With 2023 behind us, many in the construction industry are cautiously looking ahead to the rest of 2024 and beyond. The Federal Reserve’s aggressive interest rate hikes over the past year have mostly succeeded in curbing inflation, bringing current levels close to the pre-pandemic environment of 2019.

Key Metrics and Trends

Several key metrics indicate a dynamic and challenging year ahead for the U.S. construction industry:

• Total U.S. Engineering and Construction Spending: Forecast to end 2023 up 5% compared to 2022, reaching approximately $1.9 trillion. While there has been significant growth in segments like food and beverage, chemicals, and pharmaceuticals, the industry overall is still below pre-Great Recession levels when adjusted for inflation.
• Nonresidential Construction Index Movement (NRCI): FMI Consulting reports a drop from Q3 2023 to Q4. Despite reduced costs, both the overall U.S. economy and regional business conditions suggest a slowing environment.
• Architectural Billings Index (ABI): The American Institute of Architects' December 20 reading was below 50 for the seventh time in 2023, indicating reduced confidence among design professionals for the next two to three years. However, government-funded projects like infrastructure and megaprojects may see better performance in the coming quarters.
• FMI’s Q4 2023 U.S. Construction Industry Outlook: While segments like office and multifamily are expected to decline in 2024–25, transportation and power sectors could grow by up to 12% over the next 12–24 months. Data centers and warehouses might see growth rates exceeding 25%.
• Regional Growth: Small- to medium-sized cities experiencing population growth and reinvestment, such as Cleveland and Raleigh, are expected to see the highest growth rates of over 15%. Larger markets like Denver and Austin may see growth slow to single digits after years of rapid expansion.

Long-term Challenges

Several long-term challenges remain for most construction firms, including:

• Volatile Interest Rate Environment: The Federal Reserve's unprecedented pace of raising rates since 2020 will continue to impact the construction industry for years.
• Labor Productivity and Availability: The aging workforce and a lack of skilled new entrants exacerbate labor shortages, significantly affecting productivity and project costs.
• Supply Chain Issues: Despite some improvements, long-term supply chain disruptions due to geopolitical tensions and other factors remain a concern.
• Leadership Succession: Many firms are considering mergers or acquisitions to maintain market share, while others need to plan for efficient succession.

Strategic Opportunities

To navigate these challenges, consider these strategic opportunities:

• Public Funding: Explore public funding options from acts like the American Rescue Plan Act, the Infrastructure and Jobs Act, and the Inflation Reduction Act to support continued growth.
• Trade Partners: Engage specialized trade partners from project inception to reduce overall costs and increase certainty in a volatile market.
• Integrated Software Solutions: Utilize robust supply chain management and project management software to maximize efficiency and mitigate delays.
• Succession Planning: Develop a well-thought-out succession plan to ensure financial security and continuity.

The Future of Megaprojects

Megaprojects, such as data centers, EV battery plants, and chip manufacturing facilities, are expected to play a significant role in the construction industry moving forward. As we shift from old economy projects to new economy infrastructure, demand for technology-related construction will likely continue to grow.

Partnering for Success

In a complex and competitive industry, partnering with the right accounting firm can provide a distinct advantage. Meaden & Moore offers over 100 years of experience, proprietary market research, competitive analysis, and best practices to help your organization achieve its goals.

For a detailed analysis and strategies for success, read our full whitepaper. For more insights into the Construction Industry, contact us today.