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construction marketConstruction Market Remains Cautiously Optimistic Amid Macroeconomic Volatility

Capstone Partners latest Construction Services Market Update reports that the Construction market has remained cautiously optimistic amid volatile macroeconomic conditions, buoyed by healthy project backlogs and profit margins. Notably, in early 2024, expectations for interest rate cuts fueled optimism among housing developers and buyers alike for reduced financing costs as well as a rebound in new residential construction. However, recent optimism has faded as Federal Reserve Chairman Jerome Powell indicated in May that inflationary pressures have yet to subside, and that the restrictive interest rate policy is expected to remain in the near-term. The sustained elevated interest rate environment has continued to create volatility in the Residential Construction market. As a result, Construction Services sector participants have shifted operations to capture alternate revenue opportunities in segments such as Commercial or by increasing repair, remodel, and maintenance projects. However, a shortage in affordable housing, rising homeownership demand among younger generations, and eventual interest rate cuts are anticipated to bolster new residential construction in the long-term.

Despite macroeconomic volatility, sector growth within the Construction Services market has remained strong through year-to-date (YTD) 2024. Notably, sector merger and acquisition (M&A) activity accelerated in late 2023 and into 2024, with 260 transactions announced or closed YTD a 65.6% increase year-over-year (YOY). Strong backlogs, resilient construction spending, and government funding from the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA), have helped to increase M&A activity in 2024. Supported by margin expansion and YOY revenue growth, strategics have continued to bolster geographic reach and service capabilities via M&A. Furthermore, extensive dry powder reserves have propelled financial buyer activity through YTD, with deal volumes up 76.4% YOY. Additionally, demand for Environmental, Social, and Governance (ESG) and related services have continued to rise, providing sector participants with opportunities to bolster revenue diversity and growth. Capstone expects deal activity to persist in the near-term as new opportunities for growth and increased government funding coupled with healthy backlogs, margin expansions, and revenue growth among sector participants fuel buyer interest in the Construction Services space.

Additionally, firms that provide architecture and engineering services have been active in acquiring companies with strong relationships to the public sector amid an influx in government funding for infrastructure projects. Notably, the Architecture & Engineering Services segment has showcased elevated activity, comprising 42.7% of total sector transactions YTD (34.2% engineering and 8.5% architecture firms). Strong backlogs, increased new project inquires, and elevated design contract values are expected to further support segment M&A activity for the foreseeable future.

Also included in this report:

  • Analysis on how an elevated interest rate environment has created volatility in the Residential Construction market.
  • A breakdown of YTD M&A activity in the sector, with a focus on private equity buyers.
  • Insights into architecture and engineering firms’ next twelve-month projections and segment M&A activity, with commentary on select transactions.

Capstone Partners’ Building Products & Construction Services Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the building products & construction services industries. Our team partners with leading mid-to-large sized building and construction businesses that serve growing end-markets. We ultimately look to work with companies that manufacture highly engineered products and differentiated services with an entrenched competitive position.

For more information on the Construction Market Update featured in this report or to speak with one of our Buildings Products & Construction Services M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.

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