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 | Nov 2, 2017
Construction spending up in September; Down on a YOY basis
Nonresidential construction spending is down 2.9% on a year-over-year basis.
Market Data | Oct 19, 2017
Architecture Billings Index backslides slightly
Business conditions easing in the West.
Industry Research | Oct 3, 2017
Nonresidential construction spending stabilizes in August
Spending on nonresidential construction services is still down on a YOY basis.
Market Data | Sep 21, 2017
Architecture Billings Index continues growth streak
Design services remain in high demand across all regions and in all major sectors.
Market Data | Sep 21, 2017
How brand research delivers competitive advantage
Brand research is a process that firms can use to measure their reputation and visibility in the marketplace.
Contractors | Sep 19, 2017
Commercial Construction Index finds high optimism in U.S. commercial construction industry
Hurricane recovery efforts expected to heighten concerns about labor scarcities in the south, where two-thirds of contractors already face worker shortages.
Multifamily Housing | Sep 15, 2017
Hurricane Harvey damaged fewer apartments in greater Houston than estimated
As of Sept. 14, 166 properties reported damage to 8,956 units, about 1.4% of the total supply of apartments, according to ApartmentData.com.
Hotel Facilities | Sep 6, 2017
Marriott has the largest construction pipeline of any franchise company in the U.S.
Marriott has the most rooms currently under construction with 482 Projects/67,434 Rooms.
Market Data | Sep 5, 2017
Nonresidential construction declines again, public and private sector down in July
Weakness in spending was widespread.
Market Data | Aug 29, 2017
Hidden opportunities emerge from construction industry challenges
JLL’s latest construction report shows stability ahead with tech and innovation leading the way.