Strong construction momentum will easily carry through the first half of 2019, despite project margins facing pressure from all sides. JLL’s Construction Outlook finds robust U.S. economic fundamentals will drive further growth of the sector, which in 2018 recorded a 5.1% increase in total construction value and a 4.5% increase in employment.
Potential risks to the construction sector such as trade war escalation, deteriorating macroeconomic conditions and the worsening labor shortage, are largely balanced by potential boosts that include a large-scale federal infrastructure package, relief from tariffs and the continuation of 3.5% annual GDP growth.
“All forward indicators for construction are still flashing green,” said Todd Burns, President, Project and Development Services, JLL Americas. “However, a year with growth equal to that of 2018 would be considered a success, given concerns of a broader economic slowdown.”
Rising construction costs will sideline select projects
Total building costs, which includes labor, materials and equipment, grew by 3.4% in 2018, outpacing the U.S. inflation rate of 1.9%. The widening spread between cost growth and inflation is pushing borderline projects past the threshold of profitability. Building costs will continue to increase in 2019 but at a slower rate than 2018. This reflects an expected cooldown in material pricing but the surging cost of labor.
Growth in total construction employment has hovered between 3 and 6% over the past six years – a far cry from what’s required for labor supply to catch up with demand. With a tight national employment market, the situation is unlikely to improve anytime soon. Construction wage growth in 2019 will top the 3.4% increase seen last year.
Trade policy a powerful “swing” force
With a direct impact on commodity prices, tariffs represent a uniquely immediate threat to an industry that typically moves slowly. Given the well-established political willingness to impose tariffs and the widening trade deficit with China, a continuation of tariffs in 2019 is expected.
The biggest chance for relief from tariffs are international trade deals that would lift tariffs in exchange for other trade or economic concessions. Such a deal could represent a dramatic positive for construction and is a potential bright spot for the industry.
Construction tech in growth mode, presents opportunity for labor shortage relief
The buzz around construction technology has long eclipsed actual adoption in the industry. The past year, however, saw meaningful gains fueled by large general contracting firms racing to improve productivity and remain competitive. High levels of tech adoption will spread to smaller firms, and elements of construction tech will become the standard across the industry in 2019. Amid intense labor pressures, contractors’ most common reason for making technology investments is to increase labor productivity.
Modular construction is poised to have the biggest long-term impact on the industry. Proponents of the technology envision a future full of dedicated warehouses churning out modular components – from exterior wall segments to entire apartment units – for most new construction.
“Adopting modular construction is not always as simple as it sounds,” said Henry D’Esposito, Senior Research Analyst, Project and Development Services, JLL. “There is often a prolonged period during which the benefits are not fully realized, as firms take time to adjust to the new system. Despite some of the initial challenges, there has been no hesitation among contractors about whether modular will continue to grow.”
Growth of modular construction in 2019 will be centered around increased use by select sectors, including hospitality and healthcare, and an increase in use for one or two select elements within a broader array of projects.
Related Stories
Market Data | Jul 7, 2020
Nonresidential construction has recovered 56% of jobs lost since March employment report
Nonresidential construction employment added 74,700 jobs on net in June.
Market Data | Jul 7, 2020
7 must reads for the AEC industry today: July 7, 2020
Construction industry adds 158,000 workers in June and mall owners open micro distribution hubs for e-commerce fulfillment.
Market Data | Jul 6, 2020
Nonresidential construction spending falls modestly in May
Private nonresidential spending declined 2.4% in May and public nonresidential construction spending increased 1.2%.
Market Data | Jul 6, 2020
Construction industry adds 158,000 workers in June but infrastructure jobs decline
Gains in June are concentrated in homebuilding as state and local governments postpone or cancel roads and other projects in face of looming budget deficits.
Market Data | Jul 6, 2020
5 must reads for the AEC industry today: July 6, 2020
Demand growth for mass timber components and office demand has increased as workers return.
Market Data | Jul 2, 2020
Fall in US construction spending in May shows weakness of country’s construction industry, says GlobalData
Dariana Tani, Economist at GlobalData, a leading data and analytics company, offers her view on the situation
Market Data | Jul 2, 2020
6 must reads for the AEC industry today: July 2, 2020
Construction spending declines 2.1% in May and how physical spaces may adapt to a post-COVID world.
Market Data | Jul 1, 2020
Construction spending declines 2.1% in May as drop in private work outweighs public pickup
Federal infrastructure measure can help offset private-sector demand that is likely to remain below pre-coronavirus levels amid economic uncertainty.
Market Data | Jul 1, 2020
7 must reads for the AEC industry today: July 1, 2020
Facebook to build $800 million data center and 329 metro areas added construction jobs in May.
Market Data | Jun 30, 2020
AIA releases strategies and illustrations for reducing risk of COVID-19 in senior living communities
Resources were developed as part of AIA’s “Reopening America: Strategies for Safer Buildings” initiative.