The State of the Economy

North America is arguably one of the largest global construction markets due in large part because it imports enormous volumes of construction materials. To that end, the construction materials market in the U.S. has been experiencing steady growth due to a robust demand in both the residential and nonresidential construction sectors. By 2027, the market value is projected to reach $1.2 trillion, showcasing a compound annual growth rate of 4.5% between 2023 and 2027.

This expansion can be likened to several key components.

First, population increase and urbanization have led to a rise in residential housing demands, particularly in major metropolitan areas. The result is a heightened need for construction materials, such as cement, concrete and steel to accommodate the growing number of these projects.

Second, the nonresidential construction sector, including commercial, industrial and infrastructure projects have also been a significant driver for the market. Government initiatives aimed at improving the country’s infrastructure have further fueled the demand for construction materials in this sector.

Combine the above with several other factors, such as global economic uncertainty, disruption in supply chains, increase in prices of equipment, materials shortages and fuel, and you have the perfect storm for a volatile construction industry.

To that end, while the need and desire for new construction of either residential or nonresidential construction remains, the rise in prices due to the aforementioned factors could be problematic for the industry over the long term.

The following (specific) elements that could also impact the market, are worth watching.

Domestic Political Uncertainty

As the U.S. ramps up for its 2024 elections, the two presumptive frontrunners, Joe Biden and Donald Trump (who are ideologically different on everything from taxes and climate change to immigration and regulation), have somehow aligned themselves on their respective foreign trade policies.

In March 2018, Trump imposed a 25% tariff on foreign steel and 10% on aluminum in a move that he characterized then as “necessary to protect industries ravaged by foreign trade practices,” and is “…  an assault on our country … .”

To add perspective on how this affected the construction industry then (and continues to do so), the U.S. Geological Society estimates imports make up nearly one-quarter of U.S. steel consumption and half of total aluminum consumption.

For his part, Biden seems to have kept these same tenets intact and largely preserved Trumps tariffs on steel and aluminum in an effort to maintain a protectionist trade policy, one that could continue to feed inflation prices, according to experts.

Should Trump win, he has vowed to impose a 10% tariff on all imports and a 60% tax on Chinese goods.

What does this mean for the construction industry? Simply put, it’s a matter of supply and demand and trickle-down economics. That is, if materials cost more to import (or there are heavier fines and taxes for using foreign materials), the obvious answer is that those inflated import tariffs will be passed on to consumers, due to rising construction costs and limited profit from development activity until tariffs are lifted.

That said, the U.S. seems unlikely to reverse its stance on free trade, which means that protectionist trade policies will be around for the foreseeable future, regardless of who gets elected, and will directly impact the construction industry.

Russia-Ukraine Conflict

At a time when businesses and industries around the world were still reeling and recovering from COVID-19, Vladimir Putin decided to invade Ukraine in February 2022. With that, came consequences that still exist today, which are disruptions to supply chains around the world and, according to economic analysts at KPMG, continues to have a direct impact on inflation.

Consider this: almost 375,000 businesses worldwide rely on Russian suppliers —90% of which are based in the United States. More than 240,000 businesses worldwide rely on Ukrainian suppliers — 93% of which are based in the United States, according to Dun & Bradstreet. Analysts for the firm say that exposure of this magnitude has and will persist in impacting the construction space in three areas: aluminum, steel and timber.

In addition, the war is still having an effect on crude oil prices because of its importance to manufacturing, transportation and other raw materials. Coupled with the ban on Russian petroleum or the cutoff of Russian supplies, the situation is exacerbated.

To lend perspective, on April 12, 2022, crude oil was trading at $104 per barrel, up from $90 per barrel on February 18, 2002. Today, prices have come down considerably but are still trading at $78 per barrel.

Other factors that are influencing construction material prices are, according to Dun & Bradstreet:

• Voluntary/strategic suspension of shipments. More than the price of fuel, the disruption of trade routes related to the conflict have presented its own set of challenges. Cargo ships have been halted or delayed; flights are being cancelled or rerouted, which affects cargo capacity and continues to affect global supply chains, ultimately opening up additional risks surrounding various products.
• Bans affecting the supply chain. Many countries (including the U.S.) have banned Russian flights.
• Closed ports. Shipping ports around the Black Sea have closed, which means cargo vessels are at a standstill. Shipments by air that traditionally pass through Russian airspace, as stated above, have to now divert and take longer (slower and more expensive) flight paths. This could all culminate in delays for industries that depend on air and ocean transport.

Material Costs Are Affecting Housing Affordability

As the cost of lumber, steel, aluminum and other imported (necessary) construction materials rise due to the challenges stated above, it is directly affecting housing affordability by driving up housing prices.

Three things this likely means for the construction industry.

• Increased project costs. With construction materials making up most overall project expenses, even a small increase can significantly inflate project budgets, which can lead to delays in production, cost overruns and increased financial risk for contractors and developers.
• Reduced profit margins. Contractors may find it competitively difficult to price projects based on market fluctuations, while simultaneously covering their own rising expenses and costs.
• Housing affordability. Looking at the bigger picture, the increase in the cost of construction materials directly affects consumers’ ability to afford housing. This can worsen existing housing affordability issues and slow down the overall housing market.

So, how can construction companies (successfully) navigate and mitigate some of these issues that are pressuring supply chains and affecting the industry as a whole?

• Use materials efficiently. One way to control costs is to minimize waste, recycle materials where possible and ensure best practices are used on each project where materials are concerned.
• Consider long-term contracts. Locking in material prices at the outset through long-term contracts can provide some protection against sudden price surges. This can allow for better budgeting on the back end, given the relationships between supplier and customer remains strong.
• Buy materials in advance. If you can store materials for future projects, it may be in your best interest to buy in bulk before they’ll be needed. This can help lock in prices and avoid future price surges.

It seems clear that, with material costs on the rise and supply increasingly in flux, builders and contractors will be forced to find more creative solutions to stay competitive. This could include reconsidering ways to optimize managing inventory to embracing new technologies or creating connection with others to a mutually beneficial relationship.

Similarly, the industry is going to have to reevaluate its business models and project policies.

By adopting a proactive attitude towards new practices, technologies and business models, those in the industry can weather not only the current challenges, but also set themselves up for success in a (clearly) fast-changing market.