Economic Growth Continues into 2022
Despite ongoing challenges on the supply and labor side, construction is poised for a robust, well-rounded recovery
Robust consumer spending and low interest rates will contribute to continued economic growth in 2022, according to Richard Branch, chief economist, Dodge Data & Analytics, during the Dodge 83rd annual outlook conference in early November.
Branch explained the Dodge Momentum Index ticked up “significantly” since the beginning of 2021 and, perhaps even more importantly, has become more well-balanced toward most types of public and private building projects. The number of projects in bidding also suggests market resilience; the count of general projects is ahead of this time in 2020 and a little bit behind 2019 levels.
“We feel pretty positive about construction starts next year, but cognizant of the many challenges that face the sector,” Branch says.
Branch cited prices, people and productivity as the three main challenges. “Regardless of these challenges, we also need to be aware that within them there are opportunities for you to get a step above the competition,” he says.
Material inflation is in what Branch describes as “uncharted waters” and widespread across most materials in the construction space. Although plants are slowly getting back to normal, trucking and port issues abound. “Supply delays are mounting,” says Branch. “Inflation as it relates to materials will probably last into mid-next year before we start to see prices pull back. But even as they pull back in the back half of 2022, prices should remain fairly high at least through the end of next year.”
“Historically, the cure for high prices has been high prices,” Cris deRitis, deputy chief economist for Moody’s Analytics, adds. “We’ll see more business expanding and adding more supply to alleviate supply chain effects, and that should lead to more goods being available. We’ll also see more people entering market. So, some of the wage inflation should subside as well.”
DeRitis expects hotter inflation to continue for one or two quarters before moderating to a 2.25 percent rate.
“The ability to do more with less is what will be a critical path forward in terms of increasing your profit margins,” says Branch. Productivity growth, however, is difficult to come by, he says, with the multifamily space being the one exception. Branch urges companies to consider productivity growth beyond just on the jobsite.
DeRitis also says a silver lining to the pandemic has been productivity growth. “Businesses invested more in IT, machine learning, AI and remote work,” he says. “Those are now bearing the fruit in terms of enhanced productivity. Right now it’s about a two percent year-over-year growth rate, compared to a one percent growth rate before the pandemic.”
Despite having just under 350,000 unfilled positions in the construction sector, a figure Branch says has been on the rise since the darkest months of the pandemic, labor shortages aren’t a new phenomenon for the industry. “It’s not temporary,” he cautions. “It’s systemic and could certainly mute construction starts and activity in 2022.”
DeRitis explained how there are currently 10.4 million job openings but only 7.7 million people unemployed. “We’re in this strange time period where we have more job openings than people unemployed, which suggests the labor market has more opportunity today for folks looking for work.” He cites three reasons for this. One, there’s an ongoing pandemic and people are still getting sick. Two, parents are struggling with childcare and women aren’t returning to the workforce as quickly as men are. And, three, boomers retired early, which he says is a structural change whereas the first two reasons are cyclical.
These challenges equate to projects taking nine months longer to break ground than prior to February 2020. “Modest growth is coming in 2022,” Branch says. “But if not for the challenges and shortages, construction activity would be much stronger than it currently is.”
Residential to ease back, but stay strong
The residential sector has been on “absolute fire,” Branch says, and will likely ease back next year. The sector grew 14 percent in 2020, with much of that growth backloaded in the second half of the year. Branch expects a comparable growth rate in 2021. “Growth in the first half of 2021 was strong, but as we got toward the third quarter, single-family eroded pretty quickly,” he says. “We’re about 10 to 11 percent below where we were at the end of 2020.” Even so, this is the first time since 2006 that the single-family market will exceed 1 million units.
Lower mortgage rates and the flexibility remote work affords should be drivers for this market, says Branch, but cost is affecting the market. In fact, he posits, single-family may be more exposed to high material costs than larger projects. Housing construction is also strongest in smaller, suburban areas.
Branch expects 2022 to bring about a more tepid and sustainable pace. Home sales may have slowed from the “torrid” pace earlier this year as affordability has weakened, “but we’re not seeing a cataclysmic erosion.” In fact, every state is positive on single-family construction; none are underwater.
DeRitis agrees that housing will slow down but stay strong. Housing prices increased 20 percent year-over-year, which is an even faster rate than the housing boom and bust in 2008-09. “Expect home prices to slow, but we won’t have an actual crash,” he predicts.
“Residential housing will remain robust for the next five years. That’ll keep housing prices from correcting substantially.”
A strong multifamily recovery is also on tap with strength not seen since the mid-1980s. Whereas dense, high-rise multifamily buildings ruled the sector in 2018-19, most multifamily buildings today are four to six stories. The number of units per project have also decreased, with buildings with four to ten units seeing the greatest strength.
Total construction starts will rise 6 percent in 2022, which is higher than 2019 levels. Much of that growth, however, is skewed toward the residential sector. Taking residential out of consideration, 2022 would be 3 to 4 percent shy of 2019 on a nominal dollar basis, says Branch. “It’s a long road back to full recovery for the construction space,” he says.
4 considerations for 2022
Branch concluded with four considerations for the new year:
Pricing and shortages will remain an issue.
Shifting demographics and worker shortages will remain an issue. Labor shortages are systemic and will continue beyond 2022.
Productivity gains will equal profitability. Invest in technologies and new processes.
Consider market shifts and design changes. For example, should you market into different sectors or geographies, or look into R&R versus new construction? “Make sure you’re flexible enough to stay ahead of changes as they evolve,” he says.