Construction industry momentum to carry through first half of 2019

Strong construction momentum will easily carry through the first half of 2019, despite project margins facing pressure from all sides. JLL’s Construction Outlook finds robust U.S. economic fundamentals will drive further growth of the sector, which in 2018 recorded a 5.1 percent increase in total construction value and a 4.5 percent increase in employment.

Potential risks to the construction sector such as trade war escalation, deteriorating macroeconomic conditions and the worsening labor shortage, are largely balanced by potential boosts that include a large-scale federal infrastructure package, relief from tariffs and the continuation of 3.5 percent annual GDP growth.

“All forward indicators for construction are still flashing green,” said Todd Burns, president, project and development services, JLL Americas. “However, a year with growth equal to that of 2018 would be considered a success, given concerns of a broader economic slowdown.”

Total building costs, which includes labor, materials and equipment, grew by 3.4 percent in 2018, outpacing the U.S. inflation rate of 1.9 percent. The widening spread between cost growth and inflation is pushing borderline projects past the threshold of profitability. Building costs will continue to increase in 2019 but at a slower rate than 2018. This reflects an expected cooldown in material pricing but the surging cost of labor.

Growth in total construction employment has hovered between 3 and 6 percent over the past six years — a far cry from what’s required for labor supply to catch up with demand. With a tight national employment market, the situation is unlikely to improve anytime soon. Construction wage growth in 2019 will top the 3.4 percent increase seen last year.

The buzz around construction technology has long eclipsed actual adoption in the industry. The past year, however, saw meaningful gains fueled by large general contracting firms racing to improve productivity and remain competitive. High levels of tech adoption will spread to smaller firms, and elements of construction tech will become the standard across the industry in 2019. Amid intense labor pressures, contractors’ most common reason for making technology investments is to increase labor productivity.

Modular construction is poised to have the biggest long-term impact on the industry. Proponents of the technology envision a future full of dedicated warehouses churning out modular components — from exterior wall segments to entire apartment units — for most new construction.

“Adopting modular construction is not always as simple as it sounds,” said Henry D’Esposito, senior research analyst, project and development services, JLL. “There is often a prolonged period during which the benefits are not fully realized, as firms take time to adjust to the new system. Despite some of the initial challenges, there has been no hesitation among contractors about whether modular will continue to grow.”

Growth of modular construction in 2019 will be centered around increased use by select sectors, including hospitality and healthcare, and an increase in use for one or two select elements within a broader array of projects.