U.S. Construction Market Overview Q4

In our last report, we said that the central question facing the construction industry was when — not if — things would return to normal. The last few months seem to have provided an answer: sometime in 2022. The next year is expected to be a return to form for the construction market in most of Cumming’s office locations.

Both the spike in activity in 2021 and the drop in 2020 can be explained by COVID-19. Projects that were cancelled or postponed in 2020 due to the pandemic resumed construction in 2021 as the construction market stabilized. Furthermore, a combination of shelter-in-place orders and record low interest rates created the ideal conditions for a boom in the residential sector. These two factors caused the market to be artificially subdued in 2020 and artificially elevated in 2021. Moving into the new year, we expect pre-pandemic trends to take over. Markets that were declining before the pandemic should begin to decline again, and growing markets are expected to continue their growth. COVID-19 still poses a risk, but thanks to vaccines it is more understood and can be accommodated for.

Final construction employment figures have been released for the last quarter and are showing a steady increase in the number of workers. Some markets have added to their workforce, while in others employment remains well below pre-pandemic levels. This is generally due to some markets lifting restrictions faster than others.

Total Construction Market Forecast (x $1m, Nominalized 2012$) Commodities prices remain well above their 2019 levels, although they are beginning to relax. Most notably, the price of lumber jumped by almost 200% early in the year, briefly putting it in league with precious metals. The exact cause of these increases varies by commodity — and ranges from environmental regulations to speculative buying to a lack of shipping containers — but is generally due to a mix of increased demand and constrained supply. Eased restrictions mean that demand has recovered much faster than suppliers can produce. Many of these issues are likely to persist into the new year, but we expect pricing to at least stabilize in early 2022.

The Omicron variant of the coronavirus has re-ignited fears of restrictions. It is far too early to say whether these concerns are valid, but initial figures indicate that it may be less severe (albeit more contagious) than other variants. Confidence in the market remains high, as vaccinations make COVID-19 a risk that can be planned for and mitigated, like any other risk to a project’s timeline. For those in the industry, we would again like to sound a note of caution on volatility, as we continue to see markets change on an almost daily basis. The timing of any project will be important, at least for the next few months.

Overall, the outlook for next year continues to be positive. 2022 is unlikely to be as active as 2021, but things are expected to return to normal. Old trends are likely to take over as pandemic-related projects wrap up, and this will make contractors less likely to be caught off-guard by sudden changes in the market.

National Director of Forecasting + Analytics DPomfrett@cumming-group.com

Research Analyst DLantz@cumming-group.com

Research Analyst Xwang@cumming-group.com

The Data

National Indicators................................................................................................................................................................. 4 U.S. Annual Unemployment Rate ...................................................................................................................................... 5 GDP Annual Growth Rate..................................................................................................................................................... 6 Consumer Price Index .............................................................................................................................................................7 10-Year Treasury Note............................................................................................................................................................ 8 Energy Costs ............................................................................................................................................................................. 9 Credit Markets........................................................................................................................................................................10 Lending Activity .....................................................................................................................................................................11 Global Demand ......................................................................................................................................................................12 Global Growth Forecasts.....................................................................................................................................................13 Currency Trends ....................................................................................................................................................................14 U.S. Dollar Index ...................................................................................................................................................................15 Material Price Trends .........................................................................................................................................................16 Commodities Price Index......................................................................................................................................................17 Domestic Materials Prices ...................................................................................................................................................18 Labor Trends ...........................................................................................................................................................................19 Construction Employment ..................................................................................................................................................20 Volume + Activity .................................................................................................................................................................21 Architectural Billings Index.................................................................................................................................................22 U.S. Construction Index ........................................................................................................................................................23 Cost Per SQ FT ............................................................................................................................................................. 24 Typical Costs by SF/by Location................................................................................................................................ 25

By Region East ................................................................................................................................................................................... 26 West ................................................................................................................................................................................. 35 Central ......................................................................................................................................................................... 45

The U.S. unemployment rate fell by 0.4 percentage points to 4.2 percent in November of 2021 from 4.6 percent in October, which was well below market expectations of 4.5 percent.

