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Backlogs Remain Robust While Labor Shortages Challenge Sector

Capstone Partners, a middle market investment banking firm, released its May 2023 Construction Services Sector Update, reporting that elevated construction spending, increased project backlogs and continued employment growth have driven acquisition activity. While macroeconomic headwinds have challenged the Construction Services space, sector participants have remained optimistic in their outlook for operating performance. Notably, contractors expect growth in sales, profit margins and staffing over the next six months. These projections have been supported by healthy construction spending, which increased by 5.8% year over year as of January 2023. Elevated interest rates and materials costs have continued to present hurdles for sector players, however, pockets of the market have maintained steady project visibility. Notably, backlogs in the heavy industrial and commercial and institutional segments increased by 2.5 months and 0.7 months, respectively, in March.


Labor shortages have been the main challenge to sector growth as the supply of workers has lagged construction project demand. While employment in the construction space increased 2.5% year-over-year in March, the industry lost 9,000 net jobs month-over-month. Notably, heavy and civil engineering and residential building were the only two segments to add jobs from the previous month. Industry employment will likely continue to lag demand as one in four construction workers are over the age of 55 and nearing retirement age.


Merger and acquisition activity in the construction services sector has remained strong, with 78 transactions announced or closed year-to-date. Although this marks a 32.1% year-over-year decline, year-to-date volume has remained in line with pre-pandemic averages. Sector valuations have remained elevated, with the average M&A sector multiple standing at 10.6x EV/EBITDA, outpacing the broader Building Products & Construction Services industry multiple of 8.3x EV/EBITDA. Strategic buyers have represented the majority of M&A deals, comprising 65.4% of total transactions year to date. Private strategic buyers accounted for 52.6% of all sector M&A activity to date. Sector participants have looked to acquire assets that expand product and service offerings to increase firm attractiveness in the project bidding process.

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