Construction Sector Will Feel the Sting of High Interest Rates in 2023

By Emily Gallagher

With the Federal Reserve’s continued interest rate push and a recession looming around the corner, it looks like construction will stagnate in 2023.

In its 2023 projection, the Dodge Construction Network, a data analytics platform for general contractors, predicts a decline in the U.S. construction industry across a wide range of typologies. Overall, construction starts will cost $1.08 trillion, which is unchanged from 2022 but represents a 3 percent decline when inflation is factored. 

However, the lag in activity will be unevenly felt, and some industries will wildly outperform others. For 2023, the value of commercial starts–office, retail, hotel, and warehouse developments–is projected to decrease by 3 percent (or 13 percent when adjusting for inflation). Single-family construction is also expected to take a hit with a 5 percent projected decrease in activity. Institutional projects, on the other hand, will remain unchanged in 2023, but that will still reflect a 1 percent inflation-adjusted drop. 

Meanwhile, construction projects in the manufacturing and infrastructure sectors will continue to be profitable. Construction starts for manufacturing facilities, such as chip fabrication and EV battery plants, tripled in 2022. While it’s unlikely that the same aggressive pace will continue, the $51 billion value of 2023 starts is still much greater than historical averages. 

Thanks to the recent passing of public investment initiatives like the Inflation Reduction Act and the Infrastructure Investment and Jobs Act, nonbuilding and infrastructure-type initiatives will be on the upswing as well. After inflation, public work starts will increase by 12 percent, driven by increases in roadway and bridge construction.

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