The climate we find ourselves in for 2023 should not be a surprise to anyone, given the year we had in 2022. As much as COVID was the disruptive factor impacting everyone in 2020 and 2021, the significant level of funding pushed out by the federal government kept the economy afloat. Unfortunately, the large influx of cash flow, supply chain shortages, low-interest rates, a tight labor market, and a strong stock market boosted spending and created 40-year highs in inflation rates. Unfortunately, the long-term impact of these conditions was an economic downturn that started in 2022 and will most likely continue to be a factor throughout 2023.
The Economy:
In January we started to see a loosening of the labor market, however, expect unemployment to stay below 5% until the 2nd or 3rd quarters of the year. Anticipate inflation to start leveling out between 5% and 6% by the second or third quarter of the year and expect the Feds to boost interest rates another ½% to ¾% before the year is out, with no relief until 2024. So, what does this mean for the construction industry?
- Expect construction material costs to increase during 2023 by another 6% to 7%, this coming on the heels of double-digit increases during 2022.
- Supply chain shortages have been an issue and will most likely continue to be an issue as we move into 2023 as the cost of production continues to rise, COVID and other disruptions remain prevalent, and the labor market continues to be stretched. This creates project delays, logistical headaches, inconsistent labor needs, and decreased margins.
- During 2022, contractors saw cancellations of contracts due to rising costs. Expect that trend to continue as consumer discretionary resources are shrinking and interest rates are negatively impacting new construction and major improvements. This is also anticipated to drive down home pricing further shrinking margins.
- The tight labor market in the construction industry will continue with 6 times more contractors expecting to be expanding their labor forces than those reducing them. This will drive up the cost of labor and the benefits that will need to be offered to attract and retain staff. On a positive note, according to 2022 data, the percentage of construction industry wage and salary workers belonging to unions dropped to a record low of 11.7% in 2022, a decline from 12.6% in 2021.
Government Projects:
In 2021, the federal government passed the Infrastructure Investment and Jobs Act (IIJA) which directed $550 billion toward traditional and next-generation infrastructure projects, representing one of the most significant infrastructure investments in U.S. history. In the first year since its passage in November 2021, the disbursement of federal funds to the various states has been on track, resulting in progress on projects and new contracts for engineering and construction firms. Although IIJA funding is already having an impact, it is expected that the projects announced in 2022 are only a fraction of what is to come. In 2023, expect to see continued rollout of IIJA’s funds, combined with other recent legislation. This could bode well for construction companies that have governmental relationships and the capacity to handle these projects.
Commercial Real Estate:
While we are seeing a softening of the residential real estate industry, certain pockets of the commercial marketplace are still strong, as indicated by the American Institute of Architects Architectural Billing Index (ABI). New project work coming into architectural firms, as well as inquiries for future projects, have been very strong, indicating design revenue at architecture firms will continue to grow. The ABI tends to be a leading indicator for construction projects, which bodes well for the building construction market for 2023.
During the tail end of 2022, there was growth in the retail market, modest gains in the office sector, and signs of recovery in the hotel sector, and the industrial market is expected to have an upturn in 2023. Construction spending in the healthcare sector never declined during the pandemic, and this strength is projected to continue with 5% to 6% gains during 2023. Finally, the education market suffered from remote learning so renovating older buildings and building new facilities was not a budget priority. This sector is projected to gain 5 percent in 2023.
Energy Efficiency and Green Buildings:
By 2025, it is estimated that over 60% of all new buildings will be labeled net-zero-ready (capable of being built with zero carbon emissions). This is significant since the U.S. green building market is estimated at over $81 billion, which means an anticipated rise in green building planning and construction over the next few years. The components of a green building are energy efficiency and renewable energy, water efficiency, environmentally preferable building materials and specifications, reductions of waste, toxin reductions, protection of indoor air quality, and smart growth and development. This will require knowledge and understanding of these areas.
Energy efficiency is a large component of green building design. With over 35% of the energy utilized for heating and cooling wasted, practical solutions can help retain energy and ensure efficient building construction and renovations. In addition, recent legislative updates are now offering tax incentives according to the new 179D Commercial Buildings Energy-Efficiency Tax Deduction in 2023 as outlined below.
Increased Technology and Automation:
The construction industry has a long history of incorporating technology, such as measuring tools and surveying equipment. Digitization will continue its progression within the industry, with even more tasks becoming automated during 2023 as AI and robotics make a greater impact on design, safety, and efficiency.
2022 saw an uptick in the level of automation through digital technologies such as drones, 3D printing, and nanotechnology. These innovations have enormous potential to improve safety, efficiency, communication, and overall productivity across the construction industry. In addition, as virtual reality (VR) technology becomes cheaper and more accessible, many builders will likely integrate VR systems into their training programs, design/pitches, and safety testing. This has the potential to reduce labor costs, fewer delays in the timeline, and reduces the amount of rework, overall helping keep costs down and speeding up the construction process.
Smart offices and smart homes are becoming an expectation, not a luxury, for businesses and homeowners. This trend will continue to grow in 2023 with increased movement towards integrated systems using Google Home or Amazon Alexa in conjunction with smart appliances and AI. These systems along with the Internet of Things will experience expansive growth … particularly in smart kitchens and bathroom spaces.
2023 will be a year of challenges and opportunities for the construction industry. The economy will cut into margins, the infrastructure bill will continue the flow of large projects, and green energy and technology will reshape the tools and skillsets needed by contractors.
Kimberly Martinez
Director
Professional Experience: Kimberly joined the firm in 2023 as a Tax Director. She started her career at a boutique CPA firm and now has fifteen years of honing her skills in providing clients with tax planning and advisory services in a variety of industries. She also has spent time working in assurance services and brings the analytics skills she developed in that practice to her tax clients and uses them to advise on improving profitability and efficiency.
Vincent Iervasi
Staff Accountant
Vincent is a Staff auditor who works with both nonprofit and special education clients.