From the American Institute of Architects (AIA)

AIA Consensus Construction Forecast

After increasing by more than 20% last year, spending on nonresidential buildings will see a much more modest 4% increase in 2024 at a pace that will slow to just over 1% growth in 2025. Spending on commercial facilities will be flat this year and next, manufacturing construction will increase almost 10% this year before stabilizing in 2025, and institutional construction will see mid-single-digit gains this year and next.

These are key conclusions from the AIA Consensus Construction Forecast panelists, a group composed of the leading construction forecasters from across the country. This survey provides the most recent update of nonresidential building forecasts for 2024 and provides the first look at 2025.

This past year produced a surprisingly strong performance for the building sector of the economy. The healthy spending rebound of almost 12% in 2022 came on the heels of only modest growth in 2020 and a decline of almost 5% in 2021, before spending accelerated to an estimated 22% in 2023. Manufacturing construction accounted for a large share of these gains, as this sector alone produced almost 30% of overall spending on nonresidential buildings last year. However, manufacturing was not the only bright light. On the commercial side, spending on offices was up an estimated 8%, retail and other commercial facilities 7%, and hotels 21%. The institutional sector did equally well, with health- care and education spending both up an estimated 13%. Religious and public safety facilities each increased at a double-digit pace, and the amusement and recreation category grew to more than 8%.

Recently enacted federal programs provided some of the latest boosts to construction spending on buildings. The CHIPS and Science Act, enacted in August 2022, has boosted manufacturing spending by providing funding to high-tech hubs and semiconductor manufacturing. The Inflation Reduction Act, also enacted in August 2022, has provided funding for the electrification of homes as well as financial incentives for energy-efficient commercial reconstruction and building. Finally, the Infrastructure Investment and Jobs Act, enacted in November 2021, provides funding for traditional infrastructure,
which eventually will encourage more building construction in conjunction with these infrastructure investments.

Several Headwinds Facing Construction

Even with the additional funding provided by these federal programs, building construction activity is projected to slow. Behind the projected slowdown are several economic headwinds facing this sector, mostly affecting commercial facilities. These include tighter credit conditions, high input costs, falling prices for commercial property values in several sectors, and structural changes in demand for key commercial categories.

• Tighter credit—Rising long-term interest rates, even with their recent easing, have put pressure on many regional banks that account for a significant share of construction lending. As a result, credit standards for construction have tightened significantly. The most recent Federal Reserve Board’s Senior Loan Office Opinion Survey, covering the third quarter of 2023, reports that almost 60% of lenders tightened credit standards for commercial real estate loans over the prior 3 months. No respondents reported easing them. Tighter credit conditions often are the reason for not moving ahead with a project, or for changing plans during the design phase of a project. ConstructConnect recently reported that its Project Stress Index, which measures the level of delayed, stalled, or abandoned projects, has been moving up sharply in recent months.
• Higher construction input costs—While cost increases for most construction commodities have stabilized recently, inflation remains a problem for the construction industry. Inputs have stabilized at levels 35% to 40% higher than their pre-pandemic rates. While price volatility seems to be under control, there is little likelihood that they will revert to early 2020 levels anytime soon. Additionally, while commodity inputs have stabilized, construction labor costs are still rising at a 4% annual pace.
• Declines in commercial property values—Weak demand has put downward pressure on property values for most commercial sectors. MSCI’s Commercial Property Price Index indicates that multifamily, commercial, and industrial property values have declined 8% on average over the past year. Office values lead the decline, down almost 15% over the past year, but apartments (down 12%) and retail facilities (down almost 7%) have also seen significant declines in property values. Only industrial facilities (up almost 2%) have withstood this downward trend.
• Structural changes in demand—While construction is a notoriously cyclical industry, some of the current trends affecting the office and retail sectors are more structural than cyclical. At present, about 30% of paid workdays nationally are worked remotely. Remote work seems to be stabilizing at around this level. Prior to the pandemic, the share of days working remotely was under 5%, underscoring the need of most companies for less office space. Also, the pandemic gave a boost to e-commerce over traditional brick-and-mortar retail facilities. E-commerce sales have been increasing at a 15% annual pace and are projected to exceed $1 trillion nationally this year.

