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By Duane Craig
January 16, 2017
The construction industry just wrapped up a strong year following a lengthy period of growth. Many are optimistic as we enter the new year as 2016 marked highs in industry employment and investments. However, while some predictions about construction in 2017 are sunny, other sources are sounding cautions. Construction risk, material prices, and labor issues continue creating uncertainty for the new year. Construction’s seven-year expansion is also suggesting a potential downturn in the industry’s economic cycle.
On the residential side, home ownership is still undergoing change, and that’s tempering the economic outlook for residential construction. Realtor.com’s 2017 Housing Forecast cites demographic influences of the Baby Boomer and Millennial cohorts as key to the sector. An increase in mortgage interest rates, tight inventory nationwide, and high prices are slowing millennial investment in single family homes.
Somewhat helpful though is the trend of boomers selling their properties at the current higher home values so they can downsize. That’s opening more of the existing supply to first-time buyers. Home ownership rates in the U.S. hit a 51-year low in the second quarter of 2016. Still, residential, both single, and multifamily, are projected for growth in 2017 of between 8% and 10%.
According to the Marcum Commercial Construction Index there’s a continuing weakness in nonresidential construction that suggests change is in the air. 11 of the 16 nonresidential categories registered drops in spending in September. The report from Marcum also sounds a cautionary note about talk of an infrastructure stimulus package. In light of the nation currently close to full employment, a stimulus package is expected to accelerate wage growth, creating long-term risks for the industry. With increases in wages and other inflationary pressures, interest rates could move upward and negatively affect the stock market, bonds, commercial real estate values, and apartment buildings. In short, that could mean a sharp drop in construction spending in the nonresidential sector following any intense stimulus spending activity.
JLL, a professional services and investment management firm, predicts a “softer construction industry across the U.S” by late 2017. Citing demand, and market saturations leveling out across property types, the firm predicts construction growth slowing. That will stimulate increased competition among firms. JLL highlights three important themes for 2017 as offering the greatest challenges and opportunities for the construction sector:
Risk: After seven years of expansion, growth is slowing, causing all players to be more cautious about the potential risks in new projects.
Labor: Shortages continue growing along with wages and those factors are beginning to limit the number of projects moving into development.
Technology: With construction finally stepping up to the technology plate, there is going to be growing disruption as the playing field continues to level out.
Owners are placing increasing importance on risk management and the area with the greatest potential for construction firms to differentiate themselves is that of fabrications and modularization, according to the International Risk Management Institute. IRMI also projects increasing demand for companies that can bring new materials and methods to bear on reducing waste during construction, and boosting energy performance efficiency of completed structures.
From a competitive standpoint, IRMI highlights the productivity gains offered by building information modeling (BIM), and new job site technologies that help people work faster, safer, and smarter. The institute says the implications of adopting these technologies are:
Technologically savvy firms will grow in importance to project owners
Firms will have to select employees based more on their willingness and ability to apply new technology
Adopting tech will increasingly require very careful forethought to avoid distractions at the expense of benefits
Construction’s increasing love affair with technology is showing that early adopters are best positioned to compete for projects, according to the IRMI report. There are three important areas where this is playing out:
Expect to see increasing demand for prefabricated building components that can boost quality, speed up construction, and make job sites more efficient. These will dominate for repetitive sections of projects, but they will also have to maintain architectural style. In some ways, prefabrication could help improve the labor market by allowing more use of lower skilled people, while increasing reliance on manufacturing competencies.
This will also affect the subcontracting pool by changing the makeup of their workforces and will require greater collaborative skills within the workforces.
Technologies that use GPS will continue moving to the forefront to provide greater job site transparency. Coupling GPS with virtual imaging promises to improve decision making while increased use of drones and robots will reduce costly errors where risks are high. To gain the benefits however, job site communications must improve, staging work will become more important, and the most time-sensitive aspects of projects will have a greater need for adoption.
The industry will continue to have greater empowerment in the ways of finding and doing work. That means changes will happen more and more quickly. Some industries will emerge quickly while others will quickly become obsolete. The implications are that:
Getting work and assessing viability of projects will improve so that project decisions become smarter
New tech will offer opportunities for differentiation
Technology that disrupts will spur new growth and new market opportunities
Organizations that develop and nurture strategic thinkers will have the best chance of effectively applying these disruptive technologies
To stay competitive, more firms will need to adopt collaboration-enhancing technology. At an even deeper level, improving jobsite transparency, and staying ahead of disruption will increasingly require solutions that can easily spread across a project and that offer options for increased efficiencies as opportunities arise.
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