European Construction Sector Faces Challenges Amid Shifting Demand Dynamics
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No drop in the non-residential sector
In the non-residential sector (excluding offices) there has been no decline in issued permits. The building permits in square meters even increased slightly in the first quarter of 2023 compared to the same period both one and two years earlier. This is mainly due to a rise in e-commerce which has increased the demand for new logistics centres and consequently the number of issued permits. Public spending on buildings for education and health also stabilised. However, the slowdown of economic growth, higher interest rates and both geopolitical and economic uncertainty all contribute to making companies in other sectors more hesitant toward investment in new premises. All in all, the amount of issued permits remains more or less stable.
Remaining uncertainty in the office market
The office building sector is seeing a slight decline in issued permits. Uncertainty still remains over the future of working from home, and that makes current investment in new offices risky. Vacancy rates are also increasing in many European cities. Office workers favour working from home, but an increasing number of companies are now demanding that employees return to the office for at least a few days out of the week. These requirements are also being seen in the US from companies such as Zoom, Amazon, JP Morgan and Disney.
In the long term, the question now remains to what extent the trend of working from home will be permanent, as well as how much demand there will be for office space. The increasing trend of hybrid working could result in rising demand for the refurbishment of offices in order to make them suitable for a new way of working, as well as for new office buildings that meet this need.
Stable volume of issued non-residential building permits
New non-residential building permits in m2 (index 2018 Q1 = 100, Seasonally adjusted)
Number of EU contractor bankruptcies picks up speed
The number of insolvencies of contractors is steadily increasing and has almost reached pre-Covid levels in many EU countries. In Belgium, it surpassed this level in the second quarter of 2023. Higher building material costs and declining demand are the leading causes. Bankruptcies in Spain have followed another path. Throughout the Covid-19 pandemic, more Spanish building companies had to close their doors, likely as a result of the contraction of construction volumes in Spain remaining relatively high from 2020 to 2022.
In September 2022, the new Spanish law on insolvency was finally passed, which also gave creditors more power. Restructuring processes that often got stuck in court in the past can therefore be handled faster and this has resulted in more bankruptcies.
A low number of bankruptcies, except for Spain
Development EU bankruptcies construction sector, (index 2019 Q3 =100, SA)
