Feb 1, 2024
By: Christopher Ng, Managing Partner | Gibbs Giden (cng@gibbsgiden.com)
As we head into 2024, sales, credit, and financial executives in the construction industry are all pondering the same question: can the red-hot construction industry continue its growth? No such luck, at least according to the 2024 American Institute of Architects (AIA) Semi-Annual Consensus Construction Forecast.
After a modest post-Covid 5% decline in construction spending in 2021, the building sector of the economy rebounded with 12% growth in 2022, followed by a whopping 22% increase in 2023. Manufacturing construction led the way, accounting for almost 30% of overall spending on nonresidential buildings last year. In addition, healthcare, education, religious, and public safety facilities each increased by more than 10%. Even office, retail, hotel, amusement, and recreation spending unexpectedly saw significant gains in 2023.
The AIA Semi-Annual Consensus Construction Forecast report, however, fears that significant obstacles lie ahead. The report is a compilation of nonresidential building forecast data from a group comprised of the leading construction forecasters from around the United States. Indeed, after an incredibly strong performance in 2023, the forecast notes that the construction sector will sour in 2024-2025.
The macroeconomic issues at the heart of the predicted headwinds are not unique to the construction industry. Unstable interest rates, tighter credit standards, inflation, higher construction costs, and declines in values of commercial properties are all among the chief reasons forecasters see a slowdown in construction spending.
In fact, the AIA Semi-Annual Consensus Construction Forecast shows that nonresidential spending will grow just 4% in 2024 and will slow even further to just over 1% in 2025. The report shows indicators that the slowdown is already underway with construction starts dramatically down and negative in the last quarter of 2023. In addition, architecture firms are seeing weaker business conditions, with significant declines in architectural billings since September 2023. If architectural billings remain soft, that will undoubtedly translate into less construction spending and less need for materials and equipment in the near future.
Of course, it does not help that Chapter 11 commercial bankruptcy filings are up significantly year-over-year. Epiq reported earlier this month that such Chapter 11 filings increased 72% in calendar year 2023 as compared to 2022. When bankruptcy strikes a construction project — whether it is an owner, general contractor, subcontractor, or even lender (e.g., Silicon Valley Bank) – much care must be taken to properly navigate the treacherous waters of the Bankruptcy Code. This is even more true for the credit professional who has been blessed with minimal bad debt and a lack of bankruptcy concerns over the last decade. And if other data, including the Project Stress Index recently released by ConstructConnect, is accurate, then it seems that the volume of delayed, stalled, or abandoned projects, which is sharply up in recent months, should serve as a reminder to credit and financial executives to remain vigilant and proactive in extending credit, securing receivables, and other risk-mitigating initiatives.
Christopher E Ng is the managing partner-elect of Gibbs Giden Locher Turner Senet & Wittbrodt, LLP. He is a member of the firm’s Business and Commercial Law and Construction Law Departments where he primarily represents private and publicly-held companies in a wide range of business, commercial and construction transactions and disputes. Chris, a member of the State Bar of California and District of Columbia and licensed to practice in all California state and federal courts, is also an educator, active speaker, published author and frequent contributor to local, regional and national legal publications. For more than a decade, Chris has served as an adjunct professor and lecturer at Pepperdine University, California State University (Northridge), and Loyola Law School (Los Angeles).