The Slowdown Is Already Underway

Even though construction spending remains strong in virtually all nonresidential construction categories, other indicators confirm that a construction slowdown is underway. By the latter part of 2023, construction starts had either slowed dramatically or turned negative in virtually all construction sectors. The value of nonresidential building starts increased a mere 2% through the first 11 months of 2023 as compared to the same period in 2022, according to ConstructConnect. Starts in the commercial sector declined 1%, with double-digit declines in retail and warehousing, but were largely offset by growth of 20% in the hotel sector. Manufacturing starts were down 4%, while institutional starts increased by 10%. Within the broader institutional category, education starts increased by 20%, while health-care starts saw a fairly significant decline.

Architecture firms also saw weaker business conditions last year. Through November of 2023, the AIA’s Architecture Billings Index (ABI) showed declining billings at architecture firms in seven of those months. More significantly, the September through November readings were all in the 44 to 45 range, indicating a more significant decline in billings in those months.

Architecture firm billings are unlikely to rebound anytime soon. New project work coming into firms has also seen a slowdown, with declines each month over the August to November period. These declines in new project work have cut into backlogs at firms. While reaching 7.2 months on average in early 2022, firm backlogs had edged down to the 6.5-month level by the third quarter of last year.

However, the status of billings at architecture firms varies considerably depending on their specialization. Firms specializing in multifamily projects reported strong billings through mid-year 2022. They have been slowing steadily since then, with significant declines by the fourth quarter of 2023. Firms specializing in the commercial/industrial sector likewise were reporting strong growth in billings through mid-year 2022, and modest decline since then. The downturn in billings moderated through most of last year.

Institutional Sector Offers the Most Upside

Institutional firms, in contrast, have fared much better in recent quarters, alternating between modest growth and modest declines in billings over the past several quarters. Institutional projects are largely immune from the headwinds confronting commercial and industrial facilities. Funding is generally more heavily dependent on government and nonprofit commitments as well as private philanthropy. Therefore, it is generally more insulated from changing market conditions.

Additionally, institutional projects often are more dependent on broader demographic trends. For example, the number of people in the school and college population will influence the size of educational construction budgets. Also, people aged 65 and older tend to be major consumers of health-care services and, therefore, the number in this age range will influence the need for health-care facilities. In contrast, demand for commercial and manufacturing facilities is heavily influenced by regular economic cycles and less so by the demographic characteristics of the population.

The AIA Consensus Construction Forecast panelists are expecting relative stability in spending on institutional facilities to follow this pattern. As a result, all the major institutional sectors are projected to see modest growth this year and next. Education and health-care facilities generally account for about 60% of construction spending in this category. Spending in the education sector is projected to increase 6% this year and 4% in 2025, in part to make up for deferred spending during the pandemic. Health care was one of the few major construction sectors that did not see a decline during the pandemic. This pattern of stable growth is projected to continue, producing an increase in spending of around 3.5% annually both this year and next.

To view the full report, visit www.aia.org/ccf and read the AIA article at https://tinyurl.com/5z53cmph. Reprinted with permission from AIA.

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2024 North American Engineering and Construction Industry Overview:

Building a Resilient, Future-Ready Business

By Chris Daum

Being resilient means various things to different people, but at its core, it is about being able to withstand or recover from adversity. And one thing is certain, the built environment experienced its share of challenging conditions in the past 3 years, making resiliency more important than ever. While historically being resilient meant focusing on the fundamentals, internal operations, and other variables within our control, that definition is now evolving to also mean being flexible, innovative, and adaptable.

