by Brianna Crandall — March 20, 2019 — Strong momentum in the construction industry is expected to easily carry through the first half of 2019, despite project margins facing pressure from all sides, according to a new report from global specialized real estate services and investment management firm JLL. JLL’s Construction Outlook report finds robust US economic fundamentals will drive further growth of the sector, which in 2018 recorded a 5.1% increase in total construction value and a 4.5% increase in employment.
According to the report, potential risks to the construction sector such as trade war escalation, deteriorating macroeconomic conditions and the worsening labor shortage are largely balanced by potential boosts that include a large-scale federal infrastructure package, relief from tariffs, and the continuation of 3.5% annual gross domestic product (GDP) growth.
Todd Burns, president, Project and Development Services, JLL Americas, pointed out:
All forward indicators for construction are still flashing green. However, a year with growth equal to that of 2018 would be considered a success, given concerns of a broader economic slowdown.
Rising construction costs will sideline select projects
Total building costs, which include labor, materials and equipment, grew by 3.4% in 2018, outpacing the US inflation rate of 1.9%. The widening spread between cost growth and inflation is pushing borderline projects past the threshold of profitability. Building costs will continue to increase in 2019 but at a slower rate than 2018. This reflects an expected cool-down in material pricing but the surging cost of labor.
Growth in total construction employment has hovered between 3% and 6% over the past six years — a far cry from what’s required for labor 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% increase seen last year.
Trade policy 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 widening trade deficit with China, a continuation of tariffs in 2019 is expected.
According to the report, 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 said to be a potential bright spot for the industry.
Construction tech in growth mode, presents opportunity for labor shortage relief
The buzz around construction technology has long eclipsed actual adoption in the industry, notes the report. 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 the standard across the industry in 2019. Amid intense labor pressures, contractors’ most common reason for making technology investments is to increase labor productivity.
Modular construction is poised to have the biggest long-term impact on the industry. Proponents of the technology envision a future full of dedicated warehouses churning out modular components — from exterior wall segments to entire apartment units — for most new construction.
Henry D’Esposito, senior research analyst, Project and Development Services, JLL, remarked:
Adopting modular construction is not always as simple as it sounds. There is often a prolonged period during which the benefits are not fully realized, as firms take time to adjust to the new system. Despite some of the initial challenges, there has been no hesitation among contractors about whether modular will continue to grow.
Growth of modular construction in 2019 will be centered around 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.
JLL’s 2019 Construction Outlook report is available to download from the JLL website upon brief registration.
JLL Project and Development Services provides development, design, construction and branding of commercial real estate projects for prominent corporations, educational institutions, public jurisdictions, healthcare organizations, industrial facilities, retailers, hotels, sports facilities and real estate owners around the world. Reportedly ranked No. 2 in Building Design + Construction’s 2018 Construction Management Giants survey and No. 6 on Engineering News-Record’s 2018 list of Top 100 Construction Management-for-Fee Firms, JLL’s project management team comprises 6,000 project managers across 56 countries.