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In the spring of 2020 as COVID-19 began to impact the U.S. economy, nearly every industry felt the effects. Construction was no exception. Projects were postponed, placed on hold, or cancelled. Construction unemployment started to skyrocket, leaving many wondering how the industry might be affected both short and long term.
Fast forward about a year and the construction business, like many other industries, has adapted to survive in this new environment. However, with so much change and lingering uncertainty, many people in the industry are asking, what will happen to construction pricing? Will it go down, hold steady, or potentially increase?
What impacts Construction Pricing?
No single factor drives construction pricing. Numerous economic forces have varying degrees of influence, and this makes predictions about pricing somewhat challenging.
What is currently happening?
After reviewing data from numerous published sources including, Associated General Contractors of America, ENR, and The Chamber of Commerce, the trends are surprising.
The Commercial Construction Index, a quarterly economic indicator designed to gauge the health of the construction industry, rose to 60 in Q4 2020, which is far below the 74 from 2020, but is up from 57 in Q3. The index also shows material prices are on the rise with steel and other key products reporting multiple planned price increases well into 2021. Trade contractors are reporting material delays expected to last into Q2 of 2021. They are also behind on their current projects and are struggling to find labor.
In addition, more than half of contractors are increasing prices, turning down new opportunities, or both. Reports also suggest that nearly 25 percent of contractors have increased their backlog during the pandemic. The big question is “Why?”
Growth and diversification in new markets and asset types may be a big reason. As retail, entertainment, office, and other sectors slow down, other verticals are seeing huge growth. The supply chain disruptions we witnessed early in the pandemic are driving domestic manufacturing. Industrial warehouse and distribution center construction is booming to meet the needs of increased local manufacturing and the continued consumer shift to e-commerce. Companies with large amounts of office workers in dense urban areas are looking for space in smaller markets that may be seen as more desirable in this environment.
What might this mean?
It means the drop in construction pricing that was predicted by many in the Spring of 2020 did not happen. Unexpectedly, the construction industry recovered quickly and was back to full speed by the end of the year. With current construction activity nearly back to pre-pandemic levels, a shortage in skilled labor, material prices on the rise, project delays, and supply struggling to keep up with demand, conditions are ideal for construction costs to significantly increase in 2021. That is correct. Prices are going up.
What can FMs do now?
Ultimately, success is determined by working with a proven design-build construction partner that can lower your risk and improve your return by:
Nick O’Hare is the Director of Business Development for ARCO/Murray.