The operating environment during the past 3 years amplified labor challenges, demonstrated constraints in the supply chain, and altered the types of projects that are getting funded and built. The growth in project sizes and overall funding for both civil and social infrastructure is shifting the entire industry, causing constraints in some areas and excess capacity in others. Therefore, understanding market dynamics and project economics where you operate will be even more critical in 2024 and beyond.

Although inflation cooled during 2023, it continues to be top of mind for regulators, business leaders, builders, and consumers, as it ticked up to 3.4% in December. In addition to rising costs of goods and services, many are struggling with financing as interest rates remain high. As the Federal Reserve considers interest rate cuts, it must be careful to avoid a return to inflation brought on by being too aggressive too soon as well as potential increases in government spending.

Banks are continuing to be more selective about the projects they finance across the built environment. This means companies will need to demonstrate they can manage risk and efficiently execute projects to get the working capital needed.

Despite the economic uncertainty, total engineering and construction (E&C) spending for the United States is forecast to end 2023 up 10%, a slightly slower pace than 12% in 2022. Significant investments in nonresidential building and nonbuilding structures led 2023’s spending, a trend we expect to continue as the residential market remains under pressure.

For 2024, FMI forecasts only a 2% increase in E&C spending levels compared to 2023. This means companies will need to have clear strategies, best-in-class operations, and inspired leaders to capitalize on current industry conditions and create resilient firms.

“Resiliency is all about being adaptive and innovative,” said Ramin Cherafat, CEO at
McCownGordon Construction, an employee-owned construction company in Kansas City, Missouri. “The companies that are going to sit back and say, ‘Well, hey, this is how we’ve always done things’ are the ones that are going to struggle the most with resiliency.”

Harness Innovation to Solve Business Challenges

Creating a resilient business will mean finding innovative solutions to tackle everything from labor shortages and productivity inefficiencies to developing the right talent to lead firms into the future. Executives across sectors and geographies in the built environment continue to look for ways to capitalize on their current opportunities and differentiate themselves from the competition.

Given the current operating environment, many are watching geopolitical developments such as the wars in Israel and Ukraine, China’s economic uncertainty, and global real-estate volatility for indications about the direction of the U.S. economy. Add in domestic factors such as supply-chain issues, election-year uncertainty, and continued high cost and limitations of financing, and more of the bigger picture begins to take shape. Understanding how these global and domestic factors affect the markets where you operate will dictate strategic decisions and help your business adapt to various operating conditions.

We recommend being informed and then focusing on what is within your control. The best firms will do the work to become destination employers, drive operational improvements, create data- and research-based strategic plans, and develop leaders to build the foundations for future success. And while many of these challenges are not new, companies will need to look to innovative solutions, implement new technologies, and adapt to the evolving E&C business environment to be successful. One example of this, according to Les Snyder, President of the Associated General Contractors of America (AGC), is getting creative when thinking about labor and how to attract the next generation of more diverse talent to the industry.

“I couldn’t be more pleased with the younger generations entering this business,” Snyder said. “We have the pipeline open and we’re being more convincing. Younger generations are enthusiastic, diverse, share their thoughts, and have a mastery
of technology.”

The trick will be keeping these individuals engaged, transferring knowledge to them from
those with more experience, and giving them the right tools and technology to be successful, Snyder said. One of the areas where he is most optimistic centers on the innovation and problem-solving that he sees from younger generations. They are working to develop tools and solutions to many of the industry’s challenges, something that will help create more resilient organizations and drive future growth.

As construction technology evolves to better solve business problems, including productivity, communication, and labor issues, it is important to carefully evaluate your options and the desired outcomes of implementing new tools. Developing a clear strategy for how to utilize tools and then giving people the necessary information to act helps drive long-term success.

For Rob Strobel, CEO of Lithko Contracting, one of the largest concrete contractors in the United States, information technology processes are helping to engage employees by quickly getting the right information to those who need it, allowing staff across projects to make better decisions. By getting the information into the right hands, employees can quickly make decisions and know the scope of their roles, helping them to have more ownership.

