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Caterpillar CEO Says Construction Industry Shows No Signs of Slowdown: According to Jim Umpleby, Caterpillar Inc.’s Chief Executive Officer, construction activity isn’t showing any signs of slowing down across North America this year. Although some are concerned that demand could start to slow in the event the U.S. dips into a recession or the March collapse of certain banks infects other sectors, he noted that Caterpillar’s customers are still seeing new projects coming in, and their outlook is pretty unanimous. He also believes that strength will last through at least the end of 2023.
In an interview at ConExpo in Las Vegas, the largest construction convention in North America, Umpleby said, “The input we’re receiving from our construction customers in North America is quite good. They see projects coming either from an infrastructure perspective or some of it’s government funded, some of it’s other, but they’re feeling quite good about what they see. We expect 2023 to be better on both the top and bottom line. That’s still our view.” Tony Fassino, the company’s head of construction industries, added that their customers are seeing strong activity for so-called “big dirt jobs,” such as new battery and chip plants.
When Umpleby was asked whether he believes the U.S. could enter a recession while construction is so strong, he said it could happen but he’s not making a prediction about the economy. His comments come as uncertainty grips investors worried that rising interest rates could hinder broader economic growth in the nation. Adding to economic concerns was the sudden March failure of Silicon Valley Bank and other regional lenders. Heavy-industry investors have also expressed concerns that a strong first half of the year could be followed by a contraction in construction in the back half.
How Construction Companies Can Combat Supply Chain Shortages:Over the last two years, as the supply chain crisis has continued, material shortages in construction have become a reality on nearly all construction job sites. Further complicating the issue is increases in the cost of materials. Clients have had to adapt to inevitable delivery delays and rising costs, while general contractors have learned they must come equipped with options to decrease both wait-times and budgets. Despite these challenges, there are a number of things general contractors can do to address ongoing supply chain and inflation issues.
Talk it Out. Communication with clients and trade partners in today’s climate is vitally important. Similarly, clients must also communicate with their construction team regarding their expectations about budget and schedule at the onset of a project. These conversations can be tough, but setting and managing expectations from the start will increase the likelihood of a successful project.
Find Alternatives. Today’s supply chain continues to be extremely unpredictable. As a result, contractors researching and recommending material alternatives has become a standard practice in the industry in helping clients make informed decisions.
Have a Backup Plan. Today’s climate has made locating the best products and materials to fit a project’s timeline and budget a much slower process. It is now common for a general contractor to be talking to five different vendors about three different products simultaneously. It is crucial today to be flexible to ensure a project is completed as efficiently as possible. Flexibility regarding project start time and phasing can also result in significant savings for a client.
Consider All Costs. There are times when general contractors and their trade partners are unable to fight cost escalation. In these cases, the client should consider all alternatives, including eliminating unneeded features, considering less expensive alternatives, and thinking about what could be included to get employees to come back to the office, such as open and collaborative workspaces with high-end amenities.
Over Prepare and Over Communicate. While we continue to deal with uncertainty in the supply chain and in cost escalation, general contractors must err on the side of caution and include contingencies in the initial project budget. Proposing a higher number may seem overly conservative at first, but it is safer to expect the unexpected and have extra cushion in the budget. When an unexpected change in delivery and cost does occur, it is essential to let the client know as quickly as possible.
Despite the current economic environment, the construction industry shows no signs of slowing. Teams need to prepare for challenges that could arise and proactively present solutions. Maintaining open lines of communication and coming armed with options are vital techniques to ensure success.
Construction’s Labor Gap Tops 500,000:According to a recent analysis conducted by Associated Builders and Contractors (ABC), in order to meet demand, contractors will need to hire an estimated 546,000 workers in 2023, in addition to the industry’s normal pace of hiring. In 2022, the industry averaged more than 390,000 job openings per month, the highest level on record. In addition, construction’s unemployment rate of 4.6% for 2022 was the second lowest ever, indicating there are few construction workers seeking jobs, and therefore there is only a small pool to fill demand.
ABC expects the demand for labor to increase by 3,620 new jobs for every $1 billion in new construction spending, on top of the current, above-average number of job openings. The problem with the high demand is not just the large shortage of labor, but a skill shortage as well. The struggle to hire and retain workers is especially dismal as the workforce increasingly reaches retirement age. There are few younger workers joining the workforce, and when they do, they are less experienced and therefore less efficient.
“With nearly one in four construction workers older than 55, retirements will continue to whittle away at the construction workforce,” said Anirban Basu, ABC’s chief economist. “Many of these older construction workers are also the most productive, refining their skills over time.” At the same time, Basu said, the number of workers with licensed skills have grown at a much slower pace, or, in the case of jobs like carpenters, actually declined in the last decade.
