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As we approach the midpoint of 2022 and the second year of economic recovery following the onset of the pandemic, construction is experiencing strong growth amid some headwinds and other challenges.
In this blog post, we’ll share data on how the construction industry is faring today from a recent Deloitte report, highlight three key trends driving business decisions in this sector, and provide economic projections for Q3-4 2022.
2022 Construction Industry Overview
Taken as a whole, the construction industry weathered the pandemic well and has experienced strong growth during the economic recovery. Consider the following 2022 highlights from Deloitte:
- Total construction spending recovered and peaked at $1.57 trillion in July 2021, a record high for the series and 12% higher than 2019 average levels.
- The Associated Builders and Contractors’ Construction Confidence Index (CCI), which had plummeted to 38.1 in March 2020, recovered and hovered at 60+ levels during the first half of 2021, signaling consistent expansion in sales.
- The Infrastructure Investment and Jobs Act (IIJA), with investments across healthcare, public safety, and other public infrastructure, is expected to bode well for the E&C firms and is likely to accelerate recovery across the nonresidential segment.
- An overwhelming majority (91%) of construction industry leaders characterize the business outlook for their industry as somewhat or very positive, which is 23% higher than last year.
- Order backlogs stood at 8.5 months in July 2021, well above pandemic-induced lows, though still below average 2019 levels.
- Residential activities continued to stay strong despite rising material prices and the spread of the coronavirus Delta variant. However, nonresidential segment spending growth remained weak for much of 2021.
- In 2022, both residential and commercial segments are expected to present substantial opportunities for E&C companies compared with 2021, where the residential and non-residential segments grew at different rates.
Construction Industry Tailwinds
Supply Chain Challenges
Our 2021 Construction Industry Outlook touched on the growing need for supply chain diversification after the pandemic disrupted the global supply of just about everything needed for construction operations in the face of booming demand.
This is still a major challenge today, with 75% of construction firms reporting project delays due to longer lead times or shortage of materials and 57% reporting delivery delays, indicating that the industry has difficulty predicting arrival times for needed materials.
These supply chain disruptions are cutting into profit margins. According to Deloitte, “Low profitability and margins have been a bane for the industry for far too long, and such a mismatch between cost and bid price will exacerbate the problem. Per a recent survey, 20% of industry respondents indicated that operating profitability and industry margins are likely to further deteriorate in 2022.”
Unfortunately, this trend shows no sign of improving in the near term. This means that many companies will need to reevaluate long-term business relationships with vendors. Some may need to look into forming new partnerships, which means taking on a certain amount of risk. Adjusting to global supply chain disruptions will require robust coordination between suppliers, subcontractors, general contractors, and owners to make timely and well-informed decisions.
Construction Industry Labor Shortages
It’s getting harder and harder to source employees in a tight construction labor market. According to the report, “Only 4,000 net payroll additions during the first eight months of 2021 may signal significant issues in getting people through the door. Labor shortages could reach crisis proportions, as the current situation is expected to continue through 2022. In a recent survey, 52% of construction executives indicated their organization is facing a severe labor and talent shortage on the job site.”
Hardening Insurance Market
The aftermath of a global pandemic, worsening economic conditions, and an unpredictable future outlook have combined to create unique challenges for business owners across every sector and the insurance industry as a whole. In the past two years, we’ve seen the industry shift out of the longest soft market in recent history and move toward a hard market.
A hard insurance market is typically characterized by higher premiums, more restrictive terms, decreased capacity and enthusiasm for underwriting, and less competition for new business among insurance companies. A hard insurance market is not as favorable to the buyer because coverage can be more difficult to obtain and prices are not as competitive.
Conclusion
I recently spoke with Blake Hastings, Chief Economist at SWBC and former SVP at the Federal Reserve Bank of Dallas. He shared the following economic projections for the construction industry for Q3-Q4 2022:
“With a lot of pent-up demand, expect construction to remain strong for at least the next two quarters. New housing starts grew at the fastest pace since 2006, driven primarily by multifamily construction. As higher interest rates reduce demand for single-family housing, multifamily will continue to do very well. Additionally, construction for industrial space will continue to be strong in 2022.
With that, expect the construction sector to begin slowing in the fourth quarter as slower growth, tightening labor, and higher interest rates eventually impact both supply and demand in the sector. The outlook is positive with some modest slowing by the fourth quarter.”
Between continued supply chain issues, an industry-wide labor shortage, and an economic downturn, now is the time for construction industry leaders to take a step back and evaluate the efficacy of their organizations’ risk management efforts.
The importance of working with the right commercial insurance agent cannot be overstated since your insurance coverage protects the livelihood of your business. The experts at SWBC Insurance Services have extensive experience working with construction industry clients. We leverage risk management and risk retention efforts to minimize the need for first-dollar coverage provided by insurance companies to help lower our clients’ insurance expenses.
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