“We don’t think about engagement via foosball tables and Keurigs,” Stroble said. “We’re talking engagement through providing information to track and adjust outcomes of their plans.”

Leverage Productivity Improvements to Solve Talent Issues

Labor productivity is the central economic engine that drives profitability for labor-intensive,
self-performing contractors and is at historically
low levels relative to construction spending.
Our 2023 Labor Productivity Study found that
contractors lost approximately $30 billion to
$40 billion to labor inefficiencies in 2022. These labor productivity deficits translate to significant project and enterprise margin erosion industrywide.

Almost half of 2023 survey respondents (45%) saw declining labor productivity, with 79% of contractors indicating they could improve productivity by 6% or more with better management practices. Not only will this help solve labor constraints, but it also creates an organization that is more resilient through better processes, operations, and management.

By getting a handle on productivity, giving workers the tools needed to be successful, and diligently planning for jobs, companies can improve margins and profitability. In an industry where one bad job can make or break a company, harnessing the power of your biggest asset—your people— will ensure you continue to successfully operate and thrive.

For Matthew Consigli, President at Consigli Construction Co., an employee-owned construction manager in the Northeast and Mid-Atlantic, creating a resilient business means always focusing on the fundamentals of building backlogs of quality work, superior execution of jobs, and hiring and retaining the right people who fit the company culture.

“It always comes down to the fundamentals of budget and schedule and safety and quality,” Consigli said. “The other stuff really doesn’t matter if you don’t do this right.” He also focuses on building an organization that puts people at the forefront and on creating an environment where they can develop throughout their careers.

Focus on Fundamentals

Improving resiliency often means paying attention to the basics of running a successful business. This includes having discipline around strategy and project selection, adequate capitalization, quality project execution, and investment in your people.

Review your strategy to make sure you understand your markets and where you will win work. Be selective about the projects you pursue. For successful, growing companies, this means considering strategic plans, core competencies, and market conditions to make the best decisions. It requires discipline and understanding of what differentiates your company from others in the industry.

For many looking to move into different sectors or markets, this can mean partnering with another firm or entering joint ventures to pursue successful projects. The key is understanding what you bring to the project and clearly communicating throughout the collaboration.

“We don’t believe that we have to do everything ourselves,” said Strobel of Lithko. “We believe in the concept of partnering and creating joint ventures to help bring complementary core competencies to ours, and then leading in what we do well, which is the project management and project leadership, but bringing other skill sets to bear that apply some advanced manufacturing techniques, some modular techniques that allow us to minimize the amount of labor that’s required.”

Part of that project selection discipline should also consider capitalization and cash flows. Construction projects have limits on the profits you can earn, but the amount of money you can lose is unlimited. Overcoming this risk requires an adequate capital base that allows you to withstand inevitable problems and continue to put quality work in place.

It is this emphasis on quality work that sets the most successful contractors apart from the mediocre. The top executives understand their projects are only as good as the people executing the work on the job site.

The most resilient companies are continually investing in their people, creating the next
generation of project managers, estimators, field leaders, and executives. As more people retire or leave the industry, it is going to be critical to transfer their decades of experience and knowledge to your next generation of leaders.

“Development is something that goes on for your entire career,” AGC’s Snyder said. “But those that master taking the knowledge of the generations that are moving on and getting that to transfer to the new upcoming generations will be most successful.”

Ways to Become More Resilient

Most successful businesses are continuously improving, yet it can be hard to know what is going to provide the biggest boost to the bottom line or set you up for long-term success. It is easy to focus on projects and small improvements. When it comes to being more resilient, it is important to review overall goals and metrics and think about the larger-scale changes that need to happen.

