As Q2 of 2023 gets under way, news of a rapidly deteriorating housing market, mortgage market, and banking sector seems non-stop. But one segment of the economy actually seems to be doing better than it was at this time last year. What segment might that be, you ask? According to the U.S. Census Bureau, spending on nonresidential construction (i.e. industrial plants, infrastructure, and other commercial buildings) totaled $982 billion in February 2023, nearly 17% higher than a year earlier and consistent with January spending.
The construction industry encompasses far more than just houses, apartments and commercial offices – all of which have been getting negative press of late. The sector also includes nonresidential structures such as commercial buildings, factories, warehouses, and other infrastructure. All told, the massive industry provides lots of jobs for the US economy and was instrumental in the country’s economic recovery from the 2008 recession and the COVID-19 pandemic, contributing over $1.4 trillion to the US economy in 2021. This represents almost 7% of the country’s GDP; not bad!
Construction of nonresidential real estate has experienced a significant surge in new development in recent years. In fact, the sector’s spending in February 2023 was up by 17% over the prior year, resulting in a corresponding uptick in nonresidential construction activities. And the timing couldn’t be better, given the weakening demand in the home construction sector. What’s more, contractors claim that the increased spending on these nonresidential construction projects remains strong, even with the rising borrowing costs that typically drive up the cost of construction financing.
So, what’s fueling this growth? It appears that the rising demand for nonresidential construction can be attributed to a variety of different factors, including new plants for electric vehicles, warehouses for e-commerce, and manufacturers deciding to do more work in the US after global supply chains broke down during the pandemic. And demand shows no sign of slowing as increased federal spending on public-works projects, defense, and production of electric-vehicle batteries and semiconductor chips is expected to keep construction activity elevated into next year.
But not all is sunshine and roses in the sector. The truth is that despite this surge, contractors are overwhelmed with various challenges, including rising costs and labor shortages. In the case of certain input materials – such as cement, asphalt, flat glass, and drywall sheeting – prices have actually increased more than 10% compared to the same month last year, according to the Bureau of Labor Statistics. These increased prices have in turn raised the cost of construction projects, forcing contractors to adjust their budgets, prioritize their projects, and in many cases turn other projects away.
Contractors are also facing a shortage of skilled workers, with approximately one-fifth of the most skilled construction workers being older than 55 years old. As older, higher-skilled workers or supervisors retire or leave for other jobs, many contractors have not been able to replace them quickly with younger workers with the same skill levels. And to address the large shortages of other workers, these same contractors have had to ramp up hiring of entry-level, inexperienced laborers. The hiring of junior level and entry-level staff translates invariably into falling productivity of construction projects. This influx of new workers has led to bigger backlogs, and jobs are taking longer to finish because they are typically less productive than the older, higher-skilled workers they are replacing. Some contractors have had to resort to raising pay to attract and retain newer workers; others have started training their own laborers to fill openings for skilled workers.
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