Construction companies are counting on a surge in public works projects to keep them busy this year as higher interest rates cause private real estate investment to dry up.
“Contractors are optimistic about the construction outlook for 2023, yet they are expecting very different market conditions for the coming year than what they experienced last year,” said Stephen Sandherr, CEO of the Association of General Contractors of America, which released a 2023 outlook on Wednesday. “Even as market demand evolves, contractors will continue to be confronted by many of the challenges they faced in 2022, including the impacts of supply-chain problems and labor shortages.”
Contractors, according to a survey the AGC conducted, are much less optimistic about the amount of work they will receive from private sector projects in the coming year than they were at the start of last year. Areas of greatest pessimism are in retail, office and hospitality, which are still recovering from the hit they took during the pandemic.
Multifamily is almost evenly split, with 49% of respondents predicting more work and 51% seeing less work than in 2022. That is a reversal from recent years when contractors consistently counted on increasing work building apartments in the upcoming year. Colorado contractors, however, remain much more optimistic, with those saying they expected more multifamily work surpassing those who expected less work by 19 percentage points.
When it comes to the private sector, contractors are most hopeful about landing additional work for power projects, new hospitals and other health care facilities. Most expect warehouse construction activity to increase another year, but the margin of those saying they expect to do more this year than last has shrunk significantly.
Public work projects are where general contractors are most optimistic in 2023, especially when it comes to transportation projects, water and sewer projects and federal contracts in general.
“Even when we have had recessions and slow growth, contractors are by nature optimists. They wouldn’t go into business if they didn’t think they would have more work to do,” said Ken Simonson, AGC chief economist during a news call Wednesday morning.
That optimism isn’t entirely unfounded. Public dollars often flow out during or after a recession to help boost the economy. But massive amounts of dollars were allocated as a buffer against the pandemic and could soften the blow of any downturn this year. The Bipartisan Infrastructure Law, the CHIPS Act and the Inflation Reduction Act are arriving as the larger economy slows and higher interest rates make lenders and developers skittish about taking on new work.
That isn’t to say the construction industry can flip a switch from one funding source to another. Escalating construction costs over the past two years mean many proposals formulated with federal dollars are no longer in line with market realities, and that is forcing government agencies to go back and rework them.
And many agencies are waiting for clearer guidance on requirements contained within those funding acts, such as the use of American-sourced materials and hiring workers who are part of apprenticeship programs. Until specifics on those requirements are nailed down, the flow of federal dollars will be hampered.
Nor will the transition from private work to public work be easy for some. A builder that has focused on apartments or high-rises can’t easily switch to paving roads or putting up electric towers or replacing aging water mains. But they might be able to handle building fire stations or public schools.
Despite concerns about an economic slowdown, the construction sector continues to struggle to fill its openings — 388,000 per the latest count from the U.S. Department of Labor. Nearly seven in 10 construction firms surveyed expect to expand their workforces this year, while about one in 10 expect to contract it, according to the AGC survey.