Despite rising demand, the construction industry is expected to see a serious falloff in building starts, according Jones Lang Lasalle’s Construction Trends and Midyear Update, which JLL released this morning.
The report takes a fresh look at the industry’s overall health, the current availability and pricing for labor and materials, and the direction that total construction costs may be headed.
![Global disruptions](/sites/default/files/inline-images/JLL%20disruptions.png)
JLL still sees the construction sector in “uncharted economic territory,” as global threats remain unrealized “but full of disruptive potential” even as construction continues at breakneck speed to address post-pandemic built-environment needs. Consequently, JLL updated its projections for three of the seven barometers it tracks (see chart).
![employment vs. building activity](/sites/default/files/inline-images/JLL%20Construction%20activity.png)
![JLL's revised construction forecast](/sites/default/files/inline-images/JLL%20revised%20forecast.png)
The outlook’s four key takeaways are:
•Industry Health: Financing constraints have driven a rapid decline in construction starts over the last quarter;
•Labor: Firms are prioritizng talent retention strategies;
•Materials: Supply chain issues have largely stabilized, and future cost increases should be manageable;
•Total Costs: Firms' responses to the impending slowdown have led to a drop in total costs during the third quarter, prompting JLL to revise its total cost growth forecast down to 2-4%, from 4-6% in the first half of the year.
Interest rates are curtailing building starts
![Labor demand outruns availability](/sites/default/files/inline-images/JLL%20Labor%20demand.png)
Based on midyear data, JLL’s forecast for construction value put in place aligns with its previous expectations. Overall, industry sentiment is strong, but construction is expected to cool depending on resolution or escalation of threats ranging from inflation to geopolitical turmoil. JLL’s revised forecast anticipates an 18% decline in building activity, compared with its 5% growth forecast for the first half of the year.
Rising interest rates are slowing construction starts. But demand for infrastructure and other non-building projects remains strong. JLL predicts interest rates will peak near the end of this year, and construction activity should rev up, “with specialization and complexity management playing vital roles.“
JLL continues to stand by its forecast of 5-7% growth in labor costs. Job openings remain high, and unemployment is unusually low. There is “persistent” wage competition for skilled workers. However, contractors remain confident about their ability to weather the expected downturn. JLL foresees minimal disruption in sectors buoyed by public sector spending; other sectors could see more of a dropoff, though. Construction activity per employee will remain above pre-pandemic levels for the foreseeable future.
Total costs are stabilizing
![Materials costs vary by commodity](/sites/default/files/inline-images/JLL%20Materials%20monthly.png)
![Most prices on a downward trajectory](/sites/default/files/inline-images/JLL%20Materials%20YoY.png)
JLL also believes that its prediction of a 3-5% increase in materials costs remains on target. Commodities are exhibiting varying price fluctuations. Lead times were high in the first half of 2023, especially for MEP goods, making it harder for contractors to keep up with electrification and data center demand. Steel, concrete, glass, and plastic products’ price movements are also above historic levels. JLL expects materials costs to continue to rise at their current modest (single-digit) pace, having less impact on demand. But summer wildfires are likely to impact the supply of Canadian softwood.
Mixing these factors, JLL concludes that total construction costs have stabilized, having recorded the slowest period of growth (and the first declines) since the immediate aftermath of COVID-19 being declared a global emergency. Firms are navigating wage hikes, and expect sales and profit to grow modestly and stabilize, respectively. Labor retention is a priority to hold the line on costs. JLL adjusts its projection for total cost growth down to between 2-4%, from 4-6% in the first half.
Related Stories
Market Data | Jun 19, 2019
Number of U.S. architects continues to rise
New data from NCARB reveals that the number of architects continues to increase.
Market Data | Jun 12, 2019
Construction input prices see slight increase in May
Among the 11 subcategories, six saw prices fall last month, with the largest decreases in natural gas.
Market Data | Jun 3, 2019
Nonresidential construction spending up 6.4% year over year in April
Among the 16 sectors tracked by the U.S. Census Bureau, nine experienced an increase in monthly spending, led by water supply and highway and street.
Market Data | Jun 3, 2019
4.1% annual growth in office asking rents above five-year compound annual growth rate
Market has experienced no change in office vacancy rates in three quarters.
Market Data | May 30, 2019
Construction employment increases in 250 out of 358 metros from April 2018 to April 2019
Demand for work is outpacing the supply of workers.
Market Data | May 24, 2019
Construction contractors confidence remains high in March
More than 70% of contractors expect to increase staffing levels over the next six months.
Market Data | May 22, 2019
Slight rebound for architecture billings in April
AIA’s ABI score for April showed a small increase in design services at 50.5 in April.
Market Data | May 9, 2019
The U.S. hotel construction pipeline continues to grow in the first quarter as the economy shows surprising strength
Projects currently under construction stand at 1,709 projects/227,924 rooms.
Market Data | May 9, 2019
Construction input prices continue to rise
Nonresidential input prices rose 0.9% compared to March and are up 2.8% on an annual basis.
Market Data | May 7, 2019
Construction costs in major metros continued to climb last year
Latest Rider Levett Bucknall report estimates rise at more than double the rate of 2018 Growth Domestic Product.