Hot Topics
Construction Workforce Shortages Continue: Labor issues continue to plague the construction industry with no signs of letting up. Results of surveys taken in July and August of more than 1,400 U.S. construction firms show that very few candidates applying for work in the industry have the necessary skills to do the job. Ken Simonson, chief economist for General Contractors of America, noted that 85% of the survey respondents have open positions. Among those firms, 88% are having trouble filling positions, particularly among the craft workforce. These difficulties are not unique to one aspect or facet of construction. Contractors of all sizes, revenue amounts and specializations reported issues finding workers.
According to the surveys, one of the main problems contractors face is a lack of qualifications — 68% of firms reported that applicants lacked the skills necessary to work in construction. As such, Ken Simonson believes it is time to rethink the way our country educates and prepares workers. To that end, technology is a key factor as it offers firms a way to train employees to be more accurate and productive. Results of the surveys show that 41% of firms are boosting spending on training and professional development programs, 25% are enhancing their online and video training capabilities, and 14% are using augmented and virtual reality technology to better train workers. Many surveyed believe that over the next five years AI and robotics will reduce construction costs by automating manual, error-prone tasks, improving the quality of construction jobs and making construction workers safer.
As part of a shorter-term solution to the worker shortage, some contractors have offered varying benefits to entice young professionals to join their ranks. From a financial standpoint, 81% have raised base pay rates during the past year, 44% are providing incentives and bonuses, and 26% have improved their benefits packages. The real key, however, is understanding what younger workers want. Construction firms need to understand that a cultural shift is occurring in the industry. While overtime pay is desirable, younger workers value their free time more, and gone are the days when workers would tolerate being belittled or badgered on a jobsite.
Material Prices Signaling Stability Ahead: The relatively flat cost of construction materials in recent months indicates contractors are finally experiencing relief from supply chain woes and price volatility. Construction input prices were unchanged in July, marking five consecutive months of no upward movement. Overall construction costs are 3.1% lower than a year ago, while nonresidential input prices dipped 2.7%. Although the overall costs remain close to 40% higher than before the start of the COVID-19 pandemic, the flattening of costs over the past five months indicates that inflation has been cooling. “Goods prices continue to stagnate in the context of improved supply chains and a sluggish global economy,” said Anirban Basu, chief economist for Associated General Contractors of America (AGC). “It has been the improvement of supply chains that best explains recent positive economic outcomes in the U.S.”
Despite the stabilizing of inputs for most materials, prices did increase over the month for all three energy subcategories: natural gas, crude petroleum and unprocessed energy materials. Natural gas prices pushed up 11% in July, while crude petroleum and unprocessed energy materials jumped 8.4% and 8%, respectively. “With the exception of energy prices, which are heavily influenced by a cocktail of geopolitics, weather and investor frenzy, construction materials prices should be reasonably stable during the months to come,” said Basu. “As supply chains have normalized, unmet demand has been more readily satisfied.” Those improved supply chains have helped push prices lower, contributing to the disinflation seen both in the consumer price index and producer price index. One exception to stable construction materials costs may be construction equipment prices. The price of equipment increased nearly 2% on a monthly basis in July and nearly 10% over the past year.
Meanwhile, Buy America requirements for publicly funded projects will severely limit the supply of materials contractors can use and will increase costs. The new requirements are so strict that many products currently made in the U.S. would not be compliant due to containing small components that are sourced from abroad. “Federal officials continue to inhibit the ability of contractors to utilize an established diversified construction material supply chain by drumming up strict regulations,” said Stephen Sandherr, CEO for AGC. “Infrastructure is needed now, and until we have the capability of keeping all manufacturing on U.S. soil, we need to take advantage of all resources available.”
High Interest Rates and Lending Issues Hinder Construction Planning: Commercial and institutional construction is likely to continue to be constrained for the rest of 2023, as evidenced by the sixth straight monthly decline in the Dodge Momentum Index, a benchmark that measures nonresidential building planning. The index dropped 6.5% in August due to slowdowns in both commercial and institutional projects. The August decline marks the largest drop since March.
“Overall activity remains above historical norms, but weaker market fundamentals continue to undermine planning growth,” said Sarah Martin, associate director of forecasting for Dodge Construction Network. The commercial component of the index, which includes retail, warehouse and office, dropped 1.6% in August, while the institutional sector, encompassing healthcare and education projects, tumbled 14.8%. On a positive note, the index remained 4% higher than in August 2022. On the commercial side, stronger hotel planning offset weaker office activity. That caused just a mild regression in the commercial segment over the month. The sizable decline in the institutional sector stems from a deceleration in education, healthcare and amusement planning activity. “It’s likely that the full year of tightening lending standards and high interest rates has begun to affect institutional planning, which has otherwise been resistant to these market headwinds,” Martin said.