The demand and funding for mega projects such as chip manufacturing plants, clean energy facilities and infrastructure will continue to make the labor shortage problem worse. ABC predicts that in 2024, the industry will need to hire 324,000 new workers on top of its normal hiring pace, and that assumes that construction spending will slow significantly.
More Home Sellers Elect to Sit Out the Spring Housing Market: For some, it might seem like a great time to list their home for sale. Buyers are flooding back into the market, mortgage rates have fallen off their recent highs, and there are still far too few homes for sale to meet demand, but potential sellers aren’t budging. According to Realtor.com, new listings continued to fall in March, down 20% from the same month last year. However, the active inventory of homes for sale is 60% higher than it was at the start of last spring, primarily because homes are taking longer to sell. At the same time, mortgage rates, which dropped slightly in early March due to the stress on the banking system, are now moving higher again.
Homes are now sitting on the market an average of 54 days, up from an average of 36 days at the start of last spring. Time on market was longer in all of the top 50 metropolitan markets, but the greatest increases were in Raleigh, North Carolina (up 42 days), Kansas City, Missouri (up 37 days), and Austin, Texas (up 37 days). Amid fewer new choices on the market and still rising home prices, home shoppers have shown that they are very rate sensitive, only jumping back in the market when rates dip. Mortgage rates dropped slightly in early March, due to the stress on the banking system from bank failures. However, they are now moving higher again, although not quite as high as they were last fall. The average rate on the 30-year fixed is now 6.61%, about 2 percentage points higher than it was a year ago.
Home prices nationally were still higher to start this year than they were at the start of last year, but they have been falling for the past seven months. In January, prices were lower in some of the local markets that had previously been among the hottest, like Seattle and San Francisco. Prices are now flat in Phoenix, another market where prices had been surging. Other markets, especially in the South, like Atlanta and Miami, are still seeing big price gains. List prices in March, according to Realtor.com, were down in Austin and Las Vegas, two markets that were particularly popular with transplants in the first years of the pandemic.
Bank Failures Cause Uncertainty for Contractors: The recent collapses of Silicon Valley Bank and Signature Bank could weaken this year’s outlook for both commercial real estate and construction. According to economists, pressure on America’s banks is fueling uncertainty in financial markets, causing concerns of a spillover to overall construction activity. After the closures of Silicon Valley Bank and Signature Bank in March, questions surfaced about how those collapses could impact the construction industry. According to Ken Simonson, chief economist for Associated General Contractors of America, neither of those closures had any direct impact on contractors nor their projects. Nonetheless, contractors can expect tightening and some tension from small and regional banks that will likely constrict their credit lines, making it more difficult to close loans. As such, it’s important for construction companies to build cash reserves and maintain a certain level of liquidity.
President Joe Biden has taken steps to restore confidence in the U.S. banking system and said that taxpayer dollars will not pay to rescue depositors. Instead, the money will come from the Deposit Insurance Fund that banks have already paid into. Through that fund, depositors will have access to all of their money, while shareholders and certain unsecured debt holders will not be protected. Simonson believes that the impact on the construction industry will be minimal, at least until there has been more time to see if there are other hidden problems among the country’s large banks.
With the likely tightening of financial conditions given the growing stress on America’s banks and ongoing efforts by the Federal Reserve to rein in excess inflation, commercial real estate and construction are likely to weaken further during the year ahead,” said Anirban Basu, chief economist for Associated Builders and Contractors. “The current moment is, above all else, defined by uncertainty. Though contractors with work related to infrastructure, industrial facilities and healthcare will remain busy, privately financed projects outside of that scope could see a slowdown.”
Trends in Used Equipment Values
The high cost of purchasing new equipment, increasing economic uncertainty, lack of capital, technology upgradation, unpredictable construction and infrastructure growth, depreciation, costly breakdowns, and limited space availability are fueling the demand for used equipment. In fact, the used construction equipment market is valued at about $109 billion and is expected to reach $152 billion over the next five years, reflecting a compound annual growth rate of about 5.8% during the that period.
During COVID-19, the market experienced steady growth as a result of increased financial insecurities across the globe, which also encouraged the use of used equipment. The pandemic adversely affected the real estate industry due to decreased consumer spending. However, after the pandemic, the market recovered swiftly and continued its growth from 2021 forward.
Over the long term, the rise in investment in private and government sectors for developing new infrastructure projects is anticipated to witness major growth in the market. The growing adoption of bulk material handling equipment in heavy construction projects is likely to enhance the demand for used construction equipment. Renting and leasing construction machinery is also on the rise. At the same time, there has been significant growth in the re-selling of construction equipment owing to huge profits for equipment owners and sales of used construction equipment.
With construction activity predicted to be high over the next few years, construction firms are looking to replace their equipment and expand their fleets to meet their business needs. As such, we can expect the strong demand for used equipment with higher-than-normal pricing to continue.