Elite Construction Equipment’s Outlook On Construction in 2024
After another year of wild ups and downs in the construction industry, now is a good time to take a look at the most important issues that will affect us in the new year. Of course, in the words of the great philosopher Yogi Berra, It’s tough to make predictions, especially about the future.
We’ll take a look at what some experts forecast and also consider:
- Interest Rates
- Labor & Input Costs
- The Effect Of The Rental Market On Housing
- How Politics Will Complicate The Outlook
The Experts Say…
Experts generally seem to think that next year will be a stronger year for the construction market. Some of that strength will come from the decrease in headwinds caused by the long rise in interest rates, which we’ll address more thoroughly later.
Construction starts overall are expected to rise 7% in 2024 verses about 1% in 2023. That translates to $1.206 trillion in spending for next year.
Residential construction is forecasted to rise about 11% after declining almost 13%, according to the Dodge Construction Network. In 2023, single-family housing declined by 16%, and multifamily housing decreased by 8%. In 2024, single-family housing is expected to increase by 9% and multifamily housing by 14%.
Interest Rates
Interest rates have affected every part of the industry.
Rising rates have made buying a home more expensive and financing new projects for construction companies more expensive. Tighter credit standards have decreased the availability of money for new projects and increased carrying costs.
Higher mortgage rates have pushed more potential homebuyers into a position where they simply can’t buy a new home. First-time buyers have tighter credit requirements and may need a larger downpayment. Existing homeowner’s average mortgage is around 4%, so if they were to buy a new home, they would nearly double their interest rate on financing. They are stuck in their homes, so there are also fewer existing homes available.
Labor & Input Costs
We’ve been talking about labor challenges since the Pandemic started. Older, skilled laborers have retired and the number of new young laborers has been decreasing for years. The tight labor market has increased demand and, therefore, hourly wages.
Unions around the country have made record gains in the last year. Our recent article on the UAW strike touched on some of the reasons that labor costs will remain more expensive across the economy as a whole. Increased labor and transportation costs mean that input costs for the products the industry needs will remain relatively high.
The good news is that those pressures peaked in 2023. The slowdown in economic activity due to major strikes this last year means yearly comparisons will improve as companies get back to work and make up for lost ground.
Many industries across the country are seeing employment levels similar to the pre-covid era and labor costs stabilizing. Construction will continue to have unique labor challenges, but at least it shouldn’t get worse. New programs to bring diversity and encourage youth, as we talked about recently, are a bright spot for the future of the industry.
The Effect Of The Rental Market On Housing
While single-family housing demand slowed, an increase in multi-unit construction swept the industry. That means a surge of rental housing is going to bring a range of options and incentives.
According to Barrons: “More large multifamily construction projects were completed in the first 10 months of 2023 than any comparable period since 1987. The surge in new units follows a spike in multifamily housing starts in 2021 and 2022. …That’s helped soften rents: The median national rent gauged by ApartmentList in November was 1.1% lower than one year prior…”
There will be plenty more supply coming online in 2024. Projects that were started while rents were rising are still being finished. That means rents will go down even more than they have recently. Currently, many multifamily properties are offering concessions; in Orange County, it is about 7%, and in San Diego, it is about 19%, at last count.
Rent decreases will be another reason potential home buyers might wait to make a move.
How Politics Will Complicate The Outlook
Domestic politics and geopolitical problems will challenge the overall economic outlook. Business and the economy as a whole like predictability and security, and those are in short supply at the moment.
Domestically, the political parties can’t seem to work together and have been increasingly ineffective at governing. When every routine procedure sinks into petty rivalry, basic governing suffers and that has an impact on the economy and confidence in the future.
Dwindling confidence in government and the financial system makes it more challenging, so lenders will be on their guard. Even as interest rates come down at the Fed, it may take significantly longer for that improvement to trickle its way through the system to positively impact the construction industry.
Geopolitical issues from Ukraine, Israel, China, or some other region could throw a monkey wrench into any prediction for 2024.
Cautious Optimism
While there are serious reasons to be concerned in the short term, the longer term looks brighter. We are coming out of a historically challenging time with the pandemic and the economy. The truly unpredictable number of challenges we’ve overcome in the last few years should be mainly in back of us.
It’s sensible to be cautiously optimistic for 2024. Happy New Year!