Here are a few tips for keeping business resiliency top of mind:

• Revisit and update your strategic plan. One of the most common things we see with companies is they create excellent plans and then put them aside. Like everything, plans need to evolve with the operating environment and your goals. Did you meet your 5-year growth plan in 3 years? Excellent, how are you going to capitalize on that momentum?It is also important to understand your markets, geographies, and the various environments where you operate. Conditions change, and you may need to shift resources to better serve particular markets.
• Invest in your people across the organization. Creating great leaders and engaged employees means providing tools, resources, and training for all your employees from the field to the C-suite. You need to think about who is going to run your business in 1, 5, and 10 years, and what skills those employees will need to be ready.Investing in your field and project staff will directly deliver better project outcomes, generate repeat business, and ensure you are generating profits on each project. Yet, you will need leaders in risk management, human resources, operations, and other executive roles to lead your business into the future. This becomes even more critical if you are thinking about transferring ownership of your company.
• Focus on improving operations. Operationally superior firms continually review their tools, equipment, procedures, and processes to drive productivity and efficiency. Best-in-class companies have several common characteristics, with a critical one being that they review each job for lessons learned and then communicate those lessons back to the entire firm.
• Tie investments to your strategic plan and clear, measurable goals. No one tool or technology is going to fix everything. It is important to make sure the investments you are making in the business are tied to your strategic plan and that you can measure the outcomes. Often companies will jump from solution to solution and not follow through on full implementation or reviews.

As the definition of being resilient evolves to incorporate new technologies, processes, and generations of talent, companies that are truly prepared for the future will have strategies for innovating while not losing focus on the fundamentals of what makes a successful business. You will need to be diligent in ensuring you are investing in the fundamentals and the innovations that will set you on a path of continued growth and profitability.

Chris Daum is the President and CEO of FMI Corp. (www.fmicorp.com). Daum oversees the management of all FMI businesses and services and leads the firm’s strategic growth efforts. Visit https://tinyurl.com/5xk9pcfh to download the full report. Excerpted with permission from 2024 North American Engineering and Construction Industry Overview.

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From the National Federation of Independent Business, Inc. (NFIB)

Optimism on Main Street Remains Low in New Year

The NFIB Small Business Optimism Index decreased two points in January to 89.9, marking the 25th consecutive month below the 50-year average of 98. The net percentage of owners who expect real sales to be higher declined 12 points from December to a net negative 16% (seasonally adjusted), a very negative shift in expectations.

“Small business owners continue to make appropriate business adjustments in response to the ongoing economic challenges they’re facing,” said NFIB Chief Economist Bill Dunkelberg. “In January, optimism among small business owners dropped as inflation remains a key obstacle on Main Street.”

Key findings include:

• The frequency of reports of positive profit trends was a net negative 30%, five points worse than in December and a very poor reading.
• Twenty percent of owners reported that inflation was their single most important problem in operating their business, down three points from January 2024 and one point behind labor quality as the top problem.
• Small business owners’ plans to fill open positions softened, with a seasonally adjusted net 14% planning to create new jobs in the next 3 months, down two points from December and the lowest level since May 2020.
• Thirty-nine percent (seasonally adjusted) of all owners reported job openings they could not fill in the current period, down one point from December and the lowest reading since January 2021.

As reported in NFIB’s monthly jobs report, 39% (seasonally adjusted) of all owners reported job openings they could not fill in the current period. Seasonally adjusted, a net 39% reported raising compensation, up three points from December. A seasonally adjusted net 26% plan to raise compensation in the next 3 months, down three points from December. Ten percent cited labor costs as their top business problem, and 21% said that labor quality was their top business problem.

Fifty-nine percent of owners reported capital outlays in the last 6 months, up one point from December. Of those making expenditures, 40% reported spending on new equipment, 25% acquired vehicles, and 17% improved or expanded facilities. Twelve percent of owners spent money on new fixtures and furniture, and 7% acquired new buildings or land for expansion. Twenty-three percent (seasonally adjusted) plan capital outlays in the next few months.

