Construction Costs 2023
  • Construction & The Economy

Where Will Construction Costs Go in 2023?

Inflation, supply chain bottlenecks and near-term economic uncertainty have recently clouded contractors’ ability to forecast their project costs

Construction and the Cost-of-Living Crisis

  • Construction & The Economy
The UK is facing a near-perfect storm of economic headwinds, fuelled by inflation, rising interest rates and slumping demand. Construction firms, which face higher energy costs and rising prices for essential materials, can weather this, but it’s going to be tough.

It’s often said that the British like to obsess about the weather. Recently they have had another pressing topic to mull: the cost of living. More accurately, the cost of living crisis. 

Why “crisis?” Well, prices for a range of goods are rocketing, driven in part by the steep increase in the cost of energy. Incomes, relative to prices, are falling behind as inflation rises. Interest rates are at highs not seen for years in an effort to bring down soaring inflation. Meanwhile, the UK appears to be heading for a recession, which some fear could last a year. 

Why is this happening? What does the current climate mean for the economy and business, and specifically for construction? 

Why is the cost of living rising? 

The cost of living has risen sharply since the end of 2021 for a number of reasons. That it has become a crisis is largely due to several factors making their presence felt all at once. 

The impact of COVID-19 shouldn’t be underestimated. Pandemic restrictions dramatically slowed economic activity, a situation from which the UK has still to properly recover.  

There’s rising inflation, which along with a downturn in consumer confidence is eroding people’s spending power, with the cost of pretty much everything increasing faster than earnings. Inflation was already climbing before Russia’s invasion of Ukraine in February 2022 led to a breakdown in the supply of gas to several European countries, including the UK. Now domestic households and businesses alike face soaring energy prices for the foreseeable future. 

The UK has also been affected by a series of post-Brexit scenarios, where trade has been hit, particularly exports to the EU. Additionally, many businesses report permanently losing EU-citizen staff who went home as COVID-19 tightened its grip on the UK and haven’t returned.  

Then there was the hike in interest rates last year, following the then-Chancellor of the Exchequer Kwasi Kwarteng’s now-infamous “mini budget,” which rocked the financial markets and sent the cost of borrowing for businesses and mortgage holders skyrocketing.  

What does this mean for the cost of construction? 

Of course, the UK and other countries have faced economic crises before. Cyclical recessions have periodically rocked the UK, prompted by events such as the Middle East oil crisis in the mid-1970s and the global financial crash of 2008-09.  

However, the multifaceted nature of the current situation means there is little respite to be had, at least for the foreseeable future. Some, like the British Chamber of Commerce, don’t expect any semblance of growth to return until the last three months of 2023 at the earliest. 

Inevitably, this has had an impact on the construction industry, which has seen business slow and the cost of building materials and energy go up.  

According to the latest S&P Global/CIPS UK Construction Purchasing Manager’s Index report, the UK’s construction sector recorded a fall in business activity during December 2022, ending a three-month sequence of moderate growth. Worryingly, the rate of decline was the fastest since May 2020.  

The S&P report added that the December data highlighted a reduction in new orders placed with UK constructors, despite a “modest” uplift in November 2022. “According to survey respondents, the fall was driven by weak client demand, linked in turn to higher prices charged,” it said. 

This is resulting in what some in construction dub as a “cost of building crisis.” Supply chains have been tightening for some time, and while certain materials can be sourced relatively easily, albeit more expensively, others—such as steel and timber—are getting harder to come by. The situation in Eastern Europe has added to such pressures. 

Construction cost inflation is likely to get worse before it gets better. According to the Construction Leadership Council (CLC), rising energy and wage costs are expected to push prices upwards in the coming months: “Manufacturers of energy-intensive products (such as bricks, cement, glass, insulation and plasterboard) warn that although many have been able to hedge energy costs through Q1 of 2023, energy prices in Q2 and Q3 are expected to be considerably above historical (pre-Ukraine war) levels without further government support.” 

Amid the cost-of-living crisis, the construction sector has also been affected by the loss of workers, particularly those from the EU who left the UK during the pandemic and declined to return. Firms have reported struggling with recruitment drives among UK nationals. 

The reduced construction activity in December was most marked across the residential and civil engineering sectors. 

Leading housebuilders including Taylor Wimpey and Persimmon have warned they won’t be ramping up the delivery of new homes this year, pointing to an increasingly tough market—fuelled by a slide in consumer confidence—whose features include lower sales and rising cancellation rates.  

How can construction firms weather the cost-of-living crisis? 

So, what can construction firms do to navigate the impact of inflation and the cost-of-living crisis? Keeping a close eye on costs is an obvious example—although there is only so much firms can do to mitigate some increases. 

As the CLC has said, the sector, like others, will be seeking further backing from government, particularly around energy. However, ministers have already indicated that existing support will be scaled back from March 2022, a move described by the Federation of Small Businesses as “bitterly disappointing.” 

Strengthening the relationship with one’s supply chain and key customers is another important approach, although one would expect this already to be in place. 

