Global construction markets are mirroring a turbulent economy, with elevated costs casting a shadow over the sectors outlook, exacerbated by long-term challenges over the availability of skilled resource. However, there remain pockets of strong opportunity, especially in the context of resilient infrastructure, public policy stimulus and new markets that are opening up.
High inflation continues to affect most economies, which has prompted the tightening of monetary policy through interest rate hikes. Rising borrowing costs and ongoing challenges with labour and material availability are just some other factors adding to immensely challenging construction market conditions.
This comes at a time when the outlook for future demand is becoming increasingly uncertain. Many investors are revaluating whether to green-light projects now or delay.
This is being reflected in softening in private sector demand in a number of sectors, but with strong appetite still seen in high-growth industries associated with environmental and societal transition, including data centres, advanced manufacturing facilities and corporate office fit-out.
On balance, the expectation is that these pockets of both public and private spending will not entirely offset increasing caution from investors and that markets are likely to shift down a gear. Against a backdrop of high inflation, that could provide an opportunity for supply chains to rebalance, construction markets to recalibrate and cost escalation to settle.
Construction market challenges – intensity fades and challenges evolve
The construction industry has now been navigating uncertainty for several years, with the disruption of COVID-19 followed quickly by supply chain dislocation from the Russia-Ukraine war. Nonetheless, the industry has tackled these challenges head-on.
We asked our regional specialists to rank the main challenges facing their construction markets on a scale of one to five, with one being no difficulty and five signalling significant difficulty.
It was no surprise to see last year’s top three challenges being repeated this year. Rising construction costs, excessive lead times and skilled labour shortages topped our rankings in that order as elevated inflation, low unemployment rates and freight constraints shaped project delivery.
The significant difference this year is linked to the extent of which these prominent challenges are being a major influence: they are all thankfully coming down. This points towards construction becoming less expensive, people easier to find and components easier to procure.
Source: Turner & Townsend International construction market survey 2023
While the severity of these three core challenges is lessening, other concerns are taking their place. Lack of confidence in the market to invest in new projects, insufficient credit availability and government constraints have increased the most since last year. They rank respectively at six, seven and five on our respondents’ list of concerns.
This is also against the backdrop of rising market uncertainty – the fourth largest challenge – highlighting the tougher economic conditions being experienced across global markets. Insolvency risk among contractors has increased, which is impacting confidence, demand and capacity.
As net-zero commitments are increasingly adopted and understood, concern over delivering them is also growing. The cost, expertise and material requirements over sustainability are becoming clearer.
Top-performing sectors – top sectors reinforced
While we are seeing challenges for construction, some positivity remains. Those sectors that performed well in the face of adversity last year have continued to go from strength to strength.
The top-performing sectors identified through our 2023 survey remain largely unchanged, reflecting the significance of these markets against a global context of population growth, changing consumer patterns and digitisation.
Industrial, manufacturing and distribution has held the top position, driven by continued growth in e-commerce. Geopolitical tensions and the fall-out from the COVID-19 pandemic have also highlighted the need for countries to restructure and build resilience into their supply chains through re- or near-shoring.
Despite rising interest rates, residential and social housing remains in second position, aided by demographic shifts and a greater onus on public housing investment to placate home shortages. This is also helping to counter the softening seen in private sector demand as housing affordability is continually challenged.
Transport infrastructure remains in third position in this year’s survey, with large pipelines of projects to be delivered across many markets. Infrastructure spending remains robust and will help to keep markets active while other sectors slow. Data centres has also remained in fourth position and ongoing strong investment over the remainder of the decade should see this strong performance continue.
The only mover in our top sectors is in commercial office development, which has dropped from fifth to ninth position. With construction costs at a premium, ongoing work-from-home arrangements dragging on demand, and sustainability becoming a key focus in many markets, there is less appetite for the construction of new office buildings. By contrast, this is driving more growth in the corporate occupier (office fit-out) sector, which has moved from seventh to fifth position in this year’s survey.
Figure 8:
Top-performing construction sector, by activity levels – 2022 vs. 2023
Source: Turner & Townsend International construction market survey 2023
* New sector for 2023
Supply chains – respite on offer to dislocated supply chains
While we may not be seeing growth across the board, the industry is benefitting from a loosening of supply chains after a long period of disruption.
Bottlenecks borne by COVID-19 are finally beginning to be unwound as restrictions on manufacturing, freight transfer and people movements have faded. Although conflict persists in Ukraine, the initial shock to supply chains has reduced in fervency and logistics networks, as well as key commodity production, are unlocking further.
While our 2023 survey finds that the severity of supply chain disruption in 20.2 percent of markets was significant, the outlook ahead is much rosier. Over half – 55.1 percent – of respondents indicated that supply chain performance will improve during the next 12 months.
Source: Turner & Townsend International construction market survey 2023
Source: Turner & Townsend International construction market survey 2023
The impact of these supply chain disruptions cannot be entirely disregarded though, with 29.2 percent of markets indicating that lead-in times had increased by more than five weeks over the last 12 months. However, while some markets continue to face challenges, there has been a notable improvement in lead-in times with many regions now seeing a decrease in lead-in times over the last 12 months. The proportion of markets suggesting lead-in times increased by five weeks or more decreased by 7.2 percentage points. The same trend can be seen across programme slippage, where the number of markets to see a decrease in programme times has increased over the last year.
Source: Turner & Townsend International construction market survey 2023
Source: Turner & Townsend International construction market survey 2023
In part, disruption is lessening due to cooling activity, which is taking pressure out of the system and resulting in fewer supply and demand mismatches. However, there are more positive reasons for supply chain easing. Forced to adapt, we find that supply chains have matured and adopted new models to combat disruption.
This improvement has come at a cost. In many instances, it has been more expensive to procure for construction projects as supply chains diversify and resilience is built. A key example is the growth evident in on-shoring and friend-shoring by countries, to provide greater control over supply chains and to limit the risk of global headwinds. Moving away from a globalised approach has increased base costs.
These shifts across global logistics networks, and the redistribution of supply chains, may well be a defining feature – contributing to raised levels of inflation – of the years ahead. This trend goes in lockstep with the threat of continued market volatility, which is contributing to a heightened level of risk across global supply chains.
© 2023 Turner & Townsend