It was the lowest jobless rate since February 2020, as the number of unemployed persons fell by 542,000 to 6.9 million. Meanwhile, the labor force participation rate edged up to 61.8 percent in November, the highest level since March 2020, and is 1.5 percentage points lower than in February 2020. The employment-population ratio increased by 0.4 percentage points to 59.2 percent in November, up from its low of 51.3 percent in April 2020 but below the 61.1 percent reported in February 2020.

U.S. employers likely stepped up hiring in November as they scrambled to meet strong demand for goods and services, giving the economy a strong boost as another challenging year draws to a close, though worker shortages remained a constraint. The Labor Department’s closely watched employment report on Friday is expected to show a rapidly tightening jobs market, with the unemployment rate seen falling to a 20-month low of 4.5% and wages increasing further. Nonfarm payrolls likely increased by 550,000 jobs last month after rising 531,000 in October, according to a Reuters survey of economists. That would leave employment about 3.7 million jobs below its peak in February 2020. Estimates ranged from as low as 306,000 to as high as 800,000 jobs.

Strong employment gains would add to solid consumer spending and manufacturing data in suggesting that the economy was accelerating after hitting a speed bump in the third quarter. They would also put an early interest rate increase from the Fed on the table. The Omicron variant of COVID-19, however, poses a risk to the brightening picture. While little is known about Omicron, some slowdown in hiring and demand for services is likely, based on the experience with Delta, which was responsible for the slowest economic growth pace in more than a year last quarter.

GDP in the United States is expected to reach USD 21,500 billion by the end of 2021, according to Trading Economics’ global macro models and analysts’ expectations. In the longterm, the United States GDP is projected to trend around USD 22,790 billion in 2022 and USD 23,420 billion in 2023, according to our econometric models.

The Conference Board forecasts that real GDP growth in the U.S. will rise to an annualized rate of 5.0 percent in Q4 2021, vs. 2.0 percent growth in Q3 2021, and that 2021 annual growth will come in at 5.5 percent year-over-year. Looking further ahead, we forecast that the U.S. economy will grow by 3.5 percent year-over-year in 2022 and 2.9 percent year-over-year in 2023. This forecast is a downgrade from our October outlook despite the recent approval of a large bipartisan infrastructure package by Congress. While this package will certainly benefit growth in 2022 and 2023, our forecasts had already assumed it would pass for several months.

Next year, the bulk of economic growth will be associated with continued expansion in consumer spending. However, we also expect support from business investment and, critically, a rebound in private inventories. Government spending should also grow more rapidly as money associated with the infrastructure package begins to be spent. Finally, we are also increasing our inflation outlook for the second half of 2022. Recent bottlenecks in supply chains, elevated demand for some goods and services, and higher energy prices appear to be more persistent than previously thought.

Goldman Sachs recently cut its outlook for U.S. economic growth to 3.8% for 2022, citing risks and uncertainty around the emergence of the Omicron variant of the coronavirus. The firm now sees 2022 GDP growth of 3.8%, down from 4.2% previously on a full year basis, and Q4/Q4 growth of 2.9%, down from 3.3% before. Worker shortages could last longer if people do not feel comfortable returning to work due to the variant, according to the note. Goldman pointed out that the spread of the virus could worsen supply shortages should other countries implement tighter restrictions, while an increase in vaccination rates among foreign trade partners would help prevent severe disruptions.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in October on a seasonally adjusted basis after rising 0.4 percent in September, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 6.2 percent before seasonal adjustment. The monthly all-items seasonally adjusted increase was broadbased, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors. The energy index rose 4.8 percent over the month, as the gasoline index increased 6.1 percent and the other major energy component indexes also rose. The food index increased 0.9 percent as the index for food at home rose 1.0 percent. The index for all items (except food and energy) rose 0.6 percent in October after increasing 0.2 percent in September. Most component indexes increased over the month. Along with shelter, used cars and trucks, and new vehicles, the indexes for medical care, household furnishing and operations, and recreation all increased in October. The indexes for airline fares and alcoholic beverages were among the few to decline over the month. The all-items index rose 6.2 percent for the 12 months ending October, the largest 12-month increase since the period ending November 1990. The index for all items (except food and energy) rose 4.6 percent over the last 12 months, the largest 12-month increase since the period ending August 1991. The energy index rose 30.0 percent over the last 12 months, and the food index increased 5.3 percent.