A net negative 11% of all owners (seasonally adjusted) reported higher nominal sales in the past 3 months, unchanged from December. The net percentage of owners expecting higher real sales volumes declined 12 points to a net negative 16%.

The net percentage of owners reporting inventory gains increased two points to 0%. Not seasonally adjusted, 13% reported increases in stocks and 19% reported reductions, up four points. A net negative 4% of owners viewed current inventory stocks as “too low” in January, up one point from December. By industry, shortages are reported most frequently in the wholesale (18%), retail (12%), and finance (11%) sectors. Shortages were reported least frequently in the professional services (2%) and construction (4%) sectors. A net negative 3% of owners plan inventory investment in the coming months, up two points from December.

The net percentage of owners raising average selling prices declined three points from December to a net 22% (seasonally adjusted). Fifteen percent of owners reported lower selling prices, the highest since August 2020. Twenty percent of owners reported that inflation was their single most important problem in operating their business, down three points from last month and one point behind labor quality as the top problem.

Unadjusted, 15% reported lower average selling prices and 36% reported higher average prices. Price hikes were the most frequent in wholesale (47% higher, 7% lower), retail (43% higher, 11% lower), services (43% higher, 6% lower), finance (42% higher, 14% lower), and construction (36% higher, 9% lower). Seasonally adjusted, a net 33% plan price hikes.

The frequency of reports of positive profit trends was a net negative 30%, five points worse than in December and a very poor reading. Among owners reporting lower profits, 32% blamed weaker sales, 15% blamed the rise in the cost of materials, 15% cited usual seasonal change, and 11% cited labor costs. For owners reporting higher profits, 49% credited sales volumes, 24% cited usual seasonal change, and 9% cited higher selling prices.

Three percent of owners reported that all their borrowing needs were not satisfied. Twenty-six percent reported all credit needs were met, and 62% said they were not interested in a loan.

A net 6% reported their last loan was harder to get than in previous attempts. Five percent of owners reported that financing was their top business problem. A net 18% of owners reported paying a higher rate on their most recent loan, down two points from December.

This survey was conducted in January 2024.

Visit www.nfib.com for more information.

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From Deloitte Insights

Looking into the Future: Agility and Adaptability founded on digital transformation could be key for industry competitiveness

The engineering and construction (E&C) industry has demonstrated strong resilience in the face of persistent pressure and economic fluctuations. The growing focus on sustainability and efficiency, even amid economic uncertainty, emphasizes the importance of agility and adaptability. E&C companies can remain nimble through the continued adoption of new technologies, analytical methods, and the engagement of a broader workforce. Digital transformation can help E&C companies develop new synergies while improving efficiency, reducing emissions and waste, decreasing costs, generating new value streams, and enhancing talent and program management. Leveraging cutting-edge technologies, such as generative artificial intelligence (AI), can provide a competitive advantage to E&C firms in 2024. Furthermore, E&C companies can compete on both cost and revenue by accessing government incentives offered by the Inflation Reduction Act and the Infrastructure Investment and Jobs Act funding streams likely to hit the market in 2024. Finally, E&C firms should continue to embrace change, not merely as a response to external pressures but as a strategic imperative to better thrive in an uncertain macroeconomic environment.

E&C companies may add the following to their strategy playbook to navigate uncertainty, strengthen competitiveness, and take advantage of the opportunity at hand:

• Focus on the economics of sustainable construction with the usage of high- performance building materials and energy- efficient systems.
• Continue to invest in a digital foundation with building information modeling and robotics and explore applications of emerging technologies, such as generative AI, to enhance efficiency.
• Leverage data-driven insights for better decision-making and safeguarding financial performance.
• Invest in workforce development through apprenticeships and training programs, as well as in automation tools, worker safety, and expanded diversity, equity, and inclusion representation in hiring.

Excerpted with permission from Deloitte Insights (www.deloitte.com/insights). For Deloitte’s “2024 Engineering and Construction Industry Outlook,” please visit https://tinyurl.com/2ytrxjzb.