Rising Costs, Shifting Outlooks Ahead For Construction Industry

The construction industry is poised for continued growth despite ongoing supply chain challenges, materials shortages and a dearth of skilled labor.

A new report from JLL says “major markers of activity remain in growth or strong territory” despite recession fears, noting that increasing construction starts and a strong pipeline were hallmarks of the first half of 2022. Residential construction fell from its historical peak in 2021 but continues on an expansion route, and nonresidential construction has returned to nominal growth. Nonbuilding construction is expected to increase significantly.

However, labor shortages continued “with little change.”  As of June 2022, construction unemployment stood at 3.7%, down 3.4% since January and down 1.8% over pre-pandemic numbers.   JLL expects the labor pipeline to increasingly lag demand.

“The pullback is likely to continue as firms stabilize backlogs and plan for difficult times. As confidence and expectations adjust, more contractors are expected to stay on their current employment trajectories and to cease aggressive hiring,” the report notes. “However, according to sentiment surveys, few contractors are expecting to reduce their labor force, with the majority intended to maintain current levels.”

Costs continued to go up  with wages increasing by 2.4% since January and materials ticking up nearly 10% in the same period. Wages have increased by 10.5% since before the pandemic, while materials have gone up by a staggering 42.5%.  All told, total costs are now nearly 24% higher than they were pre-COVID.

Residential construction spending and starts were down 1.9% in June from January figures, while nonresidential building spending  and starts were down just higher than 6%.

Total construction spending fell roughly 1.1% on a seasonally adjusted, annualized basis in June “and the trajectories of individual sectors have shifted rapidly in a mixed pattern,” according to JLL. “Notably, public sectors for infrastructure saw continued growth and several private sectors stabilized above historic rates, albeit with moderately shrinking backlogs. Residential and other sectors began to pullback modestly from peaks earlier in the year.”

Inflation is largely responsible for much of the increased spending, according to JLL, who predicts nonresidential construction will end the year even sd residential spending is in growth territory already.

“The nonresidential sector is expected to see year-over-year growth return to historical levels in 2024, as disruptions are likely to persist in to 2023. IIJA funding distribution will be limited in the next year,” the report notes. Price volatility will continue to pose a major challenge for materials: while the prices of lumber, wood, plywood and paper are decreasing, the prices for concrete plastics, thermal protection, glass, finishes, energy equipment, and furnishings are ticking up.

Despite that, JLL analysts maintain confidence in the sector.

“With talk of a recession, shrinking margins, and reduced confidence, activity will likely see a further pullback, however, with significant capital investment flowing through existing projects and the IIJA, the market is likely to see continued growth through these challenges and beyond,” JLL’s Andrew Volz says.