New Year, New Stories, New Challenges; Commercial Construction Forecast 2023
01/10/2023
Welcome to 2023 and a new year of commercial construction projects in the Pacific Northwest. We’ve now made it through the busy holiday season and it’s time to look forward to what the new year might have in store for commercial general contracting companies.
If you’ve been following along, we spent some time reviewing the projects we completed in 2022, ranging from large industrial projects to small renovations, with many building uses including self-storage, auto dealerships, K-12 education, high-tech manufacturing, office and more. So, what’s to come for 2023? We see much of the same types of buildings and renovation projects with many of the same material procurement challenges on the horizon, but with an added complication: the forecast by economists of a mild recession.
Looking forward doesn’t just mean evaluating what projects are coming down the line, but how to successfully operate our business, how to recruit and retain a workforce in a tight labor market, to stay relevant in a competitive market and still ensure that work is still delivered on time and on budget. Today, we’ll explore what we see in store for the new year relative to commercial construction work.
Construction is Cyclical
Commercial construction is a cyclical business that follows the trends of the businesses it supports. When other businesses are performing well and growing, construction does, too. Similarly, when other businesses slow down and/or operate more conservatively, construction also slows down. What we are seeing is a large amount of new construction projects that pushed from their planned 2022 starts moving into planning for 2023, and moving for various reasons, including permit delays, financing challenges, etc. It will be interesting to see if these projects, in addition to new 2023 planned projects, actually break ground.
Where new construction and remodels in the industrial space, in particular, has been rapid in the last couple of years, some of the largest e-commerce giants have recently slowed construction. This, along with other economic predictions by both local and national economists, signals that the construction market is on the decline.
This kind of cycling is normal for the industry. We even discussed it with two of our long-term superintendents in a recent podcast. Superintendent, Mark Helling, talked about carpentry work being ‘feast or famine’, with trades workers being used to the cycling of the market and periods of too much work compared with too little.
The question everyone will be looking to answer about this decline in the construction cycle is: how deep will it go before we hit the trough and climb back up? In positive news, the State of Oregon’s economist, Josh Lehner, is anticipating only a mild recession, in large part due to the strong economic indicators that currently exist, such as the tight labor market, increased wage growth and high levels of personal savings in individual households.
Our forecast is that the ‘recession’ for commercial construction will be shallow, as well. Smart companies will be planning their workloads strategically and confirming great customer satisfaction, ensuring that clients don’t question their loyalty for upcoming projects.
Most recently, clients have reported difficulty in acquiring contractors for their work, as if there is too much work to go around. With any luck, the next year will find us with ‘just enough’ for everyone – a pleasant leveling off that doesn’t feel much like a recession at all.
The Industrial Cycle
Particularly in the industrial market sector, construction and absorption in the United States saw booming numbers in 2021 and 2022. In fact, according to NAIOP, net absorption of industrial space in 2021 was nearly double that of 2020 and most of the previous 5 years prior to that, as well. Construction, therefore, has been at the peak of the cycle, indicating that we are ‘due’ for a decrease in activity. Industry experts agree, with predictions for absorption returning to more ‘normal’ levels for 2023.
Some have suggested that this decrease in construction activity may help improve on lead times for roof structure and electrical gear, both of which have significantly increased with shipping and manufacturing delays during and after the COVID-19 pandemic. This would be a welcome relief. While we have seen developers being thoughtful about their upcoming projects and evaluating financing options closely, there are still many plans on the horizon for projects scheduled to break ground in spring and summer of 2023.
Recruitment of Tradespeople and Professional Positions in 2023
Recruitment for professional positions and craft workers has been a challenge in recent years and is not anticipated to improve any time soon. According to the Associated General Contractors of America, 93 % of construction firms reported difficulty in filling open positions as of August 2022, and 77 % of those firms cited a lack of qualified candidates or inability to pass drug testing as the most common explanation for this difficulty.
This lack of skilled labor is unlikely to improve in the near term, as workers continue to retire, and training new workers requires significant investment in education programs. Construction firms are rising to the challenge, however, with more companies increasing their spending on training and supporting local organization like Girls Build, Portland Youth Builders, and the Beaverton School District’s Career & Technical Education programs. Additionally, union trade programs continue to offer opportunities for new workers to learn skills through their education and apprenticeship programs.
While major efforts are underway to shore up skilled trades, these efforts will take time and significant resources to solve.
In addition to craft positions, recruiting for roles such as Project Manager and Project Engineer have also been a challenge this past year, with nearly every construction company seeking experienced candidates in a variety of roles and locations. We don’t see this easing much in the new year. With the anticipation of only a mild recession, smart companies will be holding tight to their team members to weather the storm and come out strong on the other side.
Retention of Construction Crews and Professional Positions
With recruitment a tough battle, retention of workers in all positions is a critical concern for the upcoming year. Fair treatment of employees and finding ways to make all workers feel included, safe and valued will go a long way towards retaining them. Some strategies include:
- Making safety programs a high priority and including all levels of employee in safety programs/committees.
- Making employees part of decision making. This can be achieved through initiatives such as Perlo’s Opportunity for Improvement Program where employees can submit ideas for peer group review and implementation.
- Finding ways to provide employee engagement opportunities with a variety of team building activities, creative work groups and collaborative meeting spaces.
- Giving back to the local community. This can be achieved through paid volunteer programs, charitable giving campaigns, engagement in youth education work, and more.
- Provide bonus programs for performance and/or certain measurable outcomes.
Most importantly, treat all workers with respect and kindness. Find ways to provide them with opportunities to increase their skillsets and challenge them to improve over time. Empowering employees goes a long way towards spurring loyalty and ingenuity.
Final Thoughts on our 2023 Forecast
The new year is upon us, and while some economic indicators might seem daunting, there is hope for a strong commercial construction market. If the predicted recession remains shallow, inflation levels off and we collectively stay optimistic, there will be plenty of work to go around.
Here at Perlo, we will remain optimistic and continue to take care of our people and always do what’s right. We wish you all a Happy New Year!