IronTrax shared insights on the construction industry for Q1/24, focusing on several topics that pertain to the industry as a whole, including an industry outlook for 2024, the anticipated plunge in office real estate values, a surge in job openings, the record-high share price achieved by Caterpillar and a summary of trends in used equipment values.

Construction Market Outlook for 2024

The construction industry outlook for 2024 can only be described as cautiously optimistic. Although the industry is likely to slow down, overall construction activity looks stable or slightly improved, particularly for companies that can adapt and keep up. Inflation and high interest rates will continue to control how money is spent, with projects funded by federal money being in high demand, and non-residential buildings and commercial construction likely to slow.

In 2024, some of the greatest emphasis will be placed on the construction of manufacturing facilities and infrastructure projects. Legislation from the CHIPs Act continues to encourage tech manufacturers to build facilities in the U.S., while the IRA Act is injecting money into various infrastructure projects. The legislation passed in 2021 and 2022 is expected to continue to provide fuel for the construction industry this year.

Sustainability will also be a major part of the construction outlook in 2024. In the U.S., federal money is fueling the push toward net zero emissions by 2050 with all new buildings and 20% of existing buildings targeted to be zero-carbon-ready by 2030. A total of $2 billion in IRA funds has been earmarked for federal projects utilizing low-embodied carbon construction materials like asphalt, concrete, glass and steel. At the same time, generative AI and other technologies offer exciting opportunities for the construction industry. AI, drones and all-in-one integrated software make it possible to take 3D modeling and rendering to new heights, improving the design process, scheduling, safety, compliance and overall quality of construction projects. These tools will continue to improve over 2024, making “early” adopters more sustainable and ready for new challenges and legislation that might arise.

Despite the cautious optimism, there are still significant challenges that construction companies will likely have to deal with. Inflation will continue to plague the industry for at least part of 2024, with interest rates remaining relatively high. The shortage of skilled labor also remains a challenge with more people leaving the construction industry than are entering the field. It’s estimated that the industry will need over 340,000 new workers in 2024, and finding younger workers with the required skills will only get harder. Finally, material pricing and supply chain issues will continue to be factors in 2024, as well.

Office Real Estate Values to Plunge Through 2025

According to Moody’s, the value of office commercial real estate (CRE) will likely plunge 26% by the end of next year as many companies adjust to the work-from-home trend by shrinking workspace or moving to cheaper properties. During the next 18 months, Moody’s expects valuations across all CRE types to slump 10% peak-to-trough, with the office subsector hit the hardest by far.

The CRE market has undergone a significant upheaval in recent years. Prices soared from 2020 to 2022, lifted initially by easy monetary policy and loose credit conditions, followed by demand from investors as a hedge against inflation. CRE prices then tumbled 11% after the Fed started raising interest rates in March 2022, erasing gains of the prior two years. In addition, lending standards on CRE loans have grown tighter since mid-2022.

Although CRE accounts for nearly 25% of all bank loans and the largest portion of bank debt, “there is ample evidence that banks are equipped to handle the challenges ahead,” Moody’s said. Still, “there is a risk that even minimal signs of stress could amplify into broader crises of confidence in the banking system.” In March, Fed Chair Jerome Powell predicted that CRE losses will mostly harm small- and medium-sized banks and cautioned that efforts to ensure stability will persist for many years. Those banks have the highest concentrations of troubled loans. The Fed, Treasury, bankers, and CRE executives for months have warned of potential market unrest as property owners struggle to refinance debt at higher rates.

In December, the Financial Stability Oversight Council of top U.S. regulators flagged CRE as a leading risk to financial stability this year, noting rising vacancy rates, declining values of office properties, the possibility of an economic slowdown, and high-interest rates. An above-average amount of CRE debt will mature this year and in 2025, with many loans featuring large balloon payments that will probably need to be refinanced. “Even with interest rates expected to inch down this year, borrowers will have to refinance at a much higher interest rate, increasing the risk of cash flow issues,” Moody’s said.

Construction Job Openings Surge

According to the Bureau of Labor Statistics, as of the last day of January the construction industry had 413,000 open jobs, marking a 41% increase year over year. At the end of January, 4.4% of construction jobs were unfilled, down from 4.7% in December and 5% a year earlier. The number of employees who quit was essentially unchanged from December but was down 19.6% year over year. Meanwhile, the industry experienced about 40% more layoffs in January 2024 than in the same month in 2023. According to Anirban Basu, chief economist of Associated Builders and Contractors, January’s quit rate was the lowest, and its rate of layoffs and discharges was the highest since March 2023. “Fortunately, this likely reflects the temporary effects of frigid weather on the industry rather than any broader slowing of construction activity,” Basu stated. At the same time, he characterized the numbers as “signs of potential softening demand for construction workers.”

