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Construction Outlook

Some Assembly Required

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MCN Editor Beth Gainer Society is clamoring for certain facilities to be built, while other sectors have grown out of favor – at least for now. 

The ancient Greek philosopher Heraclitus noted the only constant in life is change. And the construction industry is finding itself facing an ever-changing landscape. While residential housing and educational institutions are currently slow, other kinds of construction are now hot-ticket items.  

“One near-term shift has been an explosion in the construction of semiconductor facilities, given supply chain concerns,” says Scott Hazelton, director, Construction at S&P Global Market Intelligence. Many business sectors such as automotive have been craving these elusive chips. However, construction plans are in the works to produce semiconductors here at home. 

Ken Simonson, chief economist for The Associated General Contractors of America, Inc., Arlington, Va., says the number of huge semiconductor projects have tripled from March 2021 to March 2022 because Intel, Taiwan Semiconductor Manufacturing Company and Texas Instruments have been building immense plants. “That’s the single biggest change that is driving the increase, not just in manufacturing, but really all of nonresidential,” he says, adding that several steel plants have been announced or broken ground, along with an aluminum plant in Mobile, Ala.

A sea change in the focus of commercial construction is taking place – warehousing space for manufacturing rather than for retail purposes. The onset of the pandemic brought a surge in online shopping, causing a demand for retail distribution centers. “Warehouse construction went gangbusters for a while,” says Alex Carrick, chief economist for ConstructConnect, headquartered in Cincinnati. “Amazon and some of the other big suppliers really had a field day in big distribution and warehouse projects. Some of them are easing back a bit now.” 

Companies are building “$10 billion, $20 billion computer chip plants,” says Carrick, adding that Intel is building factories in Arizona and Ohio. A tsunami of megaprojects – he defines each project as costing approximately $1 billion or more – is dominating the nonresidential construction landscape. “In terms of construction, all kinds of big projects are suddenly coming up. This is an era of megaprojects that we haven’t seen in a decade or so,” he says. 

While semiconductor manufacturing is a major catalyst to building plants, other sectors are experiencing construction growth as well. “Construction of industrial facilities is the strongest segment, but the growth is largely coming from utilities, oil and gas processing, and semiconductors,” says Hazelton. “Within the next year or so, we expect construction of transportation equipment manufacturing and communications facilities to pick up.” He says infrastructure spending offers the strongest growth this year, largely from the transportation sector and water and sewer systems.  

Other strong construction segments are those that support green initiatives. Hazelton states that gas-fueled power plants have given way to wind- and solar-based plants, “which has also necessitated construction of new transmission structures.” Carrick agrees, noting that besides charging stations, investments in power distribution systems and sustainable power plants like wind and solar will grow. 

 “We’re starting to see offshore wind, and that requires specialized manufacturing; huge battery charging stations that are expected in the next several years require new manufacturing capacity,” Simonson says, adding that more automotive and automotive battery plants are being built.

And with the Biden administration’s sustainability goals, structures that house the manufacturing of electric vehicles and the batteries themselves are on trend. Carrick says the automobile manufacturers are spending billions of dollars for EV plants. He adds the battery producers include well-known car manufacturers of the likes of Ford and Chrysler, but other companies, such as Panasonic, want a piece of the proverbial EV pie. And other businesses that will manufacture EV batteries are being built. “There’s a big company out of China that’s looking to build a $5 billion plant in North America,” he says.

And single medical facilities are also growing exponentially. “We’ve already seen growth of standalone urgent care facilities and outpatient surgical centers that are not connected to a hospital, such as rehabilitation and hospice facilities,” says Simonson. He believes these construction numbers will go up, even though he acknowledges that market conditions can be unpredictable. 

Family Ties
In the residential arena, the pandemic sent people in droves to the suburbs and rural communities, as individuals perceived these areas as more conducive to health than urban living. This helped increase single-family construction, but, according to Carrick, that trend is reversing. Multifamily construction is now in more demand than single-family construction, he says, “and that’s likely to continue for a long time because people really do gravitate to cities.” 

Simonson also acknowledges that single-family construction is down. “Single-family [construction] was up through March, compared to the first quarter of last year, but this category is starting to show signs of a sharp downturn,” he says. During a week in May, for example, “the Census Bureau reported that single-family sales have dropped quite sharply, and the number of completed, unsold homes has jumped the highest level since before the so-called Great Recession,” he says. “I do think we’re going to see contraction in single-family home building.” 

He adds that multifamily construction is more popular these days because many people are deciding this isn’t a good time to buy a house or they have been priced out by the competition by the rising monthly mortgage rates. 
Part of what factors into the downward trend for the residential sector is increased prices of production components, according to Anirban Basu during a recent webinar titled Construction Executive’s 2022 Q1 Construction Economic Update and Forecast.  Basu is the chief economist of the Associated Builders and Contractors, as well as chairman and CEO of Sage Policy Group Inc., an economic and policy consulting firm in Baltimore. 

Basu noted not enough residential construction is taking place, partly due to the high price of building materials: “What is constraining home builders in terms of supplying to unmet demand – softwood lumber, concrete slab, gypsum, copper, glass, garage doors – is anything that goes into the construction of new homes that has become more expensive.” 

