Fall 2021: Three Key Trends in Commercial Building and Construction
Brought to you by the L.E.K. Building & Construction Practice
L.E.K. Consulting’s Building & Construction practice recently held a roundtable of leading commercial building and construction executives representing the following parts of the value chain: infrastructure/foundational materials (e.g., concrete, cement, aggregates), exterior-facing products (including building envelopes and HVAC), interior products (e.g., appliances, countertops, flooring, kitchen products, plumbing, interior finishings, furnishings) and job site materials, with perspectives on real estate development, manufacturing, distribution and installation.
During the discussion, three key themes emerged:
In this article, we’ll discuss each theme in detail.
Commercial construction held up well in early 2020, and then began to decline as a result of COVID-19. Forecasts for commercial construction were more bearish into late 2020, but recovery expectations have since improved, with some volatility. The Architectural Billings Index, a forward-looking measure, now exceeds the 2019-20 average of 46.3, surpassing 50 in February 2021 (indicating positive momentum), and reached an all-time high of 59 in May 2021. Similarly, ABC’s Construction Confidence Index remains over 50 (a rating over 50 indicates positive sales growth), although the index fell from a high of 65.7 in June — a change driven by labor and supply chain challenges.
Still, roundtable participants are seeing positive momentum. Spending is increasing. As one executive put it, “The purse strings are coming undone.” And some participants see variations in sector performance and a range of differences in activity among end markets — as one said, “For most of us, it’s a journey of diversity.”
Other observations included:
Executives highlighted these predominant challenges:
This loss of labor in nonresidential construction has led to skill shortages. For example, 88% of commercial contractors reported moderate-to-high levels of difficulty finding skilled workers, resulting in construction wages outpacing overall private wages in the first half of the year.1 A reduction in stimulus-driven unemployment support in September and the reopening of schools, as well as greater childcare support, are expected to increase labor supply, thereby alleviating some pressure, but labor shortages and skill gaps are expected to remain.
These logistics, material and labor challenges have forced nonresidential contractors to adapt the scope of their work. In response to material shortages, they are adopting a variety of approaches, such as using different materials, accepting fewer jobs, using different brands and charging more per job (see Figure 2).
In addition, in response to labor shortages, nonresidential contractors are not just raising job prices; they are less likely to bid on low-margin jobs and are developing expertise in additional trades in order to bid on jobs outside their traditional scope of work. Contractors are also seeking new forms of labor and say they are more likely to use subcontractors (see Figure 3).
So, what are manufacturers and distributors doing in response? Roundtable participants listed multiple approaches:
Digitalization is increasingly mainstream among nonresidential contractors, with many claiming they will significantly increase internet usage across a broad set of business processes (see Figure 4).
Increased digital adoption among contractors, together with supply-chain and labor challenges, are encouraging manufacturers to find ways to digitalize their customer-facing processes. Executives highlighted three key success factors:
Commercial construction demand is seeing a positive trajectory, but there is significant variation between and within end markets. While addressing growing demand, building and construction players must contend with supply chain and labor shortages. Even though the pressures of shortages are easing slightly in some areas, they are likely to remain for the foreseeable future. It’s clear that industry players must adopt a range of solutions to manage growth with constrained resources, including leveraging digital approaches to enhance supply chain visibility and increase customer productivity.
1Bureau of Labor Statistics