Looking beyond one’s normal route to market is another option, according to experts. Noble Francis, economics director at the Construction Products Association, said firms should look at where the opportunities are.  

“Don’t just stay in your usual sector and chase work, bidding low,” he said. “That just exacerbates the situation, especially with high and uncertain cost inflation.” 

Offering extra support to staff where possible is another consideration. While housebuilders are responding to falling demand by reducing output, many firms, notably Barratt, are giving employees special cost-of-living payments to help them through the tough times. 

Meanwhile, using digital technology to get the most out of a team’s efforts will also increase opportunities for efficiency gains.  

Sharing information through digital collaboration across a range of stakeholders and being able to make changes quickly will speed up processes, improve accuracy and help deliver better quality outcomes. 

The difficult conditions we’re seeing will be with us for several months, with the cost-of-living crisis perhaps even stretching into 2024. But this uncertainty won’t last forever. The construction industry is resilient, and while there may be cutbacks and corporate casualties along the way, the sector will bounce back, as it always does.  

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Reimagining New York City Post-Pandemic Construction

NYC’s Business District Re-Think Could Be a Boon for Local Construction Firms

  • Construction & The Economy
New York City has initiated a plan to reimagine its commercial business districts for a post-pandemic world, a development that would inject local-area construction firms with fresh opportunity in the years ahead

If you’ve spent time in the downtown business district of almost any US city in the past three years, you may be familiar with one thing: near silence.

Well, not exactly silence. But few would disagree that cities in general have lost some luster in recent years.   

Prior to the COVID-19 pandemic in 2020, throngs of coffee-toting, earphone-wearing commuters would pour out of public transit systems en route to their offices, fueling cities and their local businesses with waves of energy and activity that, in the past decade, rejuvenated many previously downtrodden downtowns.

Today, that energy and commotion is a shell of what it was. The spike in post-pandemic remote work—some of which has become permanent—has muted such energy, and cities are starting to feel it. Many are beginning to take action that they hope will help reimagine—and re-energize—city centers so people have more reasons to spend time there besides going to work.  

New York City is one of those municipalities, and in May 2022, officials there decided to do something about it. Led by Gov. Kathy Hochul and Mayor Eric Adams, a group of 59 civic leaders and industry experts assembled the “’New’ New York Panel.

The group convened frequently in recent months to identify new opportunities for improving the city with an eye toward making its business districts better suited to this post-pandemic world. What comes from the effort may have a big impact on local construction in the years ahead, as the panel aims to make proposals that could call for land redevelopment and building conversions.

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The process so far has revealed a much larger opportunity than to just breathe life into commercial hubs abandoned by remote workers.

“While our initial charge was to revive business districts, we realized we needed to look at solving a wider range of challenges faced by all New Yorkers,” said Julie Stein, the panel’s executive director. “The plan addresses fundamental questions around transportation, housing, public space and access to childcare.”

“The plan,” or the panel’s 159-page report, “Making New York Work for Everyone,” was released in December 2022. It lays out 40 improvement proposals, with suggestions including improvements to public transit systems, creating a network of public spaces through Midtown Manhattan, the city’s main office district, and updating zoning to increase the number of housing units.

“New York’s success over the centuries has really been defined by our ability to adapt and convert crises into opportunity,” she said. “As one example, the city reinventing itself as a 21st century city after the 9/11 attacks, both by reimagining Lower Manhattan as a mixed-use community, but also transforming underutilized portions of the waterfront and diversifying the economy in terms of both sectors and certain geographic locations.”

Implications for architecture, construction

Implementation, Stein said, is “moving full steam ahead” as of January 2023, with regulatory processes underway at the city and state level to greenlight projects. But what does this mean for those companies and individuals who may be designing and building such improvements?

“The vision of making New York the best place to work no matter what you do includes a package of actions, and a lot of them are focused on the built environment of the city—landscape and infrastructure,” Stein said. “If we want our business districts to be more mixed-use, we will need to redevelop outdated office spaces into other things, including housing.”

Green building and retrofits are top of mind for the panel, Stein added, as are instituting sidewalk shed reforms, public space maintenance and protected bikeway infrastructure. While all of these initiatives sound promising to the architecture and construction industries, there are yet to be hard-and-fast timelines—something likely to come later.

Top three goals

Each of the 40 proposals laid out in the plan fall into one of three categories:

To “reimagine New York’s business districts as vibrant 24/7 destinations”: “This is about shedding the ideas of single-use districts and supporting Midtown in particular and it’s evolution into a great place where people not only work, but also live and play,” Stein said. “We have a suite of recommendations that talk about making live/work/play districts in Midtown and business districts throughout the city.”

Some of those strategies include investing in permanent public spaces and improving quality of life issues, like sustainability and cleanliness, across business districts.

To “make it easier for New Yorkers to get to work”: “This is about making sure we can improve commutes into New York City and strengthening employment hubs and workspaces in all five boroughs, if people want to work closer to home,” Stein said. “Work-from-home is a great option, but not everyone has space in their New York City apartment. One of our recommendations is the acceleration of modernization of libraries to become workspaces in low-cost ways.”