Simonson sees this trend as well. “The takeaway here is that all of the materials that contractors are buying have gone up more than their bid price,” he says. Basu pointed out that many home builders cannot supply their buyers at a price point comfortable for would-be purchasers, “so that truncates the market. The demand is there, but the supply is not. We don’t have enough housing.” 

Another factor impeding residential construction is the rapid rise of mortgage rates that dissuade potential homeowners from entering the market. With inflation soaring, more individuals are seeking multifamily units. “The inflation story is real; we haven’t seen inflation like this in decades,” said Basu, adding that supply chain issues contribute even more to this problem. “Those of us who are wedded to the U.S. construction industry know that these supply chain issues are not going away quickly. And that, of course, is inflationary.” Yet Hazelton believes the supply chain will recover somewhat in 2023. “By that point, it is anticipated that many of the supply chain constraints will have dissipated,” he says.

The Downside   
Construction for educational facilities has decreased dramatically. “Education has been struggling because the number of births is way down,” Carrick says, adding that the country has an aging population. “The U.S. population growth has slowed. It’s down around 0.4 percent per year, and that takes away a bit from construction, and certainly from residential construction,” he says. Simonson concurs: “The number of high school seniors keeps dwindling as the baby bust works its way through the school grades.” 
In addition, the population of the United States is shrinking, partly “because the number of immigrants arriving in the United States is way down, and young immigrant families provide children,” says Carrick. Conversely, in Canada, population growth is 1 percent to 1.2 percent a year, mostly due to immigration, he says. Enrollment is also down in higher education because of online classes and the decrease in the number of foreign students seeking an education in the U.S. “This happened in the pandemic. The welcome mat for foreign students was taken away,” he says.

Simonson agrees. “I think really the impetus now is that foreign students have generally not come back, either because they can’t get visas, the consulates are swamped or students are seeking less expensive alternatives to U.S. universities,” he says. He also attributes students’ hesitation to go to institutions of higher learning because of their fear of going into debt.

In addition to the decline in educational facilities, retail, hotel and office spaces are all on the decline. Weaknesses in construction for retail, hospitality and urban office purposes abound, according to Philip Bell, president of Steel Manufacturers Association, Washington, D.C.  Basu said during the webinar that office vacancies exist in large numbers, thanks to people working remotely. “Workers don’t want to come back. As leases come up, you’re going to see a lot more vacancies. It’s not a great market for the construction of new office buildings, nor is it a great market for the construction of shopping centers,” he says, adding that data centers and fulfillment centers are in demand. 

Carrick is curious to see whether demand for new office space is going to return to its former status. “Office buildings will be built because developers will see opportunities in putting out projects that will have better features than existed before the pandemic,” he says. Such projects to attract tenants include enhancing air flow and cleanliness. Yet he acknowledges a plethora of vacant office space exists, a condition he predicts will last for some time. 

In fact, while building new office spaces is down, renovation for existing office buildings is up. “Perhaps the biggest shift in construction is a transition from new construction to renovation,” says Hazelton. Office space is being re-envisioned to accommodate more flexible in-office time while also improving on air quality and sustainability fronts. Retailers and restaurants saw high rates of business failure from COVID, and new management taking over will need to renovate spaces. 

Labor Shortages
As with every other industry, labor shortages in construction are plentiful. Basu discussed the large number of Baby Boomers who were committed to the construction industry but who retired early due to the pandemic, adding that the Baby Boomer generation often comprises the finest construction workers with experience and know-how. However, because so many have retired or are retiring, the younger generation must fill the available job openings. 

Bell agrees a host of construction job openings remain unfilled, noting a recent Bureau of Labor Statistics report listing more than 350,000 construction jobs open. These jobs are difficult to fill for a number of reasons, including the Great Resignation and a younger generation not recognizing the appeal of construction and manufacturing. He believes better training programs and apprenticeships could fill that void.
The tight labor market leads to bottlenecks in the supply chain, causing project delays, Simonson says. Additionally, rising prices may lead to a redesign, delay or postponement of the bid process. 

Yet an unexpected reversal of the Great Resignation may be right around the corner. “One benefit of the current inflation dilemma is that individuals who had thought they could comfortably retire are finding that they need to supplement their income,” says Hazelton. “Combined with higher wages, that is drawing some individuals back into the labor force. To the degree they have contacts with recently retired skilled workers, contractors are bringing back some workers on specific jobs.”

Overall, the Infrastructure Investment and Jobs Act will create construction opportunities for the metals industry. The trillion-dollar package was passed in November, with $500 billion going to steel-intensive projects such as roads, airports, seaports and bridge repair. Bell says the package should add about 40 to 45 million tons of incremental steel demand over the next five years.

Bell believes strongly in the Buy American provisions tacked on to the package. “We should be using steel and manufactured products that are made by Americans for Americans.” He notes domestic steel is the cleanest in the world, with the lowest carbon intensity of any major steel producer. “Anyone who is truly concerned about the environment and having a lower carbon future should want steel that is sourced in America.” 

Bell believes American steel makers have enough capacity to produce all this necessary steel domestically. “There are over 15 million tons of new capacity that is either announced or coming online between now and 2023, and we’re ready. Rebar producers are ready; structural steel producers are ready, and these are very exciting times. I think the outlook for construction is relatively positive, and I think we’re in a very good place.” 

Office building projects such as this one are rare in the current nonresidential market. 
(Photo by Dan Markham)