Parts of the construction industry will see growth, while other parts will contract. Construction companies should consider shifting markets and strategies according to forecasts delivered by economists and industry associations.
The economy overall is in good condition. GDP is above two percent, unemployment is low, inflation is moderating, and banks are lending. Plus, the federal infrastructure bill is expected to make a positive impact on the construction industry and construction companies have a fairly significant amount of work lined up from the private sector.
However, JPMorgan expects real GDP growth (https://www.jpmorgan.com/insights/outlook/economic-outlook/economic-trends) to stagnate–0.7 percent in 2024 versus 2.8 percent in 2023. And a potential lack of financing, labor shortages, and inflation are still threatening construction growth.
Equipment prices stop ballooning
New equipment pricing will remain high. According to data from the Associated Builders and Contractors (ABC), construction equipment prices have increased 27 percent between Q1 2020 and Q4 2023. (See January 2024’s date, https://www.abc.org/News-Media/News-Releases/abc-monthly-construction-input-prices-fall-sharply-in-december.) However, 2024 prices will be more in step with inflation.
Supply is finally catching up with demand across many equipment categories, decreasing wait times and purchase costs. Last year, fleet replacement was higher than it has been in more than a decade and you can expect fleet replacement levels in 2024 to be almost as high, so equipment sales should be strong.
Used equipment prices had been high in previous years due to a decrease in availability of new equipment due to supply chain issues largely caused by Covid. Expect used equipment prices to decrease slightly in 2024.
According to the Ritchie Bros. November 2023 Market Trends report (https://s24.q4cdn.com/560830410/files/doc_downloads/2023/11/rouse-used-equipment-market-trends-summary-us-ca-edition-nov-2023.pdf), prices for larger equipment, such as wheel loaders, dozers, and excavators, took a slight dip year-over-year (YOY). And prices of medium-sized equipment, such as skid steer loaders and backhoes, have seen YOY double-digit decreases.
The equipment rental industry (https://ararental.org/Rental-Management/article/ArtMID/4195/ArticleID/1676/Equipment-rental-revenue-poised-to-continue-growth-in-2023-and-beyond), which also saw pandemic-related steep price increases—12.7 percent growth in 2022 and 4.0 percent growth in 2023—will see only 2.0 percent growth in 2024, according to the American Rental Association.
In rental, there’s a lot of supply and a lot of demand (because new equipment is expensive and sometimes unavailable). And construction companies have a lot of upcoming projects, so prices for rental equipment will be slightly higher in 2024 compared to 2023.
Prices for key inputs normalize
Fuel, building supplies, and labor are three of the biggest operating costs when completing a construction project. Below are predictions for several major operating costs:
Expect fuel prices to decrease in 2024. GasBuddy predicts the yearly US national average for diesel prices will drop from $3.51 per gallon in 2023 to $3.38 in 2024.
Fitch Ratings expects North American steel demand (https://www.fitchratings.com/research/corporate-finance/north-american-steel-outlook-2024-29-11-2023) to experience modest growth in 2024. Steel prices will increase moderately, fueled by strong demand.
Concrete and masonry prices (https://www.commercialsearch.com/news/construction-outlook-paints-promising-picture) will increase by six percent YOY, according to real estate investing company, JLL.
Asphalt prices ( https://businessanalytiq.com/procurementanalytics/index/asphalt-price-index/) will decrease a few percentage points in 2024 compared to 2023, says Business Analyst IQ. Asphalt prices have seen only the smallest increase during the second half of 2023, and it appears we’ve reached the top of the asphalt price bubble.
Lumber prices will increase. The Canadian province of British Columbia—a major wood products producer—announced mill closures resulting in about 1.3 billion board feet (BBF) being taken out of the market, so supply is significantly decreased, while the infrastructure bill and a rebound in housing (https://blog.bardenbp.com/will-lumber-prices-go-down-in-2024) will bolster demand.
According to JLL, (https://www.commercialsearch.com/news/construction-outlook-paints-promising-picture/) labor prices will grow by three to five percent to remain competitive. However, productivity losses due to companies’ inability to hire key people will cost companies more than the rising cost of labor.
Contractors will get some price relief at the pumps and from asphalt (another oil product) but will see price increases when it comes to all other major building materials and for labor. Fortunately, the price increases will be nowhere near the increases of the last few years.
Construction sector breakdown
According to a survey (https://www.enr.com/articles/57954-agc-survey-finds-mixed-outlook-among-contractors-for-2024) conducted by the Associated General Contractors (AGC) of its members, respondents from 14 of the 17 construction categories expect the available dollar value of projects to expand.
According to that survey, the categories poised to see the strongest growth are heavily government-driven:
Water and sewer: 32%
Transportation (transit, rail, airport): 30%
Bridge and highway: 30%
Federal: 29%
The four non-government categories with the greatest anticipation for growth include the following:
Power: 25%
Hospital: 23%
Healthcare: 22%
Data Center: 20%
The four construction categories that are expected to show the least growth in 2024 include the following:
Multifamily residential: 4%
Lodging: -3%
Retail: -15%
Private office: -24%
If you’re a contractor who works primarily in a construction category that is expecting declines, shift strategies. Look for new revenue streams or cut costs. You can’t afford to lose money while other contractors are growing.
The construction forecast is overall positive. As long as inflation continues to decrease, supply chains continue to improve, banks continue to lend, and geopolitical conflicts continue to have little effect on the North American economy, expect a stable growth period.