To “generate inclusive, future-focused growth”: The last goal includes strategies for establishing New York City as a hub for innovation, increased access to housing (specifically, 500,000 new housing units over the next decade) and trying to ensure that growth and access to opportunity is fair for all residents.

What this means for other big cities

New York City isn’t the only place where whispers of post-pandemic, city-wide improvements are at the forefront. News stories abound with chatter of previously busy business districts now bare and what that may mean for the future of cities.

“We are getting outreach from cities across the country who want to learn, and we are benefiting from others who have their own ideas for their cities,” Stein said. “Every city has different challenges. New York City is unique because we don’t have one traditional downtown.”

Stein hopes the nuanced lessons in the report help to inform a path forward for city improvements nationwide. “There are interconnected actions that can be taken from public and private standpoints to help with transportation, making childcare more affordable, reducing barriers to labor force participation and looking at broader workforce development systems,” Stein said. “What I hope to convey is a more complex thinking of what economic development is.”

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How Technology Can Help Construction Amid Economic Uncertainty

  • Construction & The Economy
Technology has the potential to eliminate redundant work and streamline mundane-yet-critical tasks, easing the burden on construction firms as they face a possible challenging economy ahead.

What happens to construction during a recession? 

Months of political and economic uncertainty point to a potentially bleak outlook for the construction industry in 2023. 

According to the latest Autumn Construction Forecasts 2022-2024 from the Construction Products Association (CPA), construction output is expected to fall by 3.9% in 2023. 

As real wages plummet and further rises in interest rates are expected, demand for private housing new build and repair, maintenance and improvement (RM&I) is likely to fall as well.  

What’s more, those working in commercial and infrastructure are increasingly concerned about inflation driving up construction costs during recession. 

While adopting new technologies can be daunting for any business, it would be remiss to rule anything out as the industry faces turbulent times. There are many ways in which technology can help businesses survive a construction recession.  

Mitigating the impact of recession on the construction industry 

Building information modelling (BIM) has been around for a while, but the construction industry has generally been slow to embrace the digital world and what it has to offer. 

However, the COVID-19 pandemic accelerated digital transformation in several industries including construction, forcing companies to review their processes, operations and procedures, many of which were outdated and no longer fit for purpose. 

Organisations were given the opportunity to identify gaps that could be filled through digitalisation, and embracing new technologies has enabled them to adopt solutions that might otherwise have taken years to integrate. 

Here are some ways in which technology can help the construction industry in recession: 

  1. It aids sustainability efforts 

One of technology’s biggest appeals relates to sustainability in that it enables businesses to become paperless, thus eradicating printing costs.  

Plus, having everything processed digitally not only reduces carbon footprints but also facilitates remote working—something many businesses had to adapt to for the first time during the pandemic.  

  1. It improves collaboration 

Cloud technology makes it easier to share information even when you’re not physically in the same location; real-time data can be shared from any device at any time so everyone has access to the latest information. This can help avoid unnecessary delays, saving time and resources.  

  1. It streamlines processes and saves money 

There is a myriad of software that can be used to automate processes that have typically drained people’s time and energy. From payroll to scheduling to project management, there is a wide range of construction software out there that can help businesses save valuable time and money. 

  1. It supports training     

It’s important to retain as many employees as possible, especially during a downturn and as the construction industry already struggles with recruitment. Technology can help connect your teams and offer access to flexible, up-to-date training. 

  1. It minimises re-work 

Re-work is one of the most common reasons construction companies lose money during projects. Not only does it extend the project schedule and risk late delivery, but it also impacts your company’s reputation, impacting the number of bids secured. Software can help track progress and bring the whole team together, making mistakes and problems less likely. 

Embracing digital construction during recession 

Technology helps to boost productivity in the construction industry by streamlining and automating processes and, despite having a long way to go before being completely digitalised, firms that take advantage of its power have an opportunity to stand above competitors that are slow to adapt. 

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Higher interest rates and construction activity

How Rising Interest Rates Are Confounding Construction

  • Construction & The Economy
Higher interest rates have frozen owner-occupied residential construction and may soon scuttle commercial deals as the Federal Reserve continues to fight inflation with rate hikes

What a difference a year makes. At the start of 2022, the Federal Reserve was holding the federal funds rate at around zero and buying billions of dollars in bonds to stimulate the economy—while inflation was rising to near-record levels.

But the Fed’s approach has changed drastically since. The Fed raised interest rates several times in 2022. At its latest December 14 meeting, the Fed raised rates yet again, this time by a half percentage point, taking rates to a targeted range of between 4.25% and 4.5%.

Like everyone else, construction is feeling the pain. In December 2022, a 30-year fixed-rate mortgage ran close to 7%. Even if soaring prices for new homes begin to drop, monthly mortgage payments are likely to remain high. Construction costs are projected to increase well into 2023, according to the CBRE Construction Cost Index. Whether for a homeowner or a business, the cost of loans makes all construction projects more expensive—including those covered under the $550 billion Infrastructure Bill. In fact, inflation could significantly reduce the bill’s buying power.

