During the first half of 2022, non-residential construction spending returned to “nominal growth”. But JLL, in its construction outlook for the second half of the year, expects non-residential spending to remain flat, on an inflation-adjusted basis, and year-on-year growth to return to lows. historic levels in 2024, “as disruptions are likely to persist into 2023.”
These disruptions include supply chain issues that have contributed to building material costs rising 42.5% from pre-pandemic levels. Labor costs related to labor shortages were 10.5% higher than they were in March 2020.
“Labour availability remains a deep structural challenge for the industry and will be a bigger issue as construction demand persists and changes direction,” observes JLL. “Estimates of future needs based on this upcoming spending show the gap will only widen, with particular need for non-construction and public workers.”
Too much work, too few workers
Job postings for the construction workforce have been consistently high, even as hiring has increased above pre-pandemic rates and departures have fallen to extremely low levels. In June 2022 unemployment fell to 3.7%, just 0.1% above the national average and job vacancies eventually receded, dropping from 109,000 to 330,000. As such, the decline is expected to continue as companies stabilize arrears and anticipate difficult times.
Wage growth in the first half of 2022 was also modest, largely outpaced by inflation. Construction industry workers have actually suffered real wage losses of around 1.9% since the start of the pandemic. This gap widened in the first half of 2022 for construction workers.
“The setback is unlikely to result in any significant reduction in demand pressure in the construction labor market, as the current volume and range of work is sufficient to keep demand high over the next few months. years,” says JLL, especially once spending on the Infrastructure Investment and Jobs Act (IIJA) is in full swing.
The industry’s dilemma, however, is that it does not have the capacity to fill all of the construction jobs expected to be added over the next few years. Based on current projections of incoming IIJA funds increasing government spending by 10% or more per year from 2024, the increased need for construction jobs equates to about 350,000 jobs from this spending alone, although above the capacity identified in the historical record.
The biggest impacts could be continued wage pressure and potential project delays. JLL expects the favorable labor situation to accelerate wage growth in the second half of the year, continuing to put pressure on margins. While outright cancellations have remained limited, delays due to labor shortages are an almost universal experience “with no relief in sight”.
Uneven price stability
JLL’s outlook is mixed on the availability and cost of building materials. Steel and lumber, once the stars of price inflation, have stabilized, thanks in part to domestic steel construction that is 30% higher than pre-pandemic levels. However, “volatility has not declined uniformly” across construction products.
This is especially true of energy-related materials that were impacted by Russia’s invasion of Ukraine, whose damage to its built environment is estimated at $750 billion and growing. Cement, glass manufacturing and semiconductors for equipment and machinery ‘are among the largest price increases’ as concrete and glass rely disproportionately on a few producers with extremely high energy consumption for production. Moreover, the 10% increase in the national production of cement and concrete has not yet stabilized prices.
As a result, JLL has revised its previous outlook and now expects material prices to rise between 12% and 18% this year. “Uncertainty is still widespread and, as current cost trends demonstrate, new issues are likely to emerge that disrupt supply chains and prices in the near term.”
An active industry
From January to May 2022, the seasonally adjusted annual rate of total construction spending increased at a monthly rate of 0.63%, higher than the growth rate observed in 2021. June, however, fell by one percentage point, and any increases in the first half of the year were due to inflation.
On the bright side, JLL expects construction activity to remain healthy, notwithstanding global economic concerns. In the United States, the Northeast has weakened with many months of contraction in the first half of 2022, while the West has accelerated the pace of billing and order backlog growth in recent months. The South and Midwest have maintained billing growth that is beginning to slow but will nonetheless create a sizable pipeline of construction activity in the regions.