Meanwhile, architectural activity, which also provides a gauge for upcoming construction work, remained flat on a national level, according to the most recent data from the American Institute of Architects. The report pointed to slowdowns in public sector projects and overall financing issues.
According to Dodge, a total of 22 projects valued at $100 million or more entered planning in August. The largest of the commercial projects is the $322 million Phase 5 of the Northern Virginia Gateway Data Center in Fredericksburg, Virginia, while the largest of the institutional projects to enter planning is the $420 million Westborough Life Sciences Park in Westborough, Massachusetts.
U.S Housing Starts Surge: U.S. single-family homebuilding surged in July and permits for future construction rose amid an acute shortage of previously owned houses, but the climb in mortgage rates to a near two-decade high could slow the housing market improvement. The sharp rebound in groundbreaking on single-family housing units was another sign of the economy continuing to defy dire forecasts of a recession. “Housing generally has shown resilience, but Fed officials may overlook this latest news of strengthening demand in the economy when it comes to judging whether to hike rates again this year because of the progress made on the inflation front,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
In July, single-family housing starts, which account for most homebuilding, jumped 6.7% to a seasonally adjusted annual rate of 983,000 units. They rose 9.5% year-over-year. The increase was led by the West, where single-family starts soared 28.5%. Starts rose 12.5% in the Midwest, but fell 3.4% in the Northeast and declined 1.3% in the densely populated South. The growth was due in part to incentives offered by homebuilders. Permits for future construction of single-family homes rose 0.6% in July to a rate of 930,000 units. Permits have now increased for six straight months and were lifted by growth in the Midwest and South. Single-family building permits, however, tumbled in the Northeast and were unchanged in the West.
After being pummeled by the Federal Reserve’s aggressive monetary policy tightening, the housing market has stabilized. Further improvement, however, looks likely to be restrained by the renewed increase in mortgage rates. The average rate on the 30-year fixed rate mortgage has risen to 6.96%. That rate is within striking distance of the 7.08% seen in late October and early November, which was the highest level since April 2002. Since March 2022, the Fed has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range.
Despite the rise in starts, housing supply is likely to remain tight. The number of houses approved for construction that are yet to be started fell 0.4% to 277,000 units in July. The single-family homebuilding backlog dropped 0.7% to 140,000 units, while the completions rate for this segment increased 1.3% to 1.018 million units. The inventory of single-family housing under construction fell 0.7% to a rate of 678,000 units. Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap.
Trends in Used Equipment Values
According to the most recent reports issued by Sandhills Global, ongoing increases in inventory have led to decreased auction values across the construction equipment, farm machinery, heavy-duty truck, and semitrailer categories. These increases have also resulted in wider spreads between asking and auction values. Key trends in certain used equipment values noted in the reports are as follows:
U.S. Used Heavy-Duty Construction Equipment
The excavator category is leading the inventory recovery within the used heavy-duty construction equipment market. In the market overall, inventory levels were up 2.58% month-to-month following several months of increases, and rose 9.46% year-over-year. At the same time, asking and auction values are trending down with the largest value decreases seen in the excavator category. Dozer values are also trending down, although not as quickly as the excavator and wheel loader categories. Overall, used heavy-duty construction equipment asking values dropped 1.74% month-to-month and 4.79% year-over-year in August. Auction values were down 2.18% month-to-month and 7.17% year-over-year and are trending down.
U.S. Used Heavy-Duty Trucks
Increases in the inventory levels for used heavy-duty trucks paused in August. However, an upward trend is expected to continue. Asking and auction values maintained a downward trend that began in the second quarter of 2022, with sleeper trucks falling at a faster pace than day cabs in August. Asking values fell 3.72% month-to-month and 20.93% year-over-year following consecutive months of decreases. Auction values declined 2.43% month-to-month and 28.57% year-over-year, also following consecutive months of decreases.
U.S. Used Semitrailers
Used semitrailer inventory levels were up 3.55% month-to-month and 59.96% year-over-year after several months of increases, with the dry van and reefer semitrailer categories leading the way. A downward trend continued for both asking and auction values, with dry van semitrailers exhibiting the most significant month-to-month value decreases in August. For the same month, asking values were up 0.05% month-to-month and down 23.41% year-over-year. Auction values fell 2.87% month-to-month and 27.22% year-over-year following months of decreases.
U.S. Used Lifts
Inventory levels of used lift equipment are trending upwards with the telehandler and scissor lift categories taking the lead. Overall, inventory levels were up 2.33% month-to-month and 4.56% year-over-year. Asking values remained elevated in August, increasing 2.42% month-to-month and 3.89% year-over-year, and are trending sideways. Auction values are trending down with the largest decreases seen in the boom lift category. Auction values increased 1.01% month-to-month and 4.2% year-over-year.