How will rising interest rates impact future construction? Built spoke with Anirban Basu, chief economist for the Associated Builders & Contractors, to learn more.  

Built: How do higher interest rates impact construction?

Basu: All else equal, higher borrowing costs have a negative impact on construction activity, especially at a time when labor shortages have driven wages higher and construction inputs prices are up more than 40% since the start of the pandemic.

Built: Are higher interest rates negatively impacting the number of construction projects?

Basu: Higher interest rates have completely frozen the owner-occupied residential construction market. Average mortgage rates are at their highest level since 2002, and mortgage applications have fallen to their lowest level since 1997. As a result, new authorizations for single-family units are down 17.3% year over year.

Because higher borrowing costs have caused many would-be homebuyers to rent, authorizations for multifamily units (more than five units) increased 8.2% in September [2022] and are up 25.5% year over year.

Built: How much does the impact depend on what kind of construction a company does—residential vs. commercial?

Basu: A lot. Interest rates are high (and rising) because the Federal Reserve needs to tamp down economic activity in order to suppress inflation. Beyond the first-order effects of higher borrowing costs, an economic downturn would negatively affect construction spending in categories that are dependent on discretionary income, like commercial, office and lodging.

Publicly financed categories should fare better, especially in light of the infrastructure bill and surplus pandemic relief funds. Over the past year, construction spending has increased rapidly in primarily publicly funded segments like water supply (+23.3%), conservation and development (+18%) and sewage and waste disposal (+11.9%).

Built: Are construction companies still able to get loans and make satisfactory profits despite the cost of the loans?

Basu: Yes, despite higher interest rates, contractor optimism regarding profit margins actually increased in September, according to ABC’s Construction Confidence Index. This likely has to do with declines in materials prices, which have inched lower in recent months.

Built: If interest rates continue to rise, do you expect to see projects halted and lower growth? In an ABC news release in October 2022, you noted, “Faced with high demand for their services, contractors continue to show pricing power, helping to offset rising compensation and other construction delivery costs.”

Basu: Rising interest rates will certainly cause some projects to be halted, all else equal. But all else might not be equal. Interest rates are only one of many factors behind construction costs. Supply chains, for instance, have improved drastically in recent months. If they continue to improve, that could countervail the cost-related impacts of higher interest rates.

Built: If we ultimately experience a recession, what would you expect that to mean for the construction industry?

Basu: On the one hand, a recession would almost certainly mean fewer projects and more competition for the projects that are still greenlit. On the other hand, a recession would alleviate many of the inflationary pressures that have driven up construction costs, including freeing up the supply of both inputs and labor.

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Build it and they will come

Build It And They Will Come

  • Construction & The Economy
Australia’s infrastructure industry plays a central role in building our nation’s growth and economic sustainability. Learn how to build a pipeline of work where your construction business can capitalise on the current infrastructure boom.

Australia’s infrastructure industry plays a central role in building our nation’s growth and economic sustainability.

And the Australian government has decided to leverage the industry to counter emerging economic pressures with its October 2022 commitments to infrastructure investment in a newly released budget.

Designed to ensure that government funds are directed towards industries that generate further investment, infrastructure investment has been targeted at transport to support dispersed industries, communication and emerging industry development.

Importantly, funding in the budget includes more than $28 billion towards 410 ongoing major Infrastructure Investment Program projects in regional Australia, with a further 52 that will benefit regional and urban communities.

Enabling infrastructure—infrastructure that drives regional investment, industry diversification and growth—is central to infrastructure commitments.

A selection of enabling infrastructure programs of work the government is investing in include:

  • $1.5 billion in planned equity to build marine infrastructure at the Middle Arm Sustainable Development Precinct near Darwin.
  • $440 million in planned equity to build new regional logistic hubs in Katherine, Alice Springs and Tennant Creek in Central Australia.
  • $565 million to invest in enabling infrastructure in the Pilbara to support emerging green industries and technologies.
  • $7.7 million to develop common-user infrastructure at the Port of Bundaberg in Queensland.
  • $100 million to support the Port of Newcastle and the Hunter region to become hydrogen ready.

The pivotal role the infrastructure industry plays

Infrastructure and its associated supporting industries underpin economic and social activity throughout the whole of Australia—from transport to industry to community—including the construction of public assets such as roads and rail, hospitals and schools to private industry development across commercial, retail and residential precincts to support our communities.

From the conceptualisation of infrastructure development, a range of industries benefit directly and indirectly from such investment—including planning and analysis, manufacturing, distribution, construction and more.

As projects develop, a range of industries including finance, project management, legal, accounting, public affairs, governance and more will benefit from programs of work.

The flow on effect

Research from Australia’s Productivity Commission confirms the significant impact and economic stimulus the construction and infrastructure industry creates.

