Facing a mix of potential risks and boosts, the U.S. construction industry is positioned to provide ample excitement in 2019. Forward indicators are flashing green, but with project margins facing pressure from all sides, a year with growth equal to that of 2018 would be considered a success.
Risks to the sector – including trade war escalation, deteriorating macroeconomic conditions and the worsening labor shortage – have many of us in the industry watching closely for signs of a slowdown. Meanwhile, potential boosts such as a large-scale federal infrastructure package, relief from tariffs and the continuation of 3.5 percent annual GDP growth, generate confidence that momentum in the industry will continue for the next few months.
Amid the complex economic and political environment, three factors look to have the biggest potential impact on the construction industry: rising construction costs, trade policy and construction technology.
Rising Construction Costs will Sideline Select Projects
Total building costs (labor, materials and equipment) grew by 3.4 percent in 2018, outpacing the U.S. inflation rate of 1.9 percent. This marked the second year in a row that building cost growth exceeded U.S. inflation. The widening gap is pushing borderline projects past the threshold of profitability, resulting in some staying on the drawing board.
Building costs will continue to increase this year but at a slower rate than 2018. This reflects the combination of an expected cooldown in material price increases, but a continuation of surging labor costs across all sectors.
Growth in total construction employment has hovered between 3 and 6 percent during the past six years, which is consistently lower than the grow rate needed for 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 percent increase seen last year.
Trade Policy is 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 still-significant 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 that is evolving in real time.
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 standard across the industry in 2019.
Modular construction and Building Information Modeling (BIM) software are two technologies that are poised to have the biggest long-term impact on the industry.
Proponents of modular construction envision a future full of dedicated warehouses churning out modular components – from exterior wall segments to entire apartment units – for most new construction. However, adopting modular construction is not always as simple as it sounds. As firms take time to adjust to new systems, there is often a prolonged period during which the benefits are not fully realized. Despite some of the initial challenges, there has been no hesitation among contractors about whether modular will continue to grow.
As for the year ahead, growth of modular construction will be centered on 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.
BIM software is the critical link for getting the most out of other types of construction technology. As the common language for different firms working on a project, it allows other types of construction technology to interface with each other. BIM software is increasingly popular but by no means universal at this point. In a survey of contractors, 46 percent reported having in-house staff dedicated to BIM work, but 27.9 percent reported they do not bid on projects involving BIM.
Any new technology implementation requires time, money, and manpower, all of which are constantly in short supply. But given the labor shortage is one of the biggest challenges facing contractors, and it isn’t disappearing anytime soon, long-term investment in technology is critical for a firm’s continued growth.