Sectors to watch in 2022

Editor's note: To kick off 2022, Construction Dive is taking a look at five of the country's hottest construction verticals, starting with distribution centers and warehouses. Click here for the entire series.

Demand remains extremely strong for the construction of warehouses and distribution centers, and that should continue in 2022, according to industry experts.

"We had a record-breaking year [in 2021] for pretty much every fundamental we track: vacancy, rental rate growth, leasing activity, under construction," said James Breeze, global head of industrial real estate at CBRE, a Texas-based commercial real estate services and investment firm. "We don't see anything changing [this] year." 

Not only does he anticipate the same level of activity in the sector as was seen in 2021, he expects vacancy rates to remain at historic lows, with rents continuing to rise at a quick pace.

There is a steady flow of distribution and warehouse projects happening in early 2022, said Mike Jones, project executive at Pankow Builders, a California-based construction engineering company. 

Major transportation corridors near large metropolitan areas such as San Francisco, Dallas, New York, Seattle, Miami, Houston and Chicago, continue to be "hot markets for the distribution and warehouse space," said Jones. 

Proximity to ports, airports and trucking facilities are also underlying factors for determining where warehouse distribution facilities demand will continue to grow, Jones said. 

Matt Rotolante, president of Lee & Associates South Florida, a commercial real estate brokerage firm, pointed to the continued growth of e-commerce as the underlying catalyst for the ongoing boom in warehouse and distribution center construction.

"We're starting to see a lot more automation," said Rotolante. "A lot of it is becoming computerized where robots are picking and placing the product from the truck, onto the warehouse racks and then pulling it as well."

He also noted that it's the details of their design that set this year's warehouses distribution centers apart, including larger parking requirements and higher ceilings. Some warehouses, for example, are now two stories high.

"We're certainly seeing a different style of construction," Rotolante said. "Historically, buildings were built 24-foot clear or 22-foot clear. Now, we're seeing them as high as 36 foot-clear just for regular distribution purposes." 

Brian Sudduth, president of Miller Construction, a construction company with more than 500 completed commercial projects for the private sector in Florida, agreed the designs and specifications of these structures are changing as quickly as they are being built. 

In addition to these large projects, smaller buildings to support last-mile distribution are also needed, said Sudduth. Jones agreed.

"Sites that are close to the core of a major metropolitan area to handle that last mile distribution and servicing is key," said Jones. "Part of that last-mile is repurposing buildings for a new use."

For example, dormant shopping center parcels are becoming an alternative for mini-warehousing and last mile distribution facilities, whether by retrofitting a defunct department store or large parts of the shopping center parking lot. 

Breeze predicted that certain markets will see the most groundbreaking development for warehouses and distribution centers in terms of percentage growth over the next year or so. They include:

• Louisville, Kentucky
• Greenville, South Carolina
• Kansas City
• Phoenix
• Las Vegas
• Salt Lake City
• Central Florida

"There is very strong demand for first-generation space. The leasing is really strong, which points to this development continuing for the foreseeable future," said Breeze. "I do think there's markets that are going to start having a lot more construction than they did before."

Editor's note: This article is the second in a series looking at five of the country's hottest construction verticals. Click here for the entire series. 

Data center construction has been surging during the pandemic, fueled by huge growth in e-commerce. 

While that type of demand will likely cool off in 2022, a surge in orders by other users should keep activity in the sector humming along, according to industry experts, if enough workers can be found to build it out.

According to a data center report from U.K.-based global real estate and infrastructure consultancy Turner & Townsend:

• 95% of respondents predict data center construction demand in 2022 will be greater than 2021.
• 82% of respondents rate data center construction market conditions as hot or overheating.
• 70% of respondents consider the data center industry to be “recession proof."

Construction trends developing

Data center projects are getting larger, while timelines and schedules are getting shorter, said John Arcello, advanced technology core market leader at DPR Construction, a California-based commercial general contractor. 

Previously, the duration of a data center project could take around two to three years in planning alone, but that process has been compressed to around 18 months, Arcello said. The actual construction aspect of a project is even shorter, aided by standardized designs and repeatability, Arcello said.

"I think [shorter timelines] is from all of the stakeholders. From data center operators, they’re really looking to get in front of it by doing land banking," said Arcello. "They're looking at ways that we can do vendor management, inventory as well."

Another trend affecting data center construction is the specific types of facilities that enterprises are using to meet their IT needs, said Ryan Ferguson, vice president and project executive of Mission Critical at McCarthy Building Companies. 

"We are expecting continued strength and activity in the data center sector as demand for data centers of all types grows," said Ferguson. "The rapid growth we saw in 2020 and 2021 related to COVID-driven work-from-home and an increased dependence on web-based commerce will likely level off while other factors will ramp-up demand."

He added another factor in the sector currently is balancing the building of new facilities versus using stranded capacity and shell space in existing facilities to maximize capabilities of what's already been built, particularly in the face of labor shortages. Even cryptocurrency could spark a surge in data centers.

"As cryptocurrencies, NFTs and the metaverse continue to become more mainstream, a new sub-sector of the data center industry is rapidly emerging in the cryptocurrency mining space," said Ferguson. "China's outlawing of cryptocurrency mining sparked an arms race to deploy these facilities in North America."

Jim Nowakowski, president of Accountability Information Management, a Palatine, Illinois-based B2B research company, said it's the increased diversity of the types of businesses building data centers today — and not just the e-commerce giants — that really stands out. 

Sports arenas, convention centers and offices, for example, are "really where the action is," he said, while the overall value of hospitals and clinic projects are among the highest in the industry. 

Growth is concentrated in Northern Virginia, Dallas, Phoenix, Chicago, Silicon Valley and Atlanta, according to the report. 

Labor challenges still remain

However, despite strong demand, the sector has experienced acute staffing shortages due to COVID-19, which have restricted data center construction capacity in North America and impacted supply chains.

"The skilled labor workforce is one key theme," said Paul Barry, associate director in Turner & Townsend's Dallas office. "We have some projects in rural locations where you'd almost need to go as far as incentivizing the workforce to bring them to your project." 

The Turner & Townsend report found that:

• 87%of respondents agree global material shortages have caused delays to data center construction.
• 84% of respondents reported skills shortages for experienced data center construction teams.
• 58% expect the proportion of retrofit/conversion of existing stock, instead of new builds, to increase year-on-year.

There are currently around 180 projects valued at $9.4 billion in the planning stages in the U.S. and