According to the Australian Industry and Skills Committee, the construction industry generates more than $360 billion in revenue, producing around 9 per cent of Australia’s gross domestic product.

Public infrastructure is an important catalyst for economic growth and development. Each dollar of public infrastructure investment can generate GDP increases adding up to $4 of value over the life of the asset.

Investopedia confirms that the strong multiplier effect means that stimulus can be a powerful tool if it can be deployed effectively in a focused way: “Infrastructure spending creates jobs involved in the planning and implementation of various projects. These include both white-collar and blue-collar jobs—for example, both engineers and day laborers are needed. Infrastructure projects often take months to years to complete, meaning that the jobs will stay. These workers then spend their income locally and help stimulate the economy. Moreover, once the projects are completed, citizens can more efficiently use transportation and utilities to improve their worker productivity.”

According to the Productivity Commission, infrastructure investment may have three main effects:

1. Public infrastructure provides a benefit that directly affects private-sector output and productivity.

2. Public or private infrastructure can facilitate product or process innovations and lead to benefits that indirectly affect private-sector output and productivity. It can, for example, be an enabler for innovation, allowing firms to do what they do now in a better way or to do new things.

3. Public or private infrastructure can also affect the productivity of other inputs—it can be a complement to or substitute for these other inputs and affect their productivity. This is often referred to as the ‘factor bias effect’.

How to ensure your construction business benefits from the infrastructure boom

Building a pipeline of work where your construction business is capitalising on the infrastructure boom takes a consistent approach.

Our top tips to position yourself to secure new opportunities include:

  • Join key networks. Industry capability networks are often closely connected with all levels of government and major project developers. ICNs comprise experienced industry procurement and supply chain specialists who introduce businesses large and small to projects of all sizes across Australia and New Zealand. Chambers of Commerce exist in various forms across urban and regional Australia. With a broader range of business sectors joining chambers across the country—from sole traders to corporates—you will have the opportunity to build relationships and gain insights from experts across business development, governance, marketing, finance, innovation and more.
  • Register your interest. Ensure you receive email alerts for tenders across the regions and scopes of work that your business offers expertise in. For those businesses seeking to capture a wide range of incoming tenders, broader opportunities can be found on sites such as Australian Tenders  and TenderLink. However, access comes at a premium. Businesses can also register for alerts directly on the Australian government AusTender site, on state and territory sites and across local government web platforms. With many local and state entities considering buy-local in their weighting towards contracts, you should focus on registering local first.
  • Attend industry briefings and pre-bid meetings. Your business will have a front seat to all requirements and will also secure the contact details of key assessors and decision-makers. Pre-bid meetings often offer further insights—including underlying issues or risks, potential opportunities and, importantly, the field of competitors (or even potential partners) in the scope of works at hand.
  • Build relationships up and down the value chain. Across all projects, including construction, a collective of experience is required to deliver even the simplest of projects. Value chains and networks can also be used to diversify and future proof supply chains, reduce risks and fast-track delivery.
  • Get your house in order. Ensure you have the following plans—and evidence they are being delivered—in place: Business plan, Indigenous Workforce Strategy, Industry Participation Plan, Training and Development Plan. Also ensure your capability statement is current—including testimonials, skills and expertise, and project delivery examples.
  • Finally, set yourself up for success. Select opportunities that your business has both the capacity and capability to deliver, build a diverse portfolio and keep an eye on the future while delivering in the present.
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Construction Trends 2023

3 Economic Trends Poised to Impact Construction in 2023

  • Construction & The Economy
Recession risk, labor shortages and a possible flurry of government investment appear likely to keep construction firms on their toes heading into a new year

Rising costs. Supply chain issues. Labor shortages. Lingering effects of the COVID-19 pandemic. Geopolitical turmoil. Federal legislation.

The list of stressors on the economy heading into 2023 is long. The construction industry is no stranger to weathering cyclical economic challenges. What will be different in 2023? Where should building professionals direct their attention?

Is an inflation-induced recession on the horizon?

“Most economic forecasters see a recession beginning before mid-year 2023, in part because of the really aggressive stance on the part of the Fed to increase interest rates,” said Kermit Baker, chief economist with the American Institute of Architects (AIA). But he believes it will be “fairly mild and fairly short.”

That may bring little comfort to construction firms like McHugh, a Chicago-based general contractor that works primarily on high-rises, hospitality and self-performed concrete construction. “We saw unprecedented escalation, about 3% per month on total project costs from February to November” of 2022, said Steve Wiley, the firm’s senior vice president. “Costs increased on every component of construction from lumber to steel, concrete, paint, anything roofing related.” He added he doesn’t see that changing any time soon.

Still, Baker of AIA believes that some of the current “corrections being made by the Fed will be bringing down inflation.” “It looks like mortgage rates are likely to peak sometime early to mid-2023,” Baker said. “While all of the things causing the problems won’t disappear, they will moderate pretty significantly.”

