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Residential Demand Drives Construction Sector

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Construction spending rose 0.4% in November from an upwardly revised October figure. Private residential construction continued to lead the charge, while private nonresidential construction spending rose modestly. Public spending declined for the first time in six months. Spending continues to be boosted by price increases; everything from rising prices for raw materials prices to labor costs is creating headwinds for builders.

Private residential construction spending grew 0.9% in the month as single-family home construction and home renovations drove the gains. The housing market remains hot, although the pace of growth has been slowing in the last few months. Builders are working through project backlogs, supply chain bottlenecks and labor shortages to try and meet the high level of demand from wealthy home buyers and investors.

Multifamily construction fell during the month, however; it has been experiencing equally hot levels of demand as single-family home construction as many potential buyers are priced out and remain renters. According to the National Association of Home Builders, small metropolitan areas and suburbs of large metropolitan areas experienced the largest increase in multifamily building activity in the third quarter. Some of these trends were already occurring before the pandemic; even as renters return to larger city centers, apartment construction activity remains stronger in the suburbs.

Private nonresidential construction grew a modest 0.1% as lodging, transportation, power and manufacturing infrastructure construction grew in November. Travel and tourism were starting to return to almost pre-pandemic levels before the Omicron variant hit right before the holidays. The return to offices for many of those working from home has once again been delayed. This will deal another blow to the nonresidential construction industry as many projects are delayed or canceled, especially as more workers are off sick. Planning for large projects remains a challenge, as the volatility caused by the pandemic is not yet diminished. According to one construction analytics firm, construction plans point to spending growth in 2022; however, those plans come with downside risks.

Public spending on construction projects, most of which are funded at the state and local levels, fell 0.2% in November. It takes time for federal money passed from COVID-relief bills to work its way through state and local projects. With the Build Back Better plan still on the table, more funds could be released for infrastructure spending. The issue is the lack of workers, as construction jobs remain 1.5% below the prepandemic peak. Job openings are up 62% compared to a year ago, sitting at a historical high. Additionally, construction workers are less likely to be fully vaccinated as compared to other industries, putting them at risk as the new highly contagious variant rips through the population. More workers will be sidelined in the new year, while long-haul COVID remains a concern for the future of the workforce.

Bottom Line
Construction activity remains strong at the end of 2021, however rising input prices and labor shortages are big concerns for builders as they work through backlogs. Demand for housing will cool in 2022 as the Federal Reserve tapers asset purchases and raises rates midyear, which will affect mortgage rates. Nonresidential and public construction will take longer to strengthen because of projects sidelined by the new COVID outbreaks.

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