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Residential market is poised for a boom while rising costs, shortages threaten to hamper performance.

PMG FILE PHOTO - While single-family residential construction was up 11% in 2020, non-residential construction starts were down 24%.Commercial construction will continue to slow down throughout 2021 as residential building booms in the coming months.

However, soaring materials costs, ongoing supply-chain problems, and a labor shortage threaten to put a damper on the industry, according to a pair of recent projections.

JLL's 2021 Construction Outlook report for the first quarter of this year states that while the industry will be more stable this year than last year, it will look very different from the previous recession and recovery cycle.

One of the most significant differences will be residential construction growth, which will continue to impact labor and material markets and drive up construction costs across the industry. The net impact for nonresidential work in 2021 will be a challenging combination of decreasing work volume and increasing costs.

Single-family residential construction is booming after an 11 percent increase in construction starts in 2020, whereas nonresidential building construction starts were down 24 percent, according to JLL's report.

Tim Harrison, research manager at JLL Portland, said the boost in residential construction is due to several factors, including a generational shift in which millennials are opting to move to the suburbs rather than living downtown.

"They are moving out to the suburbs so they can have children and more space," he said, adding low-interest rates and the COVID-19 pandemic are playing a role in the dynamic as well. "It's a perfect storm, and single-family construction hasn't kept up with the demand."

With nonresidential construction spending expected to decline between 5% and 8% for 2021 due to fewer new projects and delayed starts in 2020, the sector should begin to increase month-over-month in the third or fourth quarter, returning the industry to growth in 2022.

COURTESY: AGC - As part of the research done, construction firms were asked how their costs have changed in the past year.The range between sector forecasts is more comprehensive than ever, with distribution and health care projects coming out on top, and hotels and entertainment straggling behind. Total construction costs in 2021 will bounce back to the 3.5-5.5 percent cost inflation range previously observed every year from 2012 to 2019, JLL's report states.

Noting that the lumber price index on Nasdaq has resembled a yo-yo of late, Harrison said lumber costs are up significantly compared to this time last year and impact new home construction by $20,000 to $30,000 per home. Federal duties on steel implemented by the previous administration and the ongoing labor shortage also continue to impact the market. Commercial builders have reduced their prices to attract new business and keep projects going, Harrison said, adding he expects those prices to rise again as demand improves.

A recent survey conducted by the Associated General Contractors of America led AGC officials to urge Congress and the Biden administration to take steps to eliminate tariffs on key materials, address shipping backups and boost funding for new infrastructure to help the industry's recovery.

"The survey results make it clear that the construction industry faces a variety of challenges that threaten to leave many firms and workers behind, even as some parts of the economy are recovering or even thriving," said Ken Simonson, the association's chief economist. "The pandemic has left the supply chain for a range of key construction components in tatters and undermined demand for a host of private-sector projects."

In Oregon, 46 general contractors responded to the survey, and 60% said they are experiencing shortages of construction materials, equipment or parts, 31% have a shortage of craftworkers and subcontractors, and 16% have a shortage of personal protective equipment.

The Oregon portion of the survey also showed that 13% had a potentially COVID-infected person visit a job site, 4% saw a shortage of government workers, and 2% had difficulties securing financing or covering cash flow needs. Thirty-five percent of respondents have seen no shortages or delays.

When asked what is responsible for delays of materials, equipment or parts, 96% of Oregon respondents pointed to backlogs or shutdowns at domestic producers such as factories, mills and fabricators. More than half, 54%, said backlogs or shutdowns at foreign producers was the cause; 31% cited delays at ports; and 35% said rail or trucking delays from ports to delivery points were to blame.

Simonson noted that an overwhelming 93% of the national survey's more than 1,400 respondents report the pandemic has driven up their costs. Four out of five are spending more on PPE, sanitizers and other health-related expenses. More than half say that projects are taking longer than previously.

In a sign that the pandemic has had very different effects on construction firms, about one-third said business matches or exceeds year-ago levels, while another third say it will take more than six months to reach that mark and one-fifth say they don't know.

Respondents in the West are more optimistic about the construction industry outlook for 2021, while respondents in the Northeast are the most pessimistic, followed by firms in the South. Firms from the Midwest are split, according to AGC.

AGC conducted its survey from Feb. 19 to March 4, while the latest coronavirus relief bill was taking shape in Congress.

AGC asked contractors to list up to eight additional congressional measures to address the economic fallout from the coronavirus that might be helpful to their business.

Half of the respondents favored a larger federal investment in public infrastructure and facilities. Nearly as many, 46 percent, wanted enactment of a "safe harbor" set of protocols to provide firms with protection from tort or employment liability.

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