Architects are a good bellwether for the construction industry. AIA research indicates that design activity leads construction activity by nine to 12 months. “That suggests a nine- to 12-month runway with current conditions,” Baker said. “While we’re seeing little evidence of it now, there’s the possibility as we saw during the Great Recession that many projects that architects have designed may get stalled, delayed or canceled.”

A 2022 AIA survey of architects showed that firms estimated a 7% increase in revenue for 2022 on average. “But next year will be a good deal different,” Baker said. “For 2023, they’re projecting flat revenue, a less than 1% increase.”

Ken Simonson, Associated General Contractors of America’s chief economist, is skeptical about a full-blown recession. “I remain a perpetual optimist and don’t think the US will go into recession,” he said. “We’ll see at least a modest increase in employment and growth in GDP. Many people will continue to have paychecks coming at higher wage rates than in the past.”

Simonson also is hopeful that inflation will come down significantly. “I do think there will be shrinking demand for goods,” he said. “Retail and warehouse categories are very vulnerable.”

Persistent labor shortages poised to continue

The past few decades have seen a decline in the construction labor force at every level from plumbers to framers to architects. “In our market, finding craftspeople has been a concern for a while,” said McHugh’s Wiley. “There’s the aging workforce, attrition through retirement.”

Moreover, in other parts of the workforce such as building information modeling (BIM) and among other design and office professions, Wiley said many workers are relocating amid post-pandemic trends. “Quality candidates are in high demand and, as a result, salary expectations are pretty high, too,” he said. “We have to manage the balance of getting good talent and not busting the salary structure to do that.”

So far, these trends seem likely to persist throughout 2023. “There just are not enough people,” Simonson said. He points to a recent federal government report that measures monthly job openings and hires by industry. “The number of job openings in construction at the end of September 2022 exceeded the number of employees hired during the entire month,” he said, “with the implication being that the construction industry overall wanted to hire twice as many people as they were able to bring on board.”

Baker cites a 2016 National Association of Home Builders (NAHB) survey that asked 2,000 people aged 18-25 of their desired career paths; only 3% of respondents said construction. “In normal times the construction workforce is about 6% to 8% of our total labor force,” Baker said. 

Furthermore, immigration is a major factor in the construction labor shortage. “About 30% of construction workers are foreign-born, second only to agriculture,” Baker said. “The immigration numbers have been down, and the consensus is they’re probably going to stay down for a while.”

Overall, Baker said, “we’re way short of what the industry needs, and the situation’s going to get worse in the coming years if something doesn’t change.”

Federal infrastructure spending kicks into gear

In November 2021, President Biden signed the Infrastructure Investment and Jobs Act (IIJA), which authorized $1.2 trillion for transportation and infrastructure spending, with $550 billion of that figure going toward “new” investments and programs.

“We’ll start to see some impact from IIJA in 2023,” Simonson said. “In just under a year, the White House put out a release saying $185 billion of money for projects has already been released, but I haven’t come across a contractor yet who’s had an award. I think we’re on the cusp of seeing that money turn into actual construction.”

While McHugh doesn’t take on government-funded projects, Wiley said he is concerned that “if IIJA really takes off, there can be more competition not just for labor but for materials.”

“With a supply chain that seems unable to keep up with current demand, this [type of investment] will stress it further,” Wiley added. “Some of our vendors have set up dual sourcing with facilities in North America coming online and taking the shipping component out of it. It addresses some of the geopolitical risk issues, but it may come with a higher price tag. Do we pay more for more certainty or save money and take the savings with more risky procurement strategies?”

In addition to IIJA is the amended “Buy American Act,” which has increased the amount of domestic content required for federally funded projects from the current level of just 55% to 60%, 65% and 75% over the next seven years.

“This is going to churn up the market a bit,” Simonson said. “In some cases, you’ll see increased demand for American-made. That might free up material and equipment for non-federally supported projects. It’s yet one more source of uncertainty. We’re still awaiting guidance, and federal agencies are scrambling to figure out what’s subject to [the new legislation] and what waivers are possible. It’s a learning curve for all sides.”

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Where Are All the UK Construction Workers?

  • Construction & The Economy
The UK construction industry needs more than a quarter million new workers by 2026. What does the sector need to do to tackle the skills shortage

The construction skills shortage in statistics

At the end of 2020, the total number of people in the UK working in construction fell to its lowest level in more than 20 years. No wonder there is talk of a skills shortage in construction.

Research group Statista reported that, in the fourth quarter of 2020, around 2 million people were employed across the sector, compared with a 20-year peak of 2.6 million in the third quarter of 2008.

Yet looking at numbers in isolation doesn’t give a full picture of the workforce crisis. Consider that construction jobs slumped between 2008 and early 2013 in part because of the financial crisis that hammered industry employment.

And while numbers rose from 2013 onwards—to a peak of 2.4 million at the start of 2019—they fell again thereafter, in part because workers from the EU returned to their home countries. Indeed, in 2020 the number of EU-born construction workers active in the UK fell 42%, compared with a 4% decline among those born here.

