Infrastructure market sails into 2024

The coming year may bring robust, even record-setting, growth in the infrastructure market as cities and states enjoy strong federal support while challenges like high material costs may be fading, experts said.

Next year marks the third year of implementation of the 2021 Infrastructure Investment and Jobs Act that launched what the Biden administration has dubbed the “infrastructure decade” and provided $1.2 trillion of advance appropriations through 2026. Coupled with the federal support, states are also expected to invest significant dollars into transportation projects next year, according to the American Road & Transportation Builders Association.

On the legislative front, state transportation officials will continue to press for priorities like smoother allocation of highway funds, better administration of the IIJA’s discretionary grants, and relief from some of the strict “Buy America Build America” requirements that are part of the IIJA.

Pockets of the market like highways and bridges and public works are expected to see double-digit increases in project starts. At least 38 states are expected to keep steady or increase transportation construction activity, said Alison Premo Black, ARTBA’s senior vice president and chief economist.

“We’re expecting growth of 16% in highway and bridge construction, which is very robust, and that’s on top of record growth in 2023,” Black said. “With the combination of state departments of transportation investments and as the IIJA work continues, we should see a very strong market over the next five years.”

Many of the governments that have won IIJA grants could see formal grant agreements signed next year. Some megaprojects, like the Gateway Hudson Tunnel project, the high-speed Brightline West train, and the Brent Spence Bridge are expected to put shovels in the ground.

In addition to the 16% growth that ARTBA expects to see in the highway and bridges market, the public transit and rail construction sector is expected to climb 6% to $26.9 billion, according to ARTBA. Bridge and tunnel work will climb 17% to $26.4 billion. Airport terminal and runway work will increase 14% and port and waterway construction will rise 9% to $5.7 billion, according to ARTBA.

Headwinds from a potential economic slowdown, inflation and workforce shortages will continue to act as a drag, but heading into 2024 inflation has cooled and many predict that interest rates will stabilize if not fall.

Expectations for strong project activity next year dovetail with what the majority of municipal bond firms are expecting, with an uptick in issuance driven partly by pent-up demand from issuers who have spent much of the last two years waiting for rates to come down.

Investors are hoping for more yield-friendly deals like public-private partnerships, said David Hammer, who leads municipal bond portfolio management at PIMCO.

“I’d expect to see a pickup next year due to public-private partnerships and deferred debt issuances this year,” Hammer said. “Very little of the infrastructure money has been spent, and we look over the next years we think a lot of those infrastructure dollars will be put to work with some combination of public and private debt in the debt market.”

Moody’s Investors Service has stable outlooks on all its infrastructure sectors heading into the year, said Kurt Krummenacker with the agency’s Americas Project and Infrastructure Finance group.

“All the sectors, in line with the U.S. consumer, are set to leave behind the easy sugar-high years of COVID recovery and move back to a more normalized place, where macroeconomic conditions drive the outlooks for these sectors,” Krummenacker said.

Sectors like toll roads, airports and cruises have spent the last few years enjoying a strong recovery from the pandemic-induced revenue declines, he said. “The path to growth has been very consistent and unabated,” he said. “But now they’re faced with an uncertain economic environment that’s going to be the driver of their credit conditions.”

Moody’s expects to see continued investment in the airport sector, projecting that the largest airports will invest $60 billion through 2029. That is up from Moody’s previous projection of $50 billion, Krummenacker said.

Fitch Ratings has a neutral outlook on North American Transportation infrastructure in 2024, expecting “overall stable credit conditions and a limited range of volatility in volume activities,” according to a Dec. 5 report.

Dodge Construction Network, which publishes an annual outlook, expects to see “robust growth” next year, with a project 7% increase in total construction starts, totaling $1.2 trillion. Highway and bridge projects lead all sectors, with Dodge predicting a 23% increase next year.

Dodge said it expects double-digit increases in many sectors, including multi-family housing, hotels and motels, manufacturing, driven by the Inflation Reduction Act and the CHIPS Act, both of which invest in domestic manufacturing and onshoring. 

“The only potential negative for the sector lies with Congress where recent chaos has prevented action on appropriations bills, delaying annual spending increases for infrastructure that were expected in October with the new fiscal year,” Dodge said. “Planned infrastructure construction dollars and projects will not disappear, but long delays could mean start dates might be pushed further out into 2024 or beyond.”

Staying on the Congressional front, state DOTs’ lobbying priorities include a solution to the rising problem of distributing federal highway funds late in the fiscal year and smoother implementation of the IIJA’s discretionary grant programs, said Joung Lee, deputy director and chief policy officer of the American Association of State Highway and Transportation Officials.

The current highway funding process requires the Federal Highway Administration to wait until August to ask state DOTs to obligate a significant share in just one month, Lee said. That figure totaled $7.9 billion or 15% of the $54 billion total in fiscal 2023.

“This ‘wait-and-hurry up’ approach deprives state DOTs of the full fiscal year to strategically plan, deploy investments and deliver on the promise” of the IIJA, Lee said. AASHTO is lobbying Congress to “maximize highway formula dollars provided to state DOTs at the beginning of each year by reducing the large amounts withheld for 11 months in slow-spending allocated accounts like TIFIA and INFRA,” he said.

AASHTO is also pushing for a series of fixes to ease challenges faced by states and cities eager to win a piece of the IIJA’s competitive grants.

On the infrastructure investment side, the new year could see a pickup after the relatively slow fundraising and deal flow in 2023.

“We believe that infrastructure continues to be relatively well placed due to its defensiveness, ability to protect against surges in inflation, relatively high yield and robust policy support globally,” said Macquarie in a 2024 outlook report, adding that the trends of decarbonization and digitalization “underpin the long-term growth of the asset class.”