Capstone Partners, a leading middle-market investment banking firm, released its May 2024 Construction Services Sector Update, reporting 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, participants in the construction services sector have shifted operations to capture alternate revenue opportunities in other 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 2024 so far. Notably, merger and acquisition activity in the sector accelerated in late 2023 and into 2024, with 260 transactions announced or closed on the year to date, a 65.6 percent increase year-over-year. Strong backlogs, resilient construction spending and government funding from the Infrastructure Investment and Jobs Act and the Inflation Reduction Act 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 for the year to date, with deal volumes up 76.4 percent YOY. Additionally, demand for Environmental, Social and Governance 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 and engineering services segment has showcased elevated activity, comprising 42.7 percent of total sector transactions on the year to date – 34.2 percent engineering and 8.5 percent architecture firms. Increased new project inquiries, strong backlogs and elevated design contract values are expected to further support M&A activity in the segment for the foreseeable future.

“M&A activity in the construction services industry continues to thrive as investors focus on the favorable long-term trends and the possibility of lower interest rates,” said Darin Good, managing director and head of building products and construction services investment banking for Capstone, who was the lead contributor in the newly released report.

Also included in the report:

  • Analysis on how an elevated interest-rate environment has created volatility in the residential construction market.
  • A breakdown of M&A activity in the sector for the year to date, with a focus on private equity buyers.
  • Insights into architecture and engineering firms’ 12-month projections and segment M&A activity, with commentary on select transactions.

To access the full report, click here.