Construction Industry Navigating Rising Interest Rates and Economic Challenges
August 03, 2023
The construction industry is grappling with the implications of rising interest rates, inflation and changing economic dynamics, according to Marcum’s 2023 National Construction Survey.
The annual survey, conducted by Marcum, covers a range of topics, from top priorities to problems, strategies, possible solutions, and the influence of a potential recession on the industry. The 2023 edition is the fourth iteration of Marcum’s national industry study.
Among this year’s key findings, companies are struggling with rising inflation and interest rates, with 50% expecting project delays or cancellations. Over half anticipate difficulty in passing expenses on to customers.
More than most, construction firms feel the sting of higher lending rates. Respondents in the survey pointed to a significant decline in the ease of obtaining financing, down to 4% from 19% last year. The survey also indicates increased difficulty in obtaining bonding. This issue is especially acute for firms with leveraged balance sheets and thin capital.
Despite the challenges, the industry outlook is far from bleak. The survey reveals that the construction industry is showing impressive resilience. Just 32% of respondents are expecting a lower backlog this year, and those expecting a higher backlog are at 41% this year, just a 7% drop from the previous year.
Additionally, supply chains have improved, and material costs are stabilizing, with some sectors reporting declines. A sustained demand for skilled labor indicates underlying economic robustness.
“The survey’s results confirm what we have long known: The construction industry is not just about bricks and mortar but innovation, resilience and adaptability, “ said Joseph Natarelli, national leader of Marcum’s Construction Services practice. “Despite the current economic challenges, many firms view this as an opportunity to redefine their operations and strategic planning. We are confident that this sector’s dynamism and tenacity will enable it to emerge stronger.”
Other key findings of the 2023 report include the following:
Increasing Costs. Sixty percent of respondents report higher general and administrative overhead expenses than in the past year.
Taxes. Despite being the third-most important political issue, only 26% of companies are leveraging the research and development tax credit, suggesting potential lost opportunities.
Skilled Labor Shortage. Thirty-nine percent cite securing skilled labor as their biggest threat in the coming year, up from 27% in 2022. Labor costs are also seen as a significant threat, doubling to 14% from the previous year.
Pessimistic Outlook. Just 37% of respondents expect more project opportunities in their regions in the coming year, down from 59% last year. Those expecting fewer opportunities doubled to 26% this year.
Recession Preparedness. Eighty percent are focused on managing cash flow, and 59% are planning around a potential recession, up from 49% last year.
Priorities Shift. There’s a marked increase in companies focusing on cost-cutting and sourcing skilled labor, with both seeing all-time highs of 47% and 50%, respectively.
Healthy Backlogs Despite Challenges. Despite challenges, backlogs remain healthy. Companies are being more selective when bidding on projects due to a reduction in the number of competing bidders.
“Despite the economic uncertainties brought about by the interest rate environment, our survey indicates a clear trend of resilience in the construction industry,” said Marcum Partner Roger Gingerich, who leads the Firm’s Midwest construction practice. “The progress we’ve seen in areas like supply chain optimization and strategic planning is particularly impressive. While it’s a challenging landscape, our survey demonstrates the construction industry’s ability to navigate and adapt to these complex circumstances.”