To say that a lot has changed in the construction industry over the last two years would be an understatement on par with claiming that Steph Curry is the greatest three-point shooter in NBA history. Prior to March 2020 and the impacts of COVID-19, the United States had added jobs for 113 consecutive months, and unemployment had fallen to a 50-year low of 3.5%.
Now, nearly two years past the onset of a worldwide pandemic, contractors are back to building but dealing with the aftermath of shutdowns and labor and supply chain shortages. Residential and commercial construction projects are in full swing around the country, but uncertainty is the new normal, and the construction climate is truly unprecedented.
As we gain distance from what we hope is the worst of the pandemic, let’s probe the construction climate’s 2021 third and fourth quarters and look ahead to 2022, finding some bright spots along the way.
Q3 and Q4 2021 - Project Demand Increases, Labor and Materials Volatile
The third quarter of 2021 maintained much of the previous quarters’ trajectory. Residential construction continued to rise to the occasion, posting double-digit growth rates since the third quarter of 2020. The residential sector is greatly responsible for the economy’s and overall construction industry’s bouncebacks.
Non-residential construction showed some life in quarter three of 2021 but remained firmly in recovery mode. Deemed by Construction Executive in December 2020 as the weakest it has been in more than a decade, the commercial sector was, and is, climbing out of a deep hole. Commercial construction in Q3 of 2021 was down 1.3% from Q3 2020 and 10.7% below January 2020.
Through quarter three and into quarter four, the demand for projects across the commercial spectrum is steadily rising, but above-average increases in construction costs are hampering the progress. Through August, average final construction costs for a commercial project had increased 4.5 percent, and total growth by year-end is likely to surpass 6 percent, according to an outlook report from JLL. Average material prices were up 23% from the previous 12 months, which the report called “unprecedented in contemporary history.”
According to CoreLogic, 93% of contractors experienced at least one material shortage in quarter three, and 92% reported moderate to high levels of difficulty finding skilled workers. The volatility of the materials and labor market will continue to be a primary concern for contractors as the industry trudges into 2022.
One of the most significant bright spots of the second half of 2021 is the passing of the $1.2 trillion Infrastructure Investment and Jobs Act (IIJA). The five-year law stands to provide the largest increase in federal highway, bridge, and transit funding in more than six decades. Texas is slated to receive $31.2 billion, the second-most in the nation, and Illinois will receive $15.8 billion, the sixth-most. With funding allocated to transportation, power network improvements, broadband upgrades, waterline infrastructure, and more, IIJA will deliver a jolt to the building industry and overall economy.
Looking Ahead to 2022 - Residential Decline, Commercial Optimism
As the star of the construction industry over the last year and a half, residential construction appears to be waning as we head into 2022, but the non-residential sector is set to rebound.
According to ING, residential building will gradually decline over the next 18 months. The previous wave of home-buying is subsiding due to higher borrowing costs and high home prices; the demand for residential construction will subsequently tail off.
Non-residential construction, however, has reason for optimism. While still bandaging the wounds of the last 18 months and reeling from the labor and material shortages, commercial construction is beginning to turn the corner.
The number of new construction contracts and the resumption of projects put on hold during the height of COVID-19 and the following months are two primary indicators that things are trending north. ITR Economics projects a high single-digit growth rate in 2022, stating, “It’s not that we expect to see things turn around as soon as the calendar flips, but we are expecting recovery next year. We expect to see a slowing of the bleeding through the balance in this year, and then things really getting better next year.”
An Improved Outlook
Construction teams will continue to face difficult challenges resulting from the unimaginable events of the past two years. Supply chain and labor shortages aren’t going away overnight. It will take time for the industry to return to pre-pandemic levels. However, the construction industry train is on the tracks and headed in the right direction as the economy receives a boost, new contracts are put in place, and postponed projects pick back up.
CDO Group is up for all of the challenges. We continue to team with our construction partners to navigate these unprecedented times and are excited about all that is to come in 2022. To learn how we can streamline your construction, contact us!
December 14th, 2021 |