The pendulum swings


2021 Q2 US Market Report

Market activity


We have seen an increase in new project and program starts as the economy recovers from the global pandemic, and as owners, developers and investors have more clarity. While the pendulum swings back from an ebbing market, we now face material and labor shortages in a classic case of demand growth versus constrained supply.

The current market dynamics resemble the slow recovery experienced after the recession in the late 2000s and therefore are not new to our industry. Material and labor levers are expected to keep pressuring pricing structures for various industry stakeholders.

Key challenges — materials


A year ago, industry stakeholders did not know what to do with the excess material while trying to keep the labor force busy. Today, access to certain materials is hampered by cost escalations and longer lead times. Labor availability is also limited due to a substantial backlog of work.

Per the Producer Price Index (PPI) data from the U.S. Bureau of Labor and Statistics (BLS), within the last 12-month period up to June 2021, primary construction materials have experienced significant cost escalations. Additionally, freight costs have also increased drastically (24.5%), amplifying the impacts even on the materials deemed less vulnerable. It is worth mentioning that not all regions in the U.S. are impacted the same way. The overall trend and effects, however, are observed in the same direction in most areas.

These price increases are mainly driven by demand outpacing the supply. As the pandemic slowed down construction activity and as stay-at-home mandates forced workplace closures, material suppliers had to reduce capacity or stop production while trying to offload their existing stock. With the economy and production facilities reopening and construction activity ramping up, suppliers resumed their production but not before the stock levels have shrunk, resulting in ongoing shortages. As construction backlogs and material demand grow, suppliers are trying to catch up but are still restrained in their capability to close the gap. It is expected for supply to eventually catch up with the demand (as it always does) and material prices to normalize back to their pre-pandemic levels. It is, in fact, a matter of when, not if, supply and demand would reach a balance. However, the longer the cost escalations sustain, the more pricing pressure on projects, programs and stakeholders will increase in intensity.

Additionally, extreme weather adversely affected production facilities in the Southern US and the Gulf of Mexico as they started ramping back to standard operating capacity. Also, severe port congestions, especially for offloading, increased wait times up to 2-3 months in specific locations. It was estimated that goods sat in containers represented 10% of the world's circulating supply. Coupled with the week-long Suez Canal shutdown and a national truck driver shortage, logistical delays reduced international competition, increased lead-times, transportation costs, and inevitably, material prices. Various structural steel components and insulation materials have experienced over 40 and 20 weeks of delays, respectively.

The broadening implementation of Design-Build projects, compared to traditional Design-Bid-Build, give more control to contractors in material selection. Coupled with relaxing project specifications (where possible) and qualifying more alternatives by owners, the pressure on the supply chain and material procurement are expected to be eased to a certain extent.

Market intelligence


Growth sectors

The healthcare sector continues a steady growth as providers keep investing in their service operations to become more efficient and effective. Key focus areas are adding more beds, improving patient experience, and reevaluating space to support telemedicine services.

The life sciences sector has experienced strong growth beyond the obvious post-COVID investment appeal in this domain. Increased R&D spending and the number of advanced therapy trials worldwide indicate a growing need for manufacturing space.

Mission-critical and advanced technology markets sustain growth mainly due to continuing data center investments. As businesses adopt more virtual and remote working services, the underlying infrastructure and compute power needs increase the emphasis on data center programs.

Contrary to feared lasting negative impacts of the pandemic, the commercial sector has seen a resurgence in recent activity. Many new builds that once were put on hold are coming back as viable opportunities. However, the main focus is on reimagining existing space for the new hybrid work models (i.e., in-person and remote).

Sustainability and Digital Transformation


One of the few positive outcomes of the global pandemic was the significant decline in carbon emissions due to reduced travel and commute. There is a growing debate on maintaining these environmental gains through remote and decentralized working arrangements. The sustainability implications on commercial real estate, residential and hospitality sectors are still unfolding; however, the new normal is expected to create opportunities in these verticals. End users, tenants and stakeholders are also pressuring owners and developers for more accountability in reducing the energy footprint of their facilities. In the data center sector, a shift from fossil fuels to renewable energy has been trending in new builds (e.g., solar roofs, co-generation), as well as retrofitting existing facilities in the same manner to achieve net zero carbon criteria.

The challenges of remote and siloed work throughout the pandemic accentuated the importance of digital tools to keep projects and programs moving. Construction stakeholders have been adopting various Project Management Information Systems (PMIS) and platforms at an accelerated rate to enable essential digital transformation. Digitization of workflows also allows stakeholders to do more with less in the current resource constrained (both labor and material) market.

As part of adapting to a new way of working, a growing number of commercial real estate developers are also turning to novel technologies to close the gap between remote and in-office workforces. Various technology platforms aim to bring serendipity into the hybrid working model through new communication and collaboration tools. This trend is expected only to grow and become an essential part of office build-out projects in the near future.

Columbia University Manhattanville / New York, USA

Dr. Betty L. Siegel Student Recreation and Activities Center / Atlanta, USA

Construction tech on the rise


There has been a growing interest and emphasis on industrialized construction practices (e.g., MMC, DfMA, prefabricated and modular systems) in the post-COVID era. The limitations that the global pandemic brought to field working conditions amplified the benefits of these approaches. Production in a controlled environment, reduced on-site density, and balancing the impact of material and labor cost escalations have driven industry stakeholders to reevaluate their positions in this domain. Combined with the potential to alleviate housing shortages, even major players such as Berkshire Hathaway, Google/Alphabet and Amazon have invested in this space with significant growth potential.

Increased utilization of robotics and automation on site aims to reduce waste and get more from existing resources. More use cases and proven viability around these technologies are still needed, but growing investment in this domain may yield more significant benefits in the future.

Data analysis by Foundamental, a building technology investor, indicates the sector is poised for massive growth. The firm has compared construction technology venture funding to other B2B and B2C markets. They found that each industry takes two to four years to go from $5 billion to $10 billion in investment, and then another two to three years to go from $10 billion to $50 billion. “Construction just crossed the $10 billion mark, and it took 3.5 years," says Patrick Hellermann, general partner at Foundamental. "This is one of the macro indicators that show us that in the next two to three years, the volume of construction technologies will reach $50 billion or more. We think this is the most exciting sector, along with healthcare and pharmaceutical technology".

There are heightened expectations around the proposed $1.2 trillion infrastructure bill. The eight-year plan is poised to generate various opportunities in building or rehabilitating roads, bridges, railways, public transport, airports, power grid and broadband internet system across the U.S. The plan includes approximately $550 billion in new federal spending over the next five years. Beyond the apparent growth expectations in the infrastructure sector, many other verticals are expected to benefit from the windfall.

Talk to an expert


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Res Orgut

SENIOR PROJECT CONSULTANT, UNITED STATES OF AMERICA


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Chris Williams

CHIEF EXECUTIVE OFFICER, UNITED STATES OF AMERICA


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