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Rising Costs, Labor Shortage May Add to Commercial Construction Delays in Coming Year

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Rising Costs, Labor Shortage May Add to Commercial Construction Delays in Coming Year


Contractors Can’t Keep Up With Demand for Workers as Firms Resort to Headhunting to Keep Projects Staffed

With a large increase in the amount of spec office construction nationally and continued building of warehouse and distribution facilities and multifamily housing, the outlook for commercial development hasn’t been this strong in years.

However, the increased building activity is exacerbating the already-keen competition for skilled construction workers. Combinied with the rising cost of construction materials, fuel and services, the labor shortage is expected to squeeze commercial contractors in the New Year, potentially pushing back the timetables for some CRE projects in the development pipeline, according to projections by CoStar and other analysts.

Recent data from the U.S. Bureau of Labor Statistics and temporary employment agency Manpower Group suggest that contractors’ costs continue to rise and they are having a tough time finding labor, in many cases luring workers away from rival firms with offers of higher pay, according to Kenneth Simonson, chief economist for Associated General Contractors, which released its 2018 forecasts and membership survey today.

Three-quarters of construction firms expect to expand their payrolls this year amid rising confidence that economic conditions will remain strong as tax rates fall and the Trump Administration and Congress pursue business deregulation, according to AGC’s 2018 Construction Industry Hiring and Business Outlook.

Of the more than 1,000 construction companies and contracting firms that participated in the survey, 44% expect net expansion of demand for all types of construction services, the highest in the history of the 10-year-old survey.

“Construction firms appear to be very optimistic for both private-sector and public sector construction,” said Stephen Sandherr, CEO for the Arlington, VA-based AGC.

The good news on more construction projects is tempered by concerns over workforce shortages, rising labor and business costs and whether the president’s plan to invest $1 trillion in the nation’s roads, highways, bridges, power grid and other infrastructure can move forward.

Rising materials, fuel and other non-labor costs are also squeezing constactors. The Producer Price Index for inputs to construction, excluding capital investment, labor and imports, increased 4.8% year over year in November, exceeding the 3% PPI increase for new nonresidential building construction. The PPI for all goods used in construction, including diesel fuel and other items consumed by contractors, rose 5.6%, the largest increase in six years.

At the end of October, there were 381,000 job openings in construction, the largest October total since 2009, the BLS reported in its latest Job Openings and Labor Turnover Survey (JOLTS) release. The industry hired 380,000 employees in October, the most for that month since 2008. The BLS also reported recently that there were 467,000 job seekers in November whose last job was in construction, the lowest total for the month in the 17-year history of the series.

“Together, these figures suggest contractors are still eager to hire more workers but are having difficulty finding ones who are qualified,” said Simonson.

As a result, in metros across the country, developers will find themselves paying more to get their buildings built as high demand for construction workers places pricing power in contractors’ hands, said CoStar Portfolio Strategy managing consultant Jeff Myers.

Nationally, there are 11% fewer construction workers than prior to the Great Recession. Overall U.S. employment, by comparison, is 6% above its previous peak.

While a portion of total includes the single-family housing industry, the same labor shortage is affecting commercial, multifamily and other nonresidential specialty builders and general contractors, despite a market that remains near the peak of the supply cycle for most building types, Myers said.

The worker shortage has driven up average annual pay for construction workers by 20% over the past five years, eclipsing increase in other sectors such as financial and business services. Adding salt to the wound, the shortage has pushed back delivery dates, and the combination of rising materials costs and rebuilding efforts from the hurricanes last fall is also pressuring development costs, Myers added.

In the multifamily sector, the average length of construction delays will increase to four months by the end of 2018 because of the increased construction demand, which will remain robust for the near future, with sales transaction volume once again surpassing all other property types, according to CoStar forecasts. One sign of this is that architects are continuing to do brisk business designing new buildings.

Architecture design services remain in high demand, with the American Institute of Architects (AIA) reporting a sharp increase in the monthly Architecture Billings Index (ABI) to 55 from 51.7 the previous month, an indicator that construction spending and activity should remain strong through at least most of 2018. The new projects inquiry index was 61.1, up from a reading of 60.2 the previous month, while the new design contracts index rose slightly from 52.8 to 53.2.

“Not only are design billings overall seeing their strongest growth of the year, the strength is reflected in all major regions and construction sectors,” noted AIA Chief Economist Kermit Baker. “The construction industry continues to show surprising momentum heading into 2018.”


Source: Rising Costs, Labor Shortage May Add to Commercial Construction Delays in Coming Year

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