Optimistic outlook for construction in coming months

Dodge Construction Network says a growing backlog is supporting positive momentum for construction starts. Photo: ablokhin/iStock / Getty Images Plus/Getty Images

Inflation woes are growing, supply chain challenges linger and workers remain in short supply.

Despite these headwinds, the construction industry is poised for a strong second half of the year and 2022 as a whole. During Dodge Construction Network’s midyear outlook, Richard Branch, chief economist at Dodge, provided 2022 projections for the three main construction sectors.

Branch expects the second quarter to deliver a strong rebound, forecasting 9 percent growth in total construction starts this year to slightly more than $1 trillion.

The gains, however, are dependent on several key elements.

“[We’re relying on] the pandemic [to shift] to an endemic and [that] each subsequent wave of the virus is less impactful to the economy and the health care system than the previous wave,” Branch says. “[And] that the war in Ukraine stays in Ukraine. By the time we’re at this point next year, [we hope] that major military tensions and that violence has abated significantly. Finally, that the Federal Reserve is able to walk a very thin, tight line between raising interest rates enough to combat inflation, while not forcing the U.S. into a recession. That last assumption is tenuous at best.”

Branch says a recession is more likely within the next two years. He says the possibility of a recession in the next 12 months is about 30 to 35 percent. Within the next 24 months, the possibility raises to about 45 percent.

Materials prices rose almost across in board in April compared to a year earlier, according to Dodge. Notably, structural metal is up 34.7 percent, builders hardware is up 16.4 percent, concrete is up 10.9 percent and cement is up 6.2 percent.

Branch

Branch notes that construction starts would be better if it weren’t for these price increases.

“Most plants that produce construction materials here in the United States are operating at capacities back where they were prior to the pandemic,” Branch says. “As long as we keep making baby-step progress on port and logistic issues like trucking, we should continue to see prices decelerate. It doesn’t mean prices will go down, but it means that inflation line will start to flatten out.”

Fortunately, reasonable optimism still surrounds construction starts for the rest of this year because of a growing construction backlog, according to Branch. More growth, however, is being offset by price increases and labor shortages.

“There are currently about 400,000 job openings in the construction industry, and it has been rising pretty steadily since the darkest days of the pandemic,” Branch says. “It’s essentially back to its pre-pandemic peak in late 2018, early 2019. The lack of people to get jobs done will certainly mute the ability for the construction sector to get jobs done aggressively for some time.”

He adds that office project starts are taking nine months longer to break ground versus before the pandemic. Branch says this issue is systemic throughout nonresidential building.

“[Of] all those projects that have entered or are entering the Dodge Momentum Index, we mostly likely won’t see those break ground until later this year in a positive case or, most likely, until early 2023,” he  says. “[It’s] just another sign that, in real terms, the recovery in construction starts in 2022, particularly in the nonresidential building side, will be muted.”

Residential construction

Residential construction starts slowed in the first half of 2022 after a strong 2021, according to Dodge.

Within the sector, Branch expects single-family construction starts to increase 2 percent to 1.1 million units and multifamily starts to increase 4 percent to 707,000 units. These total anticipated starts (1.8 million) would be up 3 percent from 2021 (1.7 million).

“Traditionally, what happens is what’s bad for the single-family market is good for the multifamily market,” Branch says. “Multifamily starts have taken off because of those affordability and supply issues on the single-family side.”

Total residential starts increased 17 percent from 2020 to 2021 and 8 percent from 2019 to 2020. Branch says the predominant types of residential construction in 2022 will differ from the last few years.

“The kind of construction that we saw in 2020 and 2021 were just a little bit different from what we saw prior to the pandemic,” Branch says. “Leading up to the pandemic, all that growth in multifamily construction was predicated on high-end, high-rise construction in dense, urban areas.

“The share of those types of buildings has fallen, in favor of projects in the four- to six-story range and, in terms of hard construction costs, in the $25 to $100 million range,” he adds. “We think that trend continues in terms of low-rise and medium-level building costs in the multifamily market. Demand is still very high.”

As residential construction moves away from urban centers and into more rural areas, Branch says a positive spin-off effect is set to hit nonresidential construction.

“From groundbreaking of single-family to groundbreaking of retail is about 18 months,” he says. “From groundbreaking of single-family to groundbreaking of education projects and health care projects is about 24 months. There is a significant spin-off effect that is about to hit the nonresidential sector from all those single-family starts over the last couple of years.”

« Prev Page 1 2 Next Page »