Construction Outlook: Continued Cost Increase
According to a construction outlook regarding the second half of 2021 and the first half of 2022, global provider of real estate and investment management services Jones Lang LaSalle (JLL) reports that costs are expected to continue increasing.
In its report, JLL forecasts that as materials and labor availability continue to constrain industry recovery, cost and labor conditions will worsen as nonresidential work volumes finally start to pick back up.
“At some point over the next 12 months, this trend is expected to stabilize and reverse itself, and nonresidential construction will return to month-over-month growth,” said Henry D’Esposito, JLL Research Manager, Construction. “Based on the latest data available for new project starts that have occurred this year, overall construction volume is expected to begin growing in the spring of 2022.”
Report Highlights
Having experienced an array of challenges over the last 18 months, in his report, D’Esposito points out that the construction industry has mostly recovered, referencing the industry’s strong demand for architectural work, new construction growth and employment nearing pre-pandemic levels.
In looking at the statistics, the JLL outlook reports that the construction unemployment rate in August was 4.6%, compared to 7.6% in 2020. However, while the numbers appear to be improving, lack of available labor has affected wage growth. The inability to meet increased wages or finding crews of skilled laborers has led to more project delays in 2021 than a lack of materials, and conditions are expected to worsen over the coming year.
In 2020, nearly 85% of project delays and cancellations were caused by either owner-led decisions or government-ordered construction shutdowns. While much of the shift was to be expected, it is notable that despite all of the headlines around problems with materials, both labor and materials created nearly the exact same level of delays, at 23% and 22%, respectively.
While the industry continues to overcome these challenges, two additional issues persist to loom over the industry:
With all this information in mind, D’Esposito put together a series of key forecasts for the remainder of the year into 2022. Referencing August numbers, he reports that while average final construction costs for a commercial project had increased 4.5%, total cost growth by year-end is likely to surpass 6%.
A similar level of cost escalation, in the range of 4-7%, is also expected into 2022.
Although unemployment rates are improving and wages are escalating, next year construction labor costs are expected to see continued growth at a similar elevated rate to the last six months, with wage increases in the 3-6% range.
Production challenges across the world and bottlenecks throughout supply chains are forecasted to experience delays. However, prices for some commodities, including metals, are likely to see a relief in price.
Material costs have the lowest confidence forecast due to the wide range of inputs and global supply chains bucketed into a single category. The net impact will be a wide range of price changes for individual materials, with an average increase across all materials in the 5-11% range expected.
Nonresidential construction rebound isn’t expected to occur until the spring or summer of 2022, due to a combination of uncertainties associated with the delta variant and typically slower winter months.
Overall, the fate of these industry aspects relies heavily on the outcome of public and government spending on infrastructure. Should an infrastructure bill pass in Congress soon, much of the spending, and therefore the cost impacts, will occur in 2-6 years after passage rather than right away.
A full copy of the report can be viewed here.
Supporting Reports
Earlier this year, the Associated Builders and Contractors found that construction input prices rose 0.6% in July, while nonresidential construction input prices increased 0.8% for the month. The data was collected using information released by the U.S. Bureau of Labor Statistics’ Producer Price Index.
When comparing year-over-year prices, ABC reported that construction input prices were 23.1% higher, while nonresidential construction input prices increased 23.4% over the same timeline.
Additionally, energy prices were reportedly continuing to experience substantial year-over-year price increases. The price of natural gas was up 146.7%, while crude petroleum and unprocessed energy materials prices were up 102.9% and 93.8%, respectively. Prices for steel mill products increased 10.8% for the month and were up 108.6% for the year.
Information released on the full producer price index is as follows (percentages are listed as one month and 12-month changes, respectfully):
Regarding employment, in September, the U.S. Department of Labor’s Bureau of Labor Statistics reported that construction employment witnessed an uptick, with firms hiring 22,000 new employees.
In addition, the report also revealed that construction’s jobless rate of 4.5% had slightly improved from the previous month’s 4.6% figure. Despite the increase in workers, however, the industry has yet to reach pre-pandemic levels and currently sits 201,000 employees below its February 2020 numbers.
Since the early stages of the pandemic, the Associated Builders and Contractors reports that the nonresidential construction industry has recovered 81.9% (912,000) of its jobs.
Nonresidential construction employment increased by 18,600 positions on net, with all three subcategories showing gains for September, while nonresidential specialty trade contractors added 11,400 jobs and nonresidential building and heavy and civil engineering employment rose by 4,100 and 3,100 positions, respectively.
In the residential sector—which includes building contractors, homebuilders and residential specialty trades—employment witnessed the addition of 3,600 workers over the course of the same month.
The Associated General Contractors of America weighed in on the report, noting that nonresidential construction had been affected by the widespread supply chain problems, which were causing owners already uncertain about future demand for commercial space to delay or even cancel some projects.
The August to September construction employment statistics are as follows:
In looking at the growth percentages year-over-year, the Construction sector has increased 2.6%, Nonresidential increased 1.3%, Residential increased 4.7% and Residential Building saw the biggest increase at 6.8%.
Although employment seemed to be on the rise in nonresidential construction, ABC reported that national nonresidential construction spending fell 0.4% in August. Nonresidential spending totaled $788.6 billion in August on a seasonally adjusted annualized basis, down 3.0% from August 2020.
On a monthly basis, the ABC reported that 10 of the 16 nonresidential subcategories witnessed a spending decline, with spending in transportation unchanged for the month. Private nonresidential spending was down 1.0%, while public nonresidential construction spending rose 0.5% in August.
More recently, last month, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development revealed that new residential construction witnessed a rebound.
According to the report, residential construction in August showed a seasonally adjusted annual rate of 1.62 million units, 17.4% above the pace of a year ago. The rebound is mostly attributed to a 21.6% jump in construction of apartment units, which was reported to have offset a 2.8% fall in single-family construction.
Another sign that residential construction could stay on the rise, the report suggests, is that applications for building permits saw a 6% increase, reaching a seasonally adjusted annual rate of 1.73 million units. Construction was also reported to be up across the nation, except in Western states.
In a separate survey conducted by the National Association of Home Builders and Wells Fargo, sentiment revealed a slight increase to 76 in September. Although the slight increase ends a three-month-long decrease, the index remains far below the record reading of 90 last November.
Other reports issued by the NAHB revealed an increase in residential remodeling. For the third quarter, NHAB’s Royal Building Products Remodeling Market Index posted a reading of 87, up five points from the third quarter in 2020.
Also in October, the NAHB called on President Biden to take the following actions to help address ongoing supply chain disruptions:
NAHB’s letter stated that these are “three key issues that continue to trouble our members, each extremely problematic but when combined, will severely hamper the ability to provide affordable housing and provide jobs to strengthen the economy.”