U.S. consumer prices rose last month at the fastest annual pace since 1990, cementing high inflation as a hallmark of the pandemic recovery and eroding spending power even as wages surge. Higher prices for energy, shelter, food, and vehicles fueled the supercharged reading and indicated inflation is broadening out beyond categories associated with reopening.

With inflation likely to remain hot and the labor market firmly on the path toward recovery, we now project an earlier lift-off for the federal funds rate. We look for the Federal Open Market Committee to raise the target range for the federal funds rate by 25 basis points in Q3 2022 and another 25 basis points in Q4 2022. We expect two additional rate hikes of similar magnitude over the course of 2023.

It is generally seen as a safe place to invest when the market is volatile, because the federal government is essentially guaranteed to repay it. Interest rates are generally driven by demand — high demand means low interest rates — and behave similarly to other long-term loans like 10- and 15-year mortgages. In general, demand for treasury notes is high when there is a lot of uncertainty in the market. However, by pushing interest rates down it can drive demand for real estate and thereby help to shore up the construction industry. More than half (51%) of advisors forecast 10-year Treasury interest rates to hover between 1-2% for 2022, but 41% are forecasting rates at 2-3% or more. Just 8% see rates going down to between 0-1%.

In recent months, global gas prices hit record highs as utilities around the world scrambled for LNG cargoes to replenish low stockpiles in Europe and meet surging demand in Asia, where energy shortfalls have caused power blackouts in China.

Following those global gas prices, U.S. futures jumped to a 12-year high in early October but have since pulled back because the United States has plenty of gas in storage and ample production for winter. Overseas prices were currently trading about nine times higher than U.S. futures. Data provider Refinitiv said output in the lower 48 states of the U.S. averaged 97.4 billion cubic feet per day (bcf/d) in December, topping the monthly record of 96.5 bcf/d in November.

Gasoline prices have hit a seven-year high in the U.S. due to the rising cost of oil, with Americans now paying about $3.40 for a gallon of fuel compared with around $2.10 a year ago. The Biden administration has warned the price hikes are hurting low-income people, even as it attempts to implement a climate agenda that would see America move away from fossil fuels and has released 50 million barrels of oil from the national strategic reserve to help dampen costs.

Brent oil, the main driver of prices at the pump, is expected to average $70 a barrel in 2022. That’s down from the average of $84 in October and $81 in November.

Sources: Historic - Federal Reserve Bank of St. Louis Forecast - Wall Street Journal - Bi-monthly Survey

Sources: Historic - Federal Reserve Bank of St. Louis Forecast - U.S. EIA

Real estate development is heavily dependent on lending liquidity, which feeds construction projects and thereby creates demand for materials and subcontractor capacity.

When conditions are favorable for lenders, therefore, construction volume tends to increase.

We have noticed the loan activities of the residential and commercial real estate markets continue to become slightly more active by the end of 2021. Loans associated with construction and development, meanwhile, share the same trend, with an increase of about 1% relative to last quarter. This indicates that confidence in the market is high and construction activity is slowly returning, despite abounding concerns about the spread of the new Omicron variant. 30-year mortgage rates have started to rise again this quarter, but could fall if concerns and case numbers with the Omicron variant grow. If coronavirus-related economic strain outweighs rising inflation from the Fed, we could see interest rates taking a few steps down. It’s unlikely mortgage rates will go down in 2022. The ultra-low rates enjoyed by homeowners and buyers in 2020-2021 were largely driven by the COVID-19 pandemic. As the pandemic (hopefully) recedes in 2022, rates should keep on climbing.

