A massive increase in interest rates, a rise in asset values driven by inflation and a dramatic fall in home purchasing activity normally would be all the evidence needed to pull back on portfolio concentration in construction. But these are not normal times.
Since 2020, government spending has been on the rise, with several major pieces of legislation fueling construction growth, including:
- The Infrastructure Investment and Jobs Act (IIJA)
Enacted in 2021, the Infrastructure Investment and Jobs Act, commonly known as the Bipartisan Infrastructure Law, represents a historic investment in U.S. infrastructure. This law allocates approximately $1.2 trillion toward the repair and construction of roads, bridges, public transit systems, airports and waterways. It also addresses broadband expansion, water infrastructure and resilience against climate change.
- The Inflation Reduction Act (IRA)
Signed in 2022, the Inflation Reduction Act focuses on climate change, healthcare and tax reforms. From a construction perspective, it includes significant allocations for green energy projects, including tax incentives for clean energy production and manufacturing.
- The CHIPS and Science Act
This act, also signed into law in 2022, the CHIPS and Science Act aims to revitalize the U.S. semiconductor industry through extensive funding for new semiconductor manufacturing facilities known as fabs. The law provides for more than $50 billion in federal investments intended to stimulate the construction of new plants and research facilities.
- The American Rescue Plan (ARP)
The American Rescue Plan, enacted in 2021, was primarily aimed at countering the economic fallout from the COVID-19 pandemic. Among its wide-ranging provisions, it included funds for school renovations and improvements to public buildings to meet health standards, which continue to boost construction spending in the public sector.
The time from legislation to bid to award to shovels in the ground can take years, but the effects of these pieces of legislation are starting to taking shape, as the charts below illustrate:
New Construction Spending on Manufacturing
New Construction Spending on Highways and Streets
New Construction Spending on Healthcare
New Construction Spending on Public Projects
The Equipment Finance Implications
Bond markets are normalizing but they are still far from the low-cost, ease of execution environment municipalities and healthcare firms grew accustomed to in recent years. Meanwhile, the leveraging of government incentives, combined with the necessity to re-shore supply chains, has led to more new facility and expansion groundbreakings in the last 18 months than the last six years combined. In addition, capital costs are higher, capital stacks are less flexible and a construction mandate looms.
Rate-based competition may be less intensive currently as deposit-first mindsets among some bank-owned equipment financiers thin the competitive landscape. Meanwhile, asset values are likely to remain durable, despite recent news of growth in used equipment inventories, as more of these awarded bids trickle down to smaller subcontractors, with the requirement to invest in new assets a function of such subcontractors’ ability to capitalize on the growth opportunity. There has never been a more important time for construction companies, large and small, to expand access to capital and explore capital options with greater structural flexibilities.
A strong demand outlook is intersecting with less competitive pressure, at least on the non-bank side, and an environment likely to support consistent asset values. In a climate where so many sectors are under pressure, the data above begs the obvious question: Even with other economic uncertainties, how can equipment financiers afford not to focus strategic energies toward maximizing construction sector volumes?
