.
On September 8th, the National Retail Federation (NRF) reported that “Import Cargo Volume Could Hit 2 Million TEU36 Three Months in a Row” for August through October. This reflects optimism among importers for consumer strength over the holiday season. Even though yearly TEU projection for 2023 is lower than the unusually high spike we saw in 2021 and 2022, the forecast for 2023 is about 2.3% above 2018, the prior record. Late fourth quarter shipping strength is likely, a positive sign of a general restocking cycle, as these goods would arrive too late for the holidays.37
In trucking, overall freight demand is up. The American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index rose 1.3% over July and August, and it is expected to continue to increase in the near term, which could push prices up.38 Despite this increased demand, Yellow Freight filed for bankruptcy in July, but many of their customers had already shifted to other carriers. This does, however, impact some glass related products and may lead to more than 30,000 jobs being put at risk.39
The Good News
Companies are learning and adapting. The “Covid and semiconductor crises have ‘pushed logistics industry forward’” stated Renee Wawrzynski, executive director, Global Logistics at GM. She went on to say that pre-pandemic, GM didn’t have complete visibility of its entire tiered supply base, but “we have that data now, so we’re going to be better moving forward.”40
We, too, are learning and adapting. Through leveraging our full family of companies and capabilities in direct sourcing and supplier relationship management, warehousing, logistics, and quality control, we’ve overcome many challenges in navigating the disruptions of the past three years. Our ability to capture, track, and forecast impacts, and our connections with leadership among many top-tier material manufacturers, helps us to control our destiny and deliver projects on time at the highest quality, working collaboratively with our customers for the best possible outcome.
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 0-2%; 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 $2.50 per truck mile in August 2023, a 28% 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 5%
|Less consumer spending, coupled inflationary pressures and lingering COVID issue has caused Ocean freight from Asia to US to drop 5%.
As of 9/26/23, Freightos Baltic Index, Asia-US West Coast prices (FBX01 Weekly) fell 5% to $1,778/FEU. This rate is 40% lower than the same time last year.
Asia-US East Coast prices (FBX03 Weekly) fell 8% to $2,650/FEU. This rate is 62% lower than the same time last year.
|Continue to look at the spot market to bid the best rates for ocean freight.|
|Copper and Conduit Tube:
7% Price Decrease
|Weak global demand.||
Recommend purchasing cooper needs over the next 12 months, expect pricing to stabilize and raise given coopers’ role in the global EV market.
7-10% price decrease
Continue high energy and labor cost.
|Recommend securing cement needs early, expect cost to increase over Q4 as energy cost increases.|
3% price decrease
|Weak domestic demand with manufacturers operating at 66.8% capacity.||Recommend purchasing PVC needs for the next 12 months now. Pricing is expected to increase with increase demand from EU due to soaring energy cost. US cost is expected to also recover and increase due to energy cost increase and potential weather impacts in the gulf.|
|Elevators and Lifts:
Lead Time Increase to 20-28 weeks
|Tier 2 and 3 components are impacting manufacturers.||Early release and engage manufacturers when possible.|
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.
One of our projects in California was over budget on metal panels and purchasing through distributors. Our supply chain team was able to source the metal panels directly from the manufacturer and leveraged our national position to save the client 35%. Why this matters: Leveraging DPR’s aggregated volume helps keep our clients within budget targets.
Innovating for Quality & Efficiency
Our supplier risk assessment program has expanded to include new supplier due-diligence and existing supplier performance measurement and progress tracking. This enables us to source and procure materials responsibly, strengthen relationships with our supplier partners, and continuously improve our services to DPR’s Family of Companies. By utilizing a risk based and data driven approach we create awareness and actionable risk mitigation plans towards reducing disruptions and improving predictability and efficiency. Why this matters: A robust and holistic quality program will act as a preemptive warning system to minimize and address liabilities, as well as, limiting our financial and contractual risks in the early phases of planning.
Leveraging Supplier Relationships
Recently, a confidential client in Seattle had a major issue threatening to delay the project’s electrical panel boards, so the project team reached out to obtain support. We leveraged our relationships with leadership of the manufacturer and through a collaborative strategy, were able to solve the issue and mitigate the issues, and deliveries of the panel boards were prioritized which resulted in a timely delivery of the panel boards without impacting substantial completion date of the project. Why this matters: Having strong relationships with suppliers differentiates DPR as it helps us to mitigate risks, protects completion dates, and helps ensure on-time quality delivery.
Electrical items, such as Switchgear, continue to have extending long lead times. By collaborating with key distributors and our Family of Companies, we have developed a program to procure unused equipment from previously canceled jobs. This program helps us to overcome risks and unforeseen manufacturing issues, as we can provide our project teams necessary electrical items quickly, keeping project schedules on time. Why this matters: At DPR, we are putting more emphasis on warehousing and sharing information, providing better optics and allowing us to gain deeper insights into problems and opportunities, get ahead of potential impacts to projects, and better serve our customers.
Life Science Trends
Market remains strong in 2023 but a sense of normalization to pre-pandemic levels is emergingLEARN MORE
2023 is a year of cash conservation and evolution for health systemsLEARN MORE
Challenges will continue in 2023 given a difficult debt/equity marketplace and workplace strategy redefinitionLEARN MORE
Higher Ed Trends
Recent changes to higher education ecosystem will influence and evolve the student experienceLEARN MORE
Advanced Tech Trends
Mission critical and advanced manufacturing construction markets continue their growth in 2023LEARN MORE
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 Construction Spending Rose 0.5% to $1,983B in August (floordaily.net)
7 More Than 75,000 Kaiser Permanente Health Care Workers Begin Strike - The New York Times (nytimes.com)
8 CBS Evening News, October 2, 2023. Not including Kaiser Permanente strike.
10 As of August 23, 2023
27 Ten countries and territories saw severe flooding in just 12 days | CNN
28 Drought threatens major European river trade route with ripples across the continent (cnbc.com)
29 China Yangtze region’s severe drought affecting production | The Asahi Shimbun: Breaking News, Japan News and Analysis
31 Droughts are damaging supply chains on waterways | World Economic Forum (weforum.org)
32 as of 8 August, 2023
36 Twenty Foot Equivalent Unit, aka 20’ Container
38 Trucking Industry Up 26.6% Year to Date: More Room to Run? (msn.com)
39 Why Did Yellow Freight Shut Down? It’s Facing Mounting Debt (distractify.com)
Photos: Danny Sandler and Brittany Fontana
National Preconstruction Leader
Posted on November 1, 2023
Last Updated November 7, 2023