2022 Construction Outlook

Tuesday, March 29, 2022
By Matt Sutter, Chief Executive Officer
In Planning, Community

Hurry, get the design done, order materials, race against time. The world that we are now living in, is a place that we have not been since the late 1970s. While we are not experiencing the long lines at the gas stations and staggering interest rates that were in place during the Carter and early Reagan administrations, there are many similarities to the construction environment of the late 1970s. Fast Track delivery methods are starting to come back to fight rising inflation, long material lead times and labor shortages.

Due to significant inflationary pressures, contractors are having a difficult time holding prices for any period of time. Many bids are coming in with a note that says “This bid is only good for two weeks”. This is a direct result of material price increases, which are occurring, in some industries, every month. Products such as structural steel, aluminum, drywall, metal studs, wood, and roofing insulation have been subject to increases of at least 20% over the last six months. There are several reasons for this. The Covid 19 pandemic shut down manufacturing businesses for up to 6 months, but most of the construction in the US was deemed an essential business enterprise and therefore kept moving ahead. This meant that all of the new orders to the manufacturing facilities backed up and created a large backlog of work. These backlogs allowed manufacturers to raise prices without fear of being without work. In addition, the manufacturer’s material prices increased. Raw materials feeding the manufacturing facilities are also in short supply and ports are overwhelmed, slowing delivery of imports, such as ingredients for aluminum. Lower supply and high demand naturally led to higher prices for these materials.

Discussions with many of our manufacturing and service clients have revealed a common problem with labor in Ohio, and the broader US. It is difficult to find enough people to work. Several factors are contributing to this condition; Millions of people who were laid off during the pandemic have not returned, many people that were approaching retirement age decided to retire early, and the government cash payments to those out of work, incentivized them to stay home. As a result, there are not enough people to fill all the open positions in the U.S.

The scarcity of materials, the backlog of unfilled orders and the shortages of workers have all combined to create a large time gap between the ordering of a product and its delivery to the construction site. In addition, some large international companies such as Amazon have bought a year’s worth of production of items such as steel bar joists that hold up floors and roofs. Lead times for materials have increased dramatically. Lead times for steel have increased by 2-4 months, roofing insulation by 8 months, windows by 4 months and doors by 2 months.

Rising prices and long lead times have changed the environment for the design and construction world. Client’s budgets need to be increased. In the last six months alone, construction costs on average have increase by 10-20% depending on the project. Wage reports show that labor has increased 4.7%, making a majority of the price increases in construction due to material increases. Long lead times, mean that items such as steel, roofing and windows are being ordered before the design of the project is fully complete and it is extending construction timelines on some projects by several months.

While this may sound like a terrible time to build, interest rates are still historically very low, banks are still willing to lend and there are many government grants and tax incentives that still make it a viable time to expand. The coming months, with all of the uncertainty of the supply chain, global impacts from the attacks on Ukraine and a possible Fed interest rate increase make it difficult to predict the prospects for the rest of 2022. The proverbial crystal ball is quite fuzzy.

In order to overcome some of these challenges, we are advising our clients to:

• Order materials early.
• Release drawings early in smaller parts such as structural steel to get in line for production as early as possible.
• Talk with multiple subcontractors to find better lead times.

We believe that it will be spring of 2023 at the earliest before market conditions begin to revert to a more normal state, however prices will likely not return to the levels of 2020. Of course, the crystal ball is fuzzy and life is always uncertain. Sometimes you must find a creative way through challenging times.

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