It’s a complicated time for labor and one of potential change. On March 11, a new rule from the Department of Labor redefined the Fair Labor Standards Act’s definition of an “independent contractor,” meaning more workers who previously were classified as contractors rather than employees will be considered the latter, and, as such, be owed benefits. The National Labor Relations Board is also looking to move forward with a revision to joint employer regulations that could result in more general contractors finding themselves liable for workers employed directly by subcontractors. Meanwhile, construction is seeing a boom with infrastructure and manufacturing investments leading to high backlogs, yet many of those projects are often remote and far from a reliable pool of workers, meaning contractors have had to get creative with how to staff their projects. In addition, the continued shortage of experienced workers, along with social issues, will continue to plague the industry this year. Despite those regulatory changes and ongoing challenges, the Associated Builders and Contractors say a majority of contractors expect to increase their staffing levels over the next six months.

Caterpillar’s Shares Hit Record High

Caterpillar beat fourth earnings estimates with a double-digit jump in operating profit. The company’s fourth-quarter profit rose to $2.68 billion, or $5.28 per share, topping the analysts’ consensus estimate of $4.75 per share, and $2.79 per share reported in the fourth quarter of 2022. As a result, Caterpillar’s share price rose 5% to a record high, lifted by mining equipment sales and higher prices across its machinery divisions.

Spending on heavy machinery held steady among commercial clients. Despite drilling at North American oil rigs showing signs of weakening, the company is still benefiting from higher purchase volumes for its haul trucks and other mid- to large-sized mining equipment. Dealer inventories fell for the first time in four quarters, by $900 million, an encouraging sign that spending remains resilient aided by the President’s $1 trillion infrastructure law to upgrade roads, bridges, and other transportation facilities. Looking ahead, analysts expect commercial construction, which accounts for 75% of Caterpillar’s business, to help safeguard the company’s margins in 2024 despite an anticipated slowdown in global economic growth.

“I’m very proud of our global team’s strong performance as they achieved the best year in our 98-year history, including record full-year sales and revenues, record adjusted profit per share, and record ME&T free cash flow,” Jim Umpleby, chairman and CEO of Caterpillar, said. “We remain committed to serving our customers, executing our strategy and investing for long-term profitable growth.”

Andrew Bonfield, chief financial officer of Caterpillar, told investors that top-line estimates would be relatively similar to last year. “We believe that the bottom end of the range remains challenging but achievable,” he said.

Trends in Used Equipment Values

According to the latest Sandhills Global market report, with more new construction equipment available on dealer lots, auction prices for used units are trending downward. The report reveals a consistent decline in asking and auction values coupled with a notable increase in inventory levels for construction equipment, farm machinery, trucks and semitrailers in Sandhills marketplaces. Equipment, truck, and trailer markets are skewing toward newer machines, putting downward pressure on asking and auction values for late-model units. Overall, the reports show markets adjusting to oversupply and softer demand.

Specific observations in the U.S, trends related to used heavy-duty construction equipment and lifts are as follows:

U.S. Used Heavy-Duty Construction Equipment

During January, the market for used heavy-duty construction equipment showed a small decline in inventory and values. Inventory levels decreased 2.2% month-over-month but were up 11.12% year-over-year, exerting pressure on values. Inventory is currently trending sideways. Asking and auction values are showing mixed year-over-year trends, with asking values up 1.43% and auction values down 5.34%. On a month-over-month basis, both asking and auction values were down following several months of decreases. Asking values dipped 0.12%, while auction values were down 0.08%. Used excavators have exhibited the greatest inventory and value changes over the past few months, with lower operating weight models showing the highest year-over-year volatility.

U.S. Used Lifts

The supply of used lifts in the U.S. had been rising for months but showed a 1.28% month-over-month decline in January. On a year-over-year basis, inventory levels were 14.33% higher and are trending sideways. Telehandlers are driving the inventory increases and putting pressure on values. Asking values inched up 0.61% month-over-month, declined 1.27% year-over-year, and are trending down. Auction values were up 1.35% month-over-month, dropped 9.31% year-over-year, and are trending down.

Although values for used equipment overall have been trending down, that does not appear to be the case for late-model low-hour equipment. The demand for that used equipment continues to be strong as a result of several factors, including new infrastructure improvement projects, the upward trend in the cost of new equipment, economic uncertainty, the lack of available capital, depreciation woes, costly breakdowns, and limited space availability. Considering these factors, the values of late-model low-hour equipment are likely to maintain steady levels through 2024, barring any unforeseen financial downturn in the markets.