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:

  • The recovery and volatility of construction demand
  • Addressing logistics, material and labor supply challenges
  • Digitalization opportunities

In this article, we’ll discuss each theme in detail.

The recovery and volatility of construction demand

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:

  • Data centers and warehouses have “propelled us through COVID-19,” according to one participant. Although the growth rate is expected to fall from its recent peak, activity will remain strong.
  • Healthcare is forecast to experience slightly strengthening growth. At least one executive is seeing a slowdown in the growth rate, stating that “healthcare is a mover for us, but we are seeing slower growth now.”
  • Education, retail and manufacturing are expected to show a fall in demand between 2020 and 2021 but will likely experience modest growth in 2021-22, with even higher growth rates in 2022-25.
  • Office and retail have shown more resilience than expected. Initial reporting indicates companies are using amounts of space similar to pre-pandemic times, but they are reconfiguring that space for social distancing and hybrid working. This trend, along with some relocations, is leading to what one participant called “surprising resilience” in the sector. For example, one furniture supplier highlighted an influx of recent orders due to office reconfigurations.
  • Hospitality is still challenged, with recovery not expected to begin until after 2022.

Addressing logistics, material and labor supply challenges

Executives highlighted these predominant challenges:

  • Logistics. Transport and port delays have increased, driven by COVID-19-related factors and labor shortages, such as a lack of truckers and bottlenecks at ports. One executive noted that ships coming into the U.S. are often held in port: “Sixty percent of my products come from outside the U.S. — ships parked in Long Beach, Los Angeles, in Savannah.” The short supply of trucks and truckers has been a continual challenge, and participants foresee little immediate relief.
  • Material. Construction input prices rose 22% year over year, but with significant variation by material type. Steel mill products and softwood lumber have led the charge, though many other materials have experienced substantial increases (e.g., prices of ferrous wire, rope and cable increased by 30% between August 2020 and August 2021). Some supply challenges, particularly for more commodity materials, are expected to resolve and improve, but the process of addressing major supply bottlenecks (such as developing new capacity) can have significant lead times. Products dependent on multiple material inputs and/or products that have a high import component are expected to be vulnerable to supply disruptions, given the increased risk of a critical component becoming unavailable.
  • Labor. Nonresidential construction labor is still 5.5% below its February 2020 level. In contrast, the level of residential construction employment has increased 4.9% in the same period (see Figure 1).

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.

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:

  • Increasing productivity. The industry has had to do more with less labor, which increases productivity, but at unsustainable stress levels. As one executive said, “There’s a lot of productivity occurring right now in our business, [although] we can’t find people, but it’s not healthy productivity. It’s associates getting burnt out.”
  • Improving employee value propositions. Companies are seeking to offer more than just wages to enhance their overall value proposition to employees. One participant noted, “It’s hard to compete with $17-per-hour McDonald’s wages in rural areas, so we are trying to make sure we’re offering employees a career and not just a job — putting our arms around them a little tighter.”
  • Cultivating new suppliers and redefining the arrangements with existing suppliers. Material shortages have pushed manufacturers and distributors to look beyond their current supply base. One executive said, “We’ve been forced to look for different supplies, and we have started to augment [the supply base] so we don’t get caught up not being able to provide product.” At the same time, companies are revisiting arrangements with existing suppliers. Another participant said the company is “looking at existing contracts in order to make them better.” Companies are also examining suppliers’ capabilities more closely than they have in the past. One participant stated they are “forcing suppliers to demonstrate that their supply chains are as healthy as they claim” they are.
  • Leveraging prefabrication. Some executives see prefabricated components as an opportunity to address labor constraints. As one participant put it, “We are moving in the direction of pre-cast in order to stabilize the construction site and have fewer people on-site.”

Digitalization opportunities

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:

  • Building visibility. Companies can harness digital capabilities to improve supply chain visibility. One executive said, “It used to just be: ‘Where is the product now?’ But customers now want visibility through the supply chain. We are looking at digital tools so we can tell our customers, ‘Your order is X days out.’”
  • Streamlining frontline sales processes. Sales interfaces may be the best starting point, as one participant noted. “The feedback we get from the customers is that they are wearing lots of hats and not spending enough time on-site. So we started [digitalization of] the easier processes of estimating and quoting where we’re configuring materials for projects.”
  • Being patient and building momentum over the long term. Participants emphasized that digitalization requires patience and investment. One said, “We crawl-walk-run when we think about digitalization.” Another observed, “We’ve been doing digitalization for about 10 years, swinging and missing often.”

Summary and implications

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


Lucas-PainLucas Pain, Managing Director

Rob-RourkeRob Rourke, Managing Director

Matt-KorschMatt Korsch, Managing Director

GavinMcgrathGavin McGrath, Managing Director

BromfieldPaul Bromfield, Managing Director

Tim-OneillTim O'Neil, Managing Director

David-MahinDavid Mahin, Principal

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