The numbers have slowly crept up again, passing the 2.2 million mark in the first half of 2022—a figure last seen in 2014—but there is growing concern around how the construction sector is going to meet the demand for new homes, infrastructure projects and other schemes with such a shortfall in the number of workers.

Structural challenges facing the construction industry

COVID-19 battered the UK sector in 2020 and 2021, yet the industry has often struggled with economic headwinds, and cyclical shortages of staff in the construction sector have been with us for some time.

In 2016, Mark Farmer, founder of the Cast Consultancy and a vocal advocate for the construction sector for a number of years, wrote a report titled, “The Farmer Report of the UK Construction Labour Model,” in which he spelled out the challenges facing the sector.

Subtitled “Modernise or Die: Time to Decide the Industry’s Future,” Farmer’s review highlighted the industry’s low productivity, its workforce demographic issues, a lack of research and development and investment in innovation, issues around providing training and the industry’s poor image.

Calling for radical action to tackle what he saw as systemic problems across the sector, Farmer warned that a ticking “time bomb” was the industry’s workforce size and demographic. “Based purely on existing workforce age and current levels of new entrant attraction, we could see a 20%-25% decline in the available labour force within a decade,” Farmer’s report argued.

The ageing workforce is often cited as a contributing factor behind the skills shortage in construction. According to a report by the Chartered Institute of Building (CIOB), “The Impact of the Ageing Population on the Construction Industry,” the total number of workers aged 60-plus has increased more than any other age group in recent years, while the biggest reduction was in workers under age 30.

“The likely impact is as clear,” the CIOB said in its report, “as it is worrying: a great deal of knowledge and many vital skills are about to be lost and fewer professionals are in line to replace either.”

How are UK companies closing the construction skills gap?

Attracting new talent

This construction industry skills shortage is being addressed in part by a number of initiatives aimed at attracting more young people to the sector. As well as government-backed apprenticeships—covering everything from bricklaying to becoming an architect—there are efforts to get youngsters engaged with the industry through T-levels, a qualification aimed at people aged 16 and older who don’t want to go on to do A-levels or an apprenticeship, but who still want to combine classroom education with on-the-job work experience.

While there’s hope that such initiatives will help arrest the decline in construction as a career choice, the sector meanwhile has to cope with fewer workers. The shortage, according to a Construction Skills Network (CSN) report published earlier this year, is unlikely to improve anytime soon.

Noting that the industry will need an additional 266,000 workers by 2026, the report published by the Construction Industry Training Board (CITB) argues that the greatest challenge UK construction faces over the next five years is recruiting people to fill the growing number of vacancies.

“Employers will need to refresh the way they recruit staff,” the report said. “Employing fully skilled workers is unlikely to meet the expected shortfall because, to put it bluntly, the workers aren’t available; they have left industry through retirement, emigration or choice.”

The CSN calls on the industry to consider entrants “from a variety of nontraditional sources, including adult re-skillers.” And the route from further education into a construction career, the report added, should be made easier to develop domestic talent.

Engaging with education

Individual companies have their own views on how the skills shortage in construction might be tackled. Contracting giant Balfour Beatty argues that local areas should be able to grow their own talent. “To be most effective, local authorities need to be given both greater responsibility and more resource to address skills need in their areas,” according to the firm.

Balfour Beatty also believes that employers “need to engage more closely with the education system, building relationships and ensuring that schools, further education colleges and independent training providers are delivering the necessary skills.”

The industry certainly needs to get better at attracting more people to work in the sector. Ideally it will do this as part of a collaborative approach with government, industry bodies and others, such as schools, colleges and universities.

In “Modernise or Die,” Farmer laments what he calls the lack of a single, joined up strategy around training, one “that will drive collective transformational change and reflect the needs of the industry as a whole, not just silos within it.”

On the positive side, Farmer said he had seen “evidence of some interesting and high opportunity activity in the field of trade and professional re-training and re-skilling which has rightly been supported and embraced by industry.” Such initiatives include ex-armed forces training programmes and initiatives looking to target workers from declining industries, he added.

Are modern methods the answer?

Meanwhile, the increased deployment of modern methods of construction (MMC), including greater use of off-site manufacturing and modular or volumetric techniques, could go some way to improving, or at least alleviating, the skills shortage.

The CITB suggested in 2019 that an uptake of MMC “can influence future workforce requirements and help to mitigate some of the occupational demand pressure.”

What impact the latest political and economic developments will have on UK construction remains to be seen. The new chancellor of the exchequer, Jeremy Hunt, warned that all UK government departments would have to cut their budgets, a scenario likely to impact infrastructure schemes across the country.

Against this background, the construction industry still needs more people to design, engineer, build, fit out and sign-off the new homes, offices and commercial space that people and businesses need, along with the infrastructure we as a society rely on.

Root and branch reform of the way the industry operates, like that spelled out by Farmer and others, might be the only way forward to close the construction skills gap.

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Lumber Prices End of 2022

Lumber Prices Are Down Again—But for How Long?

