Despite nearly two years of difficulty caused by the COVID-19 pandemic, the construction industry is making a steady comeback. According to a recent construction outlook report from JLL, the construction industry continues to see heightened demand, though the industry’s labor shortage and materials shortage continue to drive up prices and cause major challenges.
“Earlier in 2020, there was a lot of fear and concern about how long it would take for the economy to recover, what that would look like and what that would mean for the construction industry long term. We’ve avoided by far the worst case scenarios, which is excellent,” Henry D’Esposito, who heads research for JLL, said.
According to the report, there continues to be a need for construction. Residential projects have seen the most demand, with a 7.6 percent increase from July 2020 to 2021. Nonresidential demand, however, has declined 9.5 percent in the past year, but still continues to see interest as the economy recovers.
Heightened demand has led to an increase in construction costs. According to JLL, final construction costs for a commercial project have increased 4.5 percent through August, with total cost growth expected to exceed 6 percent over the next year.
These increased costs are largely due to issues in finding labor as well as supply chain backlogs causing a shortage of building materials. According to the report, the lack of labor has been the largest issue, causing more project delays than the lack of supplies. This has caused an increase in labor wages, with JLL reporting a 4.6 percent increase in the past year alone. However, employment in the construction industry is beginning to pick up slightly, with the unemployment rate at 4.6 percent. In 2020, the industry’s unemployment rate was at 7.6 percent. From August 2020 to August 2021, total employment in the construction industry has gone from 7.2 million to 7.4 million across the U.S.
“The challenge has been on the actual supply factor, getting both material and labor that you need for a reasonable price on the job site has made it very hard for owners and contractors to actually operate in this environment despite the fact that there is demand,” D’Esposito said.
However, labor shortages in construction are not new and have been growing since the Great Recession. From 2015 to 2019, the number of open and unfilled jobs in construction across the U.S. increased from 150,000 to 300,000 openings, and by 2019, more than 80 percent of construction firms ranked the cost and lack of labor as a top concern, the report showed.
“The labor shortage unfortunately isn’t a pandemic issue, it is much more of a structural issue, and it’s not one that’s going away anytime soon so that’s something that will continue to play out. It may even worsen over the next three to five years, D’Esposito said.
However, the rise in construction material prices is new. According to the report, lumber ans steel prices are the highest they have been since the earliest available data in 1949. Other materials, such as aluminum, have not seen as much of a price increase since 1995 and plastic prices have not increased as fast as they have since 1976. Overall, average material prices for a commercial project have increased 23.1 percent year-over-year.
“The place where it is now is easily a step above anything we’ve seen in any past recovery cycle,” D’Esposito said.
While there is much uncertainty caused by the Delta variant, JLL predicts that supply chain issues are likely to continue into the next year, with total construction cost growth expected to increase 4 to 7 percent over the next 12 months. Individual construction materials are still expected to see a wide variety of price changes as supply chain issues are sorted out. Currently, JLL predicts an average 5 to 11 percent increase across all material costs.
“I would say the cost of materials, assuming things head back to normal over the next several years, that’s a situation that will mostly resolve itself. We’ll still end up with higher prices than normal, but a lot of issues have been caused by the pandemic. Whether that’s construction at the production level, either in the U.S. or internationally, where countries or states are closing factories or closing borders or that sort of thing,” D’Esposito said.
“It’s really a compound issue and then global shipping and logistics have been really backed up. So, as those supply chains stabilize I would expect that by 2022 that would become much less volatile.”