Market Trends May 2021

5/13/2021

Construction’s Digital Transformation
A national Building Information Management (BIM) standard is in the early stages of development. The National Institute of Building Sciences (NIBS) is working with leaders from
public and private organization to develop a coordinated program to address the lack of a uniform digital process standard for BIM. Team members agree that developing a national standard will streamline business, accelerate the effectiveness of the supply chain, improve project outcomes, drive efficiency and foster innovation. Construction comprises 13% of the global economy. Project leaders say that the Executive Roundtable will convene the global stakeholders who will benefit most from the digital transformation.

ENR’s BuildTech 2021 virtual conference brought together contractors, engineers and other industry professionals who shared insights on how they kept working through the pandemic as well as the new solutions they uncovered during this difficult time. Many of the execs doing presentations noted that focusing more intently on the people side of their business and employee well-being in general turned out to be a key ingredient to success. In order to keep doing business, they were all forced to embrace new technologies and communication tools and develop new approaches in order to be able to keep working. Many of those innovations that were birthed by necessity proved to be better than established practices and will now become part of standard procedures.

Construction Market Stabilizing in 2021
ENR’s latest Construction Industry Confidence Index survey shows that industry executives see the market stabilizing this year, and say that while challenges remain, the effects of the pandemic may be less severe than they feared. The index hit a low of 36 in the second quarter of 2020, climbed to 40 in the fourth quarter and rose to 51 in the first quarter of 2021, the first double-digit rise in the index since the fourth quarter of 2016. A rating above 50 shows a growing market. The rankings were developed from 207 responses to surveys sent in February and early March to execs of US companies on ENR’s lists of leading general contractors, subcontractors and design firms. Only 15% of respondents consider the current market to be improving, but 48% think the market will be improving by mid-2022, and only 16% foresee a declining market 18 months from now. The most recent poll of CFOs by Construction Financial Management Association shows rising confidence as well. Projects are restarting that were thought to have been permanently canceled and the outlook for infrastructure and public construction is excellent. However, the majority of respondents report lower profit margins and 82% are seeing prices rise for materials. They’re also seeing more competition. Almost half see the retail construction market continuing to decline. Many believe there will be a jump in remodeling in both residential and commercial markets, especially offices.

Price Spikes Tied to Supply Chain Disruptions and Shutdowns
Ongoing pandemic-related disruptions to the supply chain for a wide range of construction materials are undermining demand, according to the AGC. More than half of all contractors have experienced delays due to shortages of materials, parts or equipment, and AGC warns that forecasters should continue to anticipate that projects will cost more and have longer, and possibly uncertain, completion schedules. Among materials in short supply are lumber and steel, steel joists, insulation, stainless steel and PVC piping. AGC has asked the Biden administration to consider removing tariffs in place on key materials as well as taking other regulatory steps to ease shortages. Container and trucking shortages are being felt across the country and some experts caution that bringing in significant quantities of materials from overseas will just add to the current distribution challenges. Overall, ENR’s average prices for lumber were up 25.6% by the end of 2020, while other materials were up 8.3%.

Inside the Lumber Crisis
The NAHB estimates that the increase in lumber prices since March 2020 has added more than $24,000 to the cost of building a $300,000 home. According to the NAHB, the US is simply not producing enough lumber. The US is also importing less lumber from Canada, which typically supplies about a third of US lumber needs, due to tariffs and the mountain pine beetle epidemic that has devastated forests in British Columbia. It is creating what lumber analysts call the perfect storm of very strong demand and very slow supply response.

About 80% of homes built in the US are wood-framed. Last year as the pandemic took hold and spread across North America, sawmills cut production, believing there would be a big drop in demand. Dealers also cut their orders and instead ran down inventory. But instead of tanking, demand accelerated as the lockdown inspired a wave of DIY and renovation projects and low interest rates supported the wave of people moving to bigger homes and/or smaller, less urban areas. NAHB had originally forecast a 4% rise in single-family new home construction in 2020; instead, it jumped 12%.

Many sawmills closed after the economic downturn and housing crisis that began in 2008 and became the Great Recession. In 2005, North American production capacity stood at
80.7 billion board feet. Today it is 72 billion board feet. Labor shortages are further complicating the problem. Timber companies in the US and Canada are scrambling to increase capacity, and industry analysts say supplies could rise 5% to 6% this year, which will help somewhat.

Lumber prices skyrocketed in 2020, and activity has remained strong this year, with lumber stocks remaining at critically low levels. Lumber futures have soared by more than 50% this year to more than $1,327 per 1,000 board feet length as builders, lumberyards and home center stores compete for increasingly scarce supplies. The real time physical market for lumber is also red-hot, with the price of the preferred product for wooden framing, which is 2x4 lengths of Western Spruce, Pine and Fir, rising to $1,205 per 1,000 board feet, nearly $900
above the average US price since 2005.

Are We in a Housing Bubble?
According to Wells Fargo, there has been a big surge in Google searches for “When will the housing bubble burst?” Some people are comparing the current housing frenzy to the time leading up to the Great Recession that began in 2008 and are wondering if the bottom is about to fall out of the market.

The median price of an existing home has soared more than 17% since last March, with single-family home prices skyrocketing 18.4%. Wells Fargo believes that bubble talk is premature, and the jump in home prices reflects a historic imbalance in the supply and demand for housing.

Home sales rose well ahead of the improvement in the economy, driven by record low mortgage rates and people who needed more space because the entire family was spending more time at home. In some households both parents were working remotely while also trying to accommodate virtual school for several children. The big surge in demand came at a time that existing home inventories were already extraordinarily low, which set off bidding wars for what few listings were available. Eighty-three percent of homes sold in March were on the market for a month or less, and properties typically were on the market for just 18 days, down from 20 in February.

Market Trends