  • Construction & The Economy
Experts say a higher interest rate environment for the foreseeable future may crimp demand for the essential building material in the years ahead, capping a period of pandemic-induced volatility

The lumber price rollercoaster has hit another big drop—with no rise in sight.

Since the start of the COVID-19 pandemic, the price for the essential building material has been on a wild ride. It initially rose to historic highs in the early months of the pandemic, as suppliers were caught off guard by a sharp rise in demand for wood as home-bound individuals hastened remodeling projects amid lockdowns. Volatility has persisted ever since.

A new, possibly extended valley has emerged. Lumber prices have been in steady decline since 2022’s peak of $1,464.40 per thousand board feet—a high that wasn’t too far off peak pandemic lumber prices of more than $1,500 in May 2021. Lumber prices rallied above $500 for two weeks in September 2022 in what Ashley Boeckholt, CRO and co-founder of digital lumber marketplace MaterialsXchange, describes as a “short rally in a bear market.”

With lumber prices closing at $410.90 at the end of September 2022, the time of this writing, that may well be the case.

Now, as many of the causes of the pandemic price surge have dissipated, the question is whether prices will continue to be volatile or are they settling into a narrow, predictable range?

What’s behind the current price drop?

The high demand for new homes and remodeling projects of the pandemic have been replaced by high interest rates and inflation. Housing starts rose slightly in August 2022 after two months of decline. Yet this increase was driven mostly by multifamily construction, which uses less lumber than new single family home construction.

There’s also been an increase in buyers backing out of home sales. Contract cancellations have risen to more than 15% for the third month in a row, according to Redfin; pre-pandemic, cancellation rates hovered around 12%.

The demand for remodeling is also slowing down, although not as much as demand for new construction. The second quarter NAHB/Westlake Royal Remodeling Market Index (RMI), a measure of remodeling activity, dropped 10 points compared to the second quarter of 2021, according to Robert Dietz, NAHB chief economist.

With Goldman Sachs predicting that the housing market will worsen in 2023, it would seem the residential market won’t be pushing lumber prices back up to extremes in the near future.

Mill production curtailment

Pandemic-induced supply chain challenges, such as worker shortages in mills and transportation obstacles, limited supply during the time of high demand, leading to wood’s initial spike. Now, low demand and rising production costs are leading some mills to curtail production.

Sawmill company Canfor recently announced a two-week production curtailment in most of its solid wood facilities in British Columbia to be followed by reduced production capacity through the end of the year. A lumber shortage in British Columbia, due in part to forest fires and wood-boring beetles, is contributing to increasing mill costs. Yet increased mill production costs are the new reality for the industry across North America.

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“Lumber is substantially more expensive to produce than it was a few years ago,” said Zach Lowry, industry expert with the Timberland Investor. “Every aspect of lumber production, from timber harvest to milling, is heavily dependent on diesel fuel, heavy machinery, vehicles and labor, all of which have risen considerably since the pandemic.”

The higher costs to produce lumber may force a new floor to lumber prices—one higher than the high $300 floor pre-pandemic. “If lumber prices get to the low $400s, there will be more curtailment talk,” said MaterialsXchange’s Boeckholt.

Ongoing tariff dispute

In August 2022, the United States Department of Commerce issued its final administrative review, reducing duties on Canadian lumber imported by the US. The Department of Commerce cut the rate nearly half, to 8.59%, from the previous 17.99%. This drops tariffs on Canadian lumber below the initial third administrative review estimating it would get cut to 11.64%.

Despite the cut, US industry groups and Canadian trade officials want the duties reduced further. Canada has filed notice that it will challenge the tariff under the Canada-United States-Mexico Agreement (CUSMA).

Mary Ng, Canada’s minister of International Trade, Export Promotion, Small Business and Economic Development, issued a statement expressing Canada’s “disappointment that the United States continues to impose unwarranted and unfair duties on softwood lumber from Canada. The only fair outcome would be for the United States to meet its CUSMA obligations and cease applying unjustified duties on all Canadian softwood lumber products.”

The NAHB has also been pushing for the Department of Commerce to eliminate the tariffs on Canadian lumber, which it characterizes as a tax on US home builders and buyers.

Is $400-$600 the ‘new normal’?

Before the pandemic, lumber prices spent decades in the $200-$400 range. Without a significant reduction in production costs or unexpected spike in demand, experts say it may be unrealistic to expect lumber prices to fall back to $200. However, Trading Economics forecasts that lumber will trade at $347.78 by the end of 2023.

Furthermore, the US Federal Reserve is poised to remain aggressive in raising interest rates to fight high inflation, increasing already high mortgage rates. If financing costs for new home purchases stay expensive, subdued housing demand may well persist for the foreseeable future, keeping wood demand—and therefore prices—low.

Still, uncertainty remains.

“I believe $400-$600 range is what can be expected as the ‘new normal,’ but I don’t believe a return to the high-highs are out of the question,” Lowry said. “Speculative mania can be a self-fulfilling prophecy, and a precedent has been set that can affect future expectations and behaviors.”

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