SOURCE: Federal Deposit Insurance Corporation

SOURCE: Federal Deposit Insurance Corporation

SOURCE: Bankrate.com

The scale and longevity of the global inflation shock has taken most forecasters and central banks by surprise and is bringing forward the start of global monetary policy normalization.

A strong recovery in global aggregate demand in nominal terms over the past year has not been matched by an equal recovery in output. Supply bottlenecks resulted in real GDP expanding by less than expected in Q3 2021, with inflation being stronger than expected. Fitch Ratings has cut its 2021 growth forecasts for the U.S., Germany, and Japan, reflecting recent supply-chainrelated disruptions to industrial production. We have lowered global GDP growth by 0.3pp since the September Global Economic Outlook, to 5.7%. This is still the fastest rate since 1973 though, and far from stagflation. Fitch has also trimmed its world growth forecast for 2022 to 4.2% from 4.4%, but this primarily reflects a more intense slowdown in China. The policy response has been slower than anticipated and while we expect more easing announcements in the coming months, we now forecast China’s growth to fall below 5% in 2022. The sharp rise in global consumer goods prices since March primarily reflects a huge surge in goods demand, fueled by stimulus measures, particularly in the U.S. We expect goods prices to stabilize in 2022 as spending switches back to services, as strong investment boosts goods supply and as fiscal stimulus is unwound. But the risk of inflation pressures broadening is making central banks nervous. Inflation has become a public concern — now amplified by energy price shocks — and inflation expectations have increased. Entering 2022, new variants of COVID-19, elevated inflation, and withdrawal of fiscal and monetary support present risk for the robustness of recovery. GDP is nevertheless expected to continue growing above trend (3.5% in the US, 4.4% in the euro area, 3.6% in Japan, and 4.6% for the UK) over the course of 2022, even if, in most cases, it normalizes to a degree from the elevated early-recovery growth of 2021. China is seen growing nearer to its trend of 5%. As expected, full economic normalization has remained vulnerable to renewed introduction of restrictions as transmissible virus variants challenge public health systems, though we see severity of virus risk for economic recovery continuing to moderate with time as governments adopt more targeted responses, the virus becomes more transmissible but less lethal, and businesses and people adapt how they do business. Nevertheless, risk to the 2022 outlook appears skewed on the downside.

It was another week of strength for the USD, further clawing back losses from last Friday’s Omicronfueled sell-off. EUR/USD, GBP/USD, and AUD/USD are nearing key inflection points on the chart.

EUR/USD: The euro dipped against the dollar on Tuesday as a firmer dollar and U.S. Treasury yields weighed on the euro. The dollar index steadied, hanging on to an overnight jump made with U.S. yields as investors hoped early signs the Omicron variant may be mild will be proved correct. GBP/USD: Sterling was pinned near 2021 lows against the U.S. dollar on Tuesday thanks to a broadly sturdy greenback and growing expectations that the Bank of England will keep interest rates unchanged next week. The dollar index was steady and riskier currencies picked up as traders bet that the Omicron variant would not be as severe as previously expected.

The Markit Materials Price Index (MPI) is expected to further decline in the fourth quarter, after a dramatic and unexpected rise in the second quarter of 2021.

As construction activity returns to or even exceeds prepandemic levels, the industry is grappling with a worsening labor shortage. The shortage is due to a number of reasons, including members of the workforce opting to retire early in response to the pandemic and others yet to return amid health concerns. This trend is expected to continue into 2022, pushing labor cost escalation higher than in previous years. With owners and clients focusing more on sustainability, understanding and reducing carbon cost in construction is becoming a priority. We expect demand for sustainability-focused services and materials to increase across the industry.

We expect prices to fall steadily through 2022. Production for most commodities is beginning to catch up to demand. As the economy reopens and restrictions are lifted, we expect prices to fall further.

