The construction industry has always had periods of highs and lows, ridges and valleys and up and downs but we’ve never had a time when they have both happened at the same time…until now.
This year, contractors are facing many of the same obstacles as they did in 2021, with ongoing supply chain interruptions, workforce woes, and soaring material costs compounded by rising inflation and interest rates.
Here are some observations from experts in all segments of construction.
Supply Chain
According to a recent report by the American Supply Association, supply chain congestion is improving for some sectors, but there are still nearly two million containers headed inbound into the United States. The good news is that once they arrive, inventories not affected by chronic raw material shortages will be replenished.
Material Prices
Closely linked with the supply chain backlog is the rising cost of materials. According to the Bureau of Labor Statistics, construction material prices were up by 25% in 2021, and so far, the cost of construction in 2022 remains high. Richard Branch, the chief economist for Dodge Construction Network, said he expects price increases to continue until about mid-2022 before tapering off in the latter half of the year, while other experts predict more up and down volatility throughout 2022.
The increases in the prices of lumber and steel, for example, are the largest seen since the government began recording the data in 1949. The percentage of increase in the cost of plastic is the greatest since 1976.
Oil prices are at record highs, significantly increasing transportation costs to deliver materials to the marketplace
Copper
In the first quarter of 2021, copper prices hit a 10-year high in the U.S. Besides being used in construction materials from electrical wires to water pipes, copper is an important building component for electric cars. As governments at home and abroad push toward green energy and electric transportation technology, the demand for copper is expected to increase exponentially.
Lumber
In 2021, the National Association of Home Builders reported that the price of lumber alone increased the cost of building a new home by an average of $36,000.
Steel
Currently, U.S. steel prices are 70% higher than the global market price. Even accounting for the 2018 steel tariff imposed by the U.S., it would be cheaper to import steel than to buy it from domestic mills, but limited global supplies combined with shipping challenges are limiting U.S. imports and keeping prices high.
Labor
Skilled construction labor has been difficult to find since long before the pandemic, and contractors are paying a premium for it. The lack of skilled labor also causes construction delays, further adding to project costs.
According to Business Insider, the construction industry needs a “staggering 2.2 million more workers,” in the next three years, or 61,000 new workers per month, to keep up with industry demands. And it goes that competition for workers will also lead to price increases.
Inflation
According to Trading Economics, the annual inflation rate in the US slowed to 8.3% in April from a 41-year high of 8.5% in March, but less than market forecasts of 8.1%. Energy prices increased 30.3%, below 32% in March namely gasoline (43.6% vs 48%) while fuel oil increased more (80.5% vs 70.1%).
Rising Interest Rates
In June 2022, the Federal Reserve approved a 0.50 percentage point rate hike, the second increase since December 2018. Rate increases are expected at each of the remaining meetings in 2022. Already, mortgage interest rates are skyrocketing. In April 2022, new data from Freddie Mac revealed that the average rate on a 30-year mortgage was 4.67% — the highest since 2018.
The National Association of Home Builders reported that high interest rates were a problem for only 2% of builders in 2021, but 31% of builders expect it to be a significant problem in 2022.
Construction Loans
All of these factors combined have shifted the focus for construction lending, as builders scramble to contain costs and lenders jockey to minimize exposure to risk. Homebuilders and homeowners who commit to contracts months in advance are faced with unpredictable changes in pricing along the way. Builders are finding that new projects require higher construction costs and extended build-cycle schedules.
Sage Advice
The experts are offering some advice to help builders succeed despite current challenges. For the most part, it all comes down to good planning and sufficient capital.
Don’t say, ‘I will get it as I need it.’ You are going to have to put your money out first. You are going to have to stock and inventory a little more, to make sure you can secure the products you need, so that each time you get to another phase of construction, you are not forced to stop working.
Builders, developers, and offsite construction factories need to be able to track, track, track. Organize, archive, screenshot, digitize, and keep everything in one central location. Make sure that you are preparing for every project before, during, and after completion.
The construction industry’s future is not all gloom and doom. History shows that steep periods of construction inflation are followed by similar periods of recessed construction costs, which is attributed to the reality that higher pricing can slow or stall projects, reduce demand and increase supply.
Believe it or not, there is a positive side to inflation, since higher prices of consumer goods are likely to force people back to work, potentially relieving some of the labor shortages.
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Time To Make Your Offsite Company Inflation Healthy
Gary Fleisher is the Editor in Chief of Modular Home Source and Offsite Builder. Email at [email protected]
To learn more about the Offsite Construction Industry, visit: Offsite Builder, the Construction Magazine for Builders and Developers
