As Headwinds Linger, The Construction Sector’s Recovery Is Slowing

The U.S. construction sector enjoyed a robust period of recovery in the spring months of 2021, buoyed by positive economic trends and growing industry confidence.

It was a welcome change from 2020, which saw many projects stall or cancel.

But experts say momentum has slowed over the past few months, reflecting the ongoing pressures of elevated material costs, extended material delivery delays and a labor shortage, as well as a reduction in demand for some types of real estate.

While there’s still a healthy pipeline of nonresidential projects starting or recommencing planning and design work, fewer projects are actually breaking ground — a trend that may continue through the end of 2021 and into the first half of 2022.

“I think that the drag has certainly kicked into gear here, as the sector faces a shortfall of labor, shortfall of material and, of course, higher prices in combination with still fairly subdued levels of demand,” Dodge Data & Analytics Chief Economist Richard Branch said.

Groundbreaking activity began to ramp up in early 2021 and peaked around May. However, since then, the number of nonresidential construction starts has trended lower. 

Dodge Data & Analytics, which tracks projects from their inception through to completion, found that nonresidential building construction starts fell to a seasonally adjusted annual rate of $244.9B in August, down 13% from the prior month. For the 12 months ending August 2021, nonresidential building starts were down 8% from the prior year.

The Dodge Momentum Index, which measures the volume of nonresidential projects entering the earliest planning stages, also fell by 3% in August. The decline was the third consecutive monthly drop in the index, a reversal of the activity that occurred during the spring months.

The firm attributed the ongoing drop to rising material prices, in combination with a shortage of labor and a rising number of new Covid-19 cases spurred by the delta variant.

Steel prices have been climbing all year, with current spot market prices for sheet steel hovering at about four times as much as during the summer of 2020. Prices for other metals like copper, nickel and aluminum, as well as petrochemicals used to make plastics, resins and other construction materials have all seen substantial increases this year.

The good news is that lumber has dramatically come down in price since reaching all-time highs in May, as consumers stopped buying wood and sawmills ramped up their production.

Dodge did note that there were some pockets of strength in August, as more data center, education and warehouse projects moved into planning compared to the prior month. And overall, the Dodge Momentum Index in August was still 19% higher than a year ago, reflecting the challenging conditions of 2020. Institutional planning was up 17%, while commercial planning was 20% higher than last year.

ConstructConnect Chief Economist Alex Carrick said that commercial real estate construction tends to lag other types of construction during a typical cyclical recovery, but the conditions created by the pandemic defy historical norms.

Carrick noted that retail construction demand has been hampered by the boom in e-commerce and online shopping, while many office users are shifting to a remote or hybrid model. Travel has also been impacted, reducing demand for hotel and motel expansions.

“I think that the bigger influence on the marketplace is demand right now,” Carrick said. “I don't think that the supply shortages are necessarily as inhibiting as all that.” 

ConstructConnect also tracks construction projects. The firm’s September 2021 construction industry snapshot report found that the January to August period in 2021 was down 11% compared with the same period in 2020. The January to August period in 2020 was 26% lower than the same period in 2019.

Not all nonresidential assets have performed equally in 2021. The industrial sector has become an investor favorite, thanks to the surge in online shopping and e-commerce activity during the pandemic. Dodge data found that manufacturing construction starts between January and August were up 33% from the same period in 2020.

Despite the flurry of construction activity this year, many existing projects around the country are still facing substantial delays. Some have slowed due to construction material delivery delays and labor shortages, but others have undergone radical design changes, prompted by major shifts in demand.

The $200M Central Market development in Dallas was originally slated to have a major office and hotel component. After a substantial redesign in the wake of the pandemic, the project will now feature almost double the planned number of multifamily units, and it is expected to break ground in 2022, according to research from ConstructConnect. 

The $200M Jacksonville International Airport Concourse B in Jacksonville, Florida, has also continued to experience delays. Design work on the airport’s third terminal was paused in 2020 when the pandemic hit, but it received approval to move forward in late July. ConstructConnect said that design work will take about a year, and construction will require two years. 

The American Institute of Architects conducts a monthly survey on architecture firm billings, which it uses to generate its Architecture Billings Index. The latest ABI showed that revenue from nonresidential projects slowed in June and July, after peaking in May during the busy spring period.

Survey results indicated that billings in July remained particularly robust at architecture firms with a commercial/industrial specialization, followed by firms with institutional and multifamily residential specializations. 

The AIA said that the growth rate being reported now is more typical for a post-recession recovery phase, while the exceptionally high numbers earlier in the year were due to the extreme decline in 2020 and subsequent strong rebound in early 2021. 

“What we’re hearing is mostly anecdotal at this time. Some firms are concerned that the lingering impact of the delta variant may start to slow or erase the recovery, but no one is actually seeing that yet,” AIA Director of Market & Economic Research Jennifer Riskus said in an email. 

Skanska USA Building Chief Strategy Officer Anita Woolley Nelson said that the biggest challenges for her firm’s projects have been regulatory suspensions and slowdowns, which vary according to the city as well as building type. The sector has also been grappling with a labor shortage that was a problem even before the pandemic. 

Those issues were acutely felt during 2020, but the vaccine rollout and other reopening measures led to an industry-wide acceleration in construction planning and groundbreakings in the first half of 2021 — before the delta variant began to erode confidence in the sector. 

“I think there was quite a bullish mentality in the late spring of 2021 about the industry from everyone, and I think it's definitely softened. But I don't see it being a cliff,” Nelson said.

Nelson said that Skanska already had a strategic supply chain group prior to the pandemic, and existing industry relationships have helped keep projects on track. Generally, the earlier that Skanska is brought in to work with a client and designer, the easier it is to plan for alternatives that can mitigate extreme costs or delays.

“Those projects that were already under construction during the cost spikes were not as impacted, or at all impacted. And it's those that are planning now that are really having to navigate that,” Nelson added.

The Associated General Contractors of America said that construction employment in August remained below levels achieved in February 2020, right before the pandemic. The organization found that construction employment slipped or stagnated from July to August across half the country, as Covid-19 affected workers and caused some owners to delay projects.

AGC’s latest workforce survey also found that 88% of respondents reported projects that have experienced delays due to a shortage of materials or delivery delays. Ninety-three percent said material prices have also affected their projects, and more than a third reported being unable to pass those costs onto the project owners.

As the industry looks ahead to the fourth quarter and early 2022, there are expectations conditions will be less busy than the spring of 2021. That's when it's hoped global supply chains will normalize and material prices will return to more manageable levels. But for some asset types, such as office, demand will remain weak until a clear picture emerges of what future usage will look like.

Branch said that he expects the first half of 2022 to remain challenging in terms of construction material prices, which will dampen activity. However, as factories return to normal levels of production and logistics bottlenecks at U.S. ports ease, inflationary pressures will ease, which should sustain higher demand for construction activity in the second half of 2022.

Carrick said that from a demand perspective, he sees nonresidential projects gaining more strength in 2022, while residential construction activity will slow.

“I think 2021 will continue to be a tough year for construction," he said. "I think by 2022, the strength in residential will start to give way and we'll start to see a handing on of the baton to nonresidential work."