Lancaster County construction industry faces year of growth with tight margins | Local company
At ABC Keystone’s annual economic breakfast last month, economist Anirban Basu told hundreds of construction industry professionals in Lancaster County that 2022 was going to be a year of growth.
Basu of Baltimore-based Sage Policy Group Inc. noted that multifamily housing, warehousing and manufacturing construction is and will continue to be strong in central Pennsylvania. Health care facilities and senior housing are also strong, Basu said.
Basu said construction of hotels, shopping malls and office buildings will be weak, due at least in part to changes caused by the pandemic.
But the war in Ukraine has clouded these forecasts somewhat.
“The Russian invasion of Ukraine will not help,” Basu said in a March 1 analysis. “Prices for oil and other key inputs are rising, putting further upward pressure on the cost of providing construction services. These high costs have already led some contractors to postpone projects in the hope for more favorable offers in the future Steel, copper, aluminum, neon and nickel prices are all implicated by the outbreak of war, and sanctions against Russia and limits on its exports will be in place long after the end of hostilities.
A look at the numbers
National non-residential construction spending rose 1.3% in January, according to a March 1 analysis of Associated Builders and Contractors of US Census Bureau data. On a seasonally adjusted annualized basis, non-residential spending totaled $838.9 billion for the month.
Spending increased on a monthly basis in nine of the 16 non-residential subcategories. Private non-residential spending rose 1.8%, while government non-residential construction spending rose 0.5% in January from the previous month.
“Normally, one would look at numbers showing that construction investment has increased in America as cause for celebration,” Basu said as he released the new analysis. “But construction spending data is not adjusted for inflation and in real terms, construction spending likely fell during the month. Total construction spending was up more than 8% from year, but material prices have risen about 24% over this period. Workers’ compensation costs have also risen rapidly. As a result, contractors’ profit margin expectations have deteriorated over the past year. months, according to ABC’s Construction Confidence Index.
“Circumstances are worse in the non-residential construction segment,” Basu said. “While construction spending was up 13% in the residential component of the industry, non-residential spending was up less than 4% year over year. In some categories, spending is down in both real and nominal terms.
Lower pandemic-related construction spending led to 35% decline in public safety segment, Basu says Year after year. The financial impacts on the education sector stemming from the pandemic resulted in a 7% decline in education-related construction spending year-over-year. Spending in the beleaguered accommodation segment is down nearly 25% regardless of inflation.
The reasons for optimism
Still, the mood is positive among many construction companies.
The Momentum Index, which measures non-residential construction projects in planning nationwide, rose 4% in February from January. The increase was a rebound from three consecutive monthly declines that followed a 14-year high in October 2021.
Much of February’s gain was due to a sizable jump in the institutional component as more education and health care projects entered planning, according to Dodge Construction Network, which calculates the index.
The Philadelphia Federal Reserve’s Beige Book for March 2 says homebuilders reported steady contract signings and construction activity, but continued to cite issues securing materials and labor , as well as rising costs for both.
The Fed report, based on research from before the war in Ukraine, indicates that construction activity and rental activity remained flat for most segments of non-residential real estate. He cited multi-family housing, institutional projects and industrial/warehouse spaces as the strongest markets. The outlook for downtown offices and retail will become brighter once workers return to offices on a regular basis, the Fed said.
Strategies for Success
As inflation rises and wages rise, the question remains: how can construction be profitable in 2022?
“How do you satisfy customers and preserve margins when the cost side of the equation is rising so rapidly? Basu asked in an interview. “It’s a question of operational excellence. It’s about getting the details right. What should be done to set the price of a project? These are really hard things to do, that’s why I do what I do.
Basu said in polls he has conducted that the construction industry is generally optimistic despite the challenges. There has been some consolidation in the industry.
“It will be a year of growth,” Basu said in his presentation. “But the economy will remain out of balance, with supply struggling to keep up with demand. Along with rising wages amid the Great Resignation, this is translating into higher-than-average economy-wide inflation in 2022.”
Basu predicted even before the Ukrainian war that interest rates would rise.
“Beware of rapid declines in commodity and asset prices at some point in 22,” he said during the economic outlook breakfast.
Companies with larger balance sheets and more established banking relationships have an advantage in this atmosphere.
“Generally it’s a tough time,” said Michael Funck, senior vice president of Lancaster-based Wohlsen Construction. “We are very positive about the market and we have a good backlog (of projects).”
A trick to profitability, he said, is to get materials at better prices by ordering early and even before they’re needed.
“For us and for the construction industry, (that means) working to lock in and get our materials as quickly as possible when we get the go-ahead for a project.”
Funck said Wohlsen created a materials tracking database to project material receipt times and feed them into project management and bids.
For example, he said, electrical switchgear panels take up to a year to arrive where they used to take about 20 weeks to arrive. It also means ordering raw materials, like two-by-fours, just to have them on hand.