Pandemic Challenges Remain but Infrastructure Funding Brings New Opportunities for Construction
AGC of America Chief Economist Ken Simonson recently sat down with Constructor publisher Jill Andreu to provide a preview of AGC’s Annual Construction Outlook Report.
Constructor: Construction employment is on the rise for the residential sector, but for non-residential, employment is down 1.8% as of November. How much of this shift can be attributed to COVID-19, and how much of it is a continued construction workforce challenge?
Simonson: COVID certainly set the construction industry back on its heels, as it did the whole economy. Construction rebounded more quickly than the rest of the economy in May 2020, when contractors were allowed to resume work on projects.
After May 2020, things diverged. Residential construction kept rolling along month after month, even though lately, we’ve seen many indicators that home building is in for a steep decline. Contractors on that side have still been hiring workers. Remodeling may keep going very strongly to the extent that people cannot afford to buy a new home and will spend more on the one they have. On the nonresidential side, though employment paused for 14 months from June 2020 until August 2021, there was no net change in employment. Since then, the industry has been adding workers at about the same rate as residential and the same rate as total non-farm payroll employment. However, it is still playing catch-up.
This has come in an environment where the unemployment rate across the economy and construction has been hovering near record lows. Job openings are at or near record highs in construction. The issue is that there are just no experienced workers out there who are looking for jobs. They’ve either gone into residential or other industries or said they will not come back into the workforce, at least for now. The challenge for contractors will be how to attract new workers and retain the ones we have. Though wages have increased, they’ll have to go up even more. We have to see if there is a way of structuring working conditions so that contractors can compete with businesses that now allow working from home or flexible work hours.
This is a real challenge for construction. Workers are outdoors in all kinds of weather and have early starting times. They can’t go home in the middle of the day if their kids were sent home because of a COVID outbreak. This is especially true if the construction worksite is remote, like on a mountain or if you are operating a tower crane. Getting back to the site in a reasonable time isn’t easy. These are somewhat new challenges for construction, or they’ve become more so in this pandemic environment.
We always hear the older generation comment on the work attitude of younger workers. However, these younger workers are so familiar with working on keyboards or other devices that they can glom on to the new technology. You see this with BIM, running a drone or using new robotics. The older generation either can’t adapt to, or they don’t understand, the utility of it. There are certainly pluses and minuses with different ages bringing varied skill sets.
Constructor: Do you envision that employment number spiking as more federal Infrastructure Investment and Jobs Act (IIJA) projects get underway?
Simonson: Construction will have a continuing challenge of finding and keeping enough workers and increasing their skill level. That will be the number one long-term challenge for the industry, mainly because it has historically relied on foreign-born workers as a high percentage of its workforce. Net immigration has dropped in the last few years, and so far, we have not seen any policy change that is opening the doors. AGC is pushing hard to try to get employment-based immigration where an employer can demonstrate there are no workers available in this country and allow them to bring in workers in those circumstances. There’s no sign yet that the administration or Congress is serious about enabling sensible immigration changes.
As we see more investment in infrastructure, partly due to the IIJA and other significant pieces of federal legislation, it’s adding to demand for selected kinds of construction. This includes power construction, boosted by the tax credits and other benefits enacted in the Inflation Reduction Act. The CHIPS and Science Act has already led to huge new investments announced, or even breaking ground, for the semiconductor fabrication or fab plants.
I do foresee growth in nonresidential construction. At the same time, some segments are likely to turn down as interest rates continue to climb and selected parts of the economy are slowing.
Though I admit I’m an eternal optimist, I don’t think we’re heading into a recession. However, most economists believe the U.S. will be in recession in 2023 if it isn’t already. At any rate, anything involving investor-financed property is likely to be hard hit. That could include apartments, office, retail, warehouse and hotel construction. We will see some migration from workers now doing home building or income-producing properties. Whether they have the skill set to do infrastructure, wind farms, solar projects, carbon capture underground or build very delicate, expensive fabs for semiconductor wafer manufacturing are yet to be determined.
In the transportation sector, highway construction has increased by 9%, according to Census Bureau figures from October 2021 to October 2022. That comes with a big asterisk, however. The Census Bureau does not deflate the numbers. We don’t have a single inflation index for sectors like housing, hotels, highways, hospitals and others. That means we don’t know how much of that 9% increase is actually new lane miles and how much is just price increases.
We know that concrete, asphalt and steel costs have increased significantly in the last couple of years. But all of this has come before money has been awarded to contractors from the IIJA. The White House, on the anniversary of the Act’s signing on November 15, put out a statement that they had released $185 billion.
That’s huge. That’s way more than we usually see in a year from the feds. However, “released” is a term that doesn’t actually fit with construction contracts or construction put in place. That may mean the money has been announced or designated for certain projects, but you still need to have a bidding process and contract awards. I have yet to find a contractor who has indicated they are working on a project funded by the IIJA.
Having said that, I think 2023 will be the beginning of a big groundswell of spending funded by that Act that will continue for several years. This will be a game changer for many categories of infrastructure – not just highways, but transit, airports, ports and areas like broadband, water and sewer projects under expanded funding of the state revolving funds. There will also be some new categories, like battery charging stations for electric vehicles.