Altogether, construction material prices will likely increase 18.4% in 2021, the largest increase since its data collection began in 1995.

All the increases in 2021 should have already occurred, with price increases recorded for each month from December 2020 through July 2021. The Bureau of Labor Statistics’ preliminary data for August 2021 points to a price decline, and IHS Markit analysts expect that prices will generally decline through the end of 2022.

Many of the price increases were driven by increasing construction activity while supply had yet to recover. This mismatch between supply and demand pushed prices higher and was further exacerbated by other issues such as logistics problems and ongoing global COVID-19 outbreaks.

U.S. construction demand is expected to grow a moderate 2% in 2021; this is buoyed by the residential market, while nonresidential construction activity is lackluster. Looking ahead, residential construction demand will soften as housing demand starts to wane, while nonresidential construction will slightly improve but remain soft.

Plywood prices are starting to decrease in North America, as the large softwood lumber price declines are finally filtering through to softwood markets. According to the Bureau of Labor Statistics, plywood prices declined 11.5% in August, but there is still plenty of room to fall. Plywood prices could fall as quickly as softwood prices did since softwood supply has returned. As such, we expect prices will continue to ease through the rest of 2021.

On the positive side, a broad price correction appears to be underway in commodity markets. The IHS Markit Materials Price Index fell 14% in the four weeks that ended November 11th, and it stands 20% below its mid-May peak. Shipping rates and prices of lumber, ferrous metals, and coal are retreating from exceptional highs. With normal lags, the declines in raw material prices should bring some relief to finished goods markets in the first half of 2022. However, natural gas prices are expected to stay elevated through the Northern Hemisphere’s winter and then decline as depleted storage facilities are refilled.

Global consumer price inflation is projected to pick up from 2.2% in 2020 to 3.7% in 2021, its highest rate since a 5.0% advance in 2008. As agricultural and industrial commodity prices retreat, consumer price inflation will ease to 3.5% in 2022 and 2.7% in 2023 and 2024.

As 2021 draws to a close, the construction labor market remains in flux. Some markets, like Honolulu, have more people working in construction than ever before.

Other markets, like New York, remain well below their prepandemic levels. These trends are likely to continue in the short term, although some markets could see a rapid recovery. It is far too early to say how much of this change is due to pandemicrelated trends in demand and how much of it is due to broad demographic trends. As we look further at details of the labor market, things are looking up as well. Unemployment is on track to fall below 3% by the end of the year — the first time it has done so since 2019.

The American Institute of Architects’ Architectural Billings Index (ABI) is a good leading indicator of construction activity that is published on a monthly basis.

It is compiled nationally, regionally, and by sector, and generally predicts conditions in the market over the next six to nine months. Values above 50 indicate growth, while values below 50 indicate a decline.

The ABI has been abnormally high through most of 2021, as the market began to recover. Now, with the recovery well underway, it is beginning to decline again. Its most recent figure was 54.6, down from 57 in April. This is somewhat misleading since the market is not declining, but rather the growth rate is decreasing.

The Midwest has emerged as the most active region, and the most recent figures there show 58.4. There has been somewhat of a decline in all markets except for the Northeast, indicating that things are beginning to return to normal. The Northeast, meanwhile, has been trending up. Restrictions here are likely to be some of the last to be eased, so things here are lagging behind other regions.

Although residential construction has been generating a lot of buzz lately, the industrial and commercial sector is the current leader with a score of 58.4. The institutional sector is next, with a score of 55.4, followed by the residential sector with a score of 54.7.

Trends in the construction market that were present before the pandemic struck are set to resume in 2022. Much of the growth of the last year was due to many markets working through a backlog created by the pandemic.

As many of these projects are wrapping up, old trends are set to resume.

The residential sector is expected to remain strong, particularly in the West. Going forward, this is expected to be due to growing cities like those in the Bay Area and Mountain West rather than a booming market for renovations. The recently passed infrastructure bill has the potential to create a lot of construction improving roads and bridges.

* This includes religious buildings, amusement, government communications and public recreation projects.