Constructor: Construction employment increased from February 2020 to October 2022 in 37 states, increasing anywhere from .1% to more than 10%. Several of the Top 5 states to have a larger increase in construction employment are not typical metropolitan states, i.e., Utah (20.4%), South Dakota (15%), and Idaho (12.7%). Does remote work have an impact on those numbers?
Simonson: Those three states have consistently ranked in the top four that AGC looks at each month when the Bureau of Labor Statistics puts up construction employment figures. We compare the February 2020 level, which was the month before the pandemic hit, as the peak for construction employment nationally. We compare the level in each state to where it is in the latest month.
Idaho and Utah were already fast-growing states. Idaho had the number one population increase for five years in a row, and Utah has been in the top five. They got an extra boost from people working on the West Coast, particularly in the Seattle and San Francisco Bay areas, who no longer had to report to an office. Many moved to places that may have had closer amenities for what they wanted to do in their leisure time. But also, they didn’t have to put up with a commute and high housing costs.
We may be at the end of that transition, particularly as those companies have suddenly gone from increasing employment to cutting jobs. That could mean people may no longer be able to afford to make that move, or they may decide these states don’t have the package they want for the long term. I think we will continue to see higher growth in states that we didn’t traditionally have.
Constructor: Bid prices increased dramatically during the height of COVID-19 and its impact on the supply chain. Pricing/inflation seems to be leveling off just a bit in recent months. What do you foresee for the coming year in the cost/bid pricing realm, and how can contractors best prepare for continued fluctuation?
Simonson: Construction continues to have higher cost increases than the overall economy. The latest figures showed that the producer price index for inputs to nonresidential construction, a weighted average of the materials and selected services such as trucking and design services used in construction, went up 10.1% from November 2021 to November 2022. Comparing that to the 7.1% increase for the consumer price index, it is a much higher cost increase.
At the same time, there is what I call a “bid price index.” The Bureau of Labor Statistics asks a large group of contractors each month what they would charge in terms of overhead and profit to build a new building. That index went up 20%, much more than the 10% for their input costs. However, the input cost index measures the cost at the producer level, and it doesn’t take into account some of the added costs of trucking or added costs of delay on delivery. For instance, we hear a lot of cement and concrete companies are now putting customers on allocation. That means it takes six extra weeks to get concrete poured. That’s money out of your pocket and additional costs.
There’s also a huge variation. We’ve seen a big drop in steel, copper and lumber prices lately, but concrete, gypsum and paint costs have been rising. It depends on the mix of materials any contractor buys as to whether they’re able to anticipate those costs correctly or if they’re still getting stuck with unanticipated increases.
There’s no crystal ball providing the answers on how contractors can respond. The best contractors can do is stay in touch with their suppliers, or subcontractor if a general contractor, and communicate regularly with owners about the choices and how to deal with them.
Constructor: Can you please provide readers insight on the mid- and long-term impacts of the pandemic to the construction industry?
Simonson: I’ve always been fascinated by demography. We’ve seen a huge drop in the population increase. According to Census Bureau estimates, a year ago, we saw just a .16% increase in the U.S. population. That was by far the lowest in the 121-year history of available data. In the last decade, growth averaged more than half a percent yearly.
Part of it is attributable to COVID with increased deaths, both from excess deaths, as the federal government calls it, or to other diseases not being treated because hospitals were full of people afraid to see a caretaker. Also, unfortunately, we’ve had a long-term rise in deaths from opioid use and suicide.
The growth rate rebounded somewhat in 2022, but a record 15 states lost population compared to 2021. Ultimately, that means lower demand for housing and the needed infrastructure that would go along with housing, including streets, underground utilities, schools, public safety and other buildings.
We are already seeing a drop in high school seniors as the “baby bust” has worked its way through the grades. I do think higher ed is in for a long-term shift. It’s possible that a lot of colleges and universities are going to either close their doors or have a lot less need for new dorms and classrooms. That has been compounded by the fact that adults can get jobs right away without having to go back for a degree or certificate in another field.
In addition, the number of international students is not what it was before. It’s come back in the last year, but we still have a backlog of visa applications at consulates, as well as students who don’t want to risk getting trapped in the U.S. as some did in 2020.
This shift from retail to e-commerce is certainly permanent in the nature of how goods are delivered. You see it evolving in many different ways today. You can see this with last-mile distribution points and big-box stores being converted to distribution. In some major metros, they’re also building multi-story distribution points where trucks go up a ramp to load or unload. We may see drone delivery, which will continue the evolving distribution efforts.
We will see a lot more solar and wind coming into the energy market. But we also need ways to store that energy so that it’s available when people use it in the evening or when the wind isn’t blowing. That could mean hundreds of thousands of battery charging stations.
The health care market is also changing as more delivery comes through telemedicine through specialized diagnostic and treatment centers that may be outside of a hospital setting.
And then, finally, the big question about offices and urban versus suburban versus remote areas. And we’ll have to see how that shakes out. It does guarantee that there will be demand for construction, but where it takes place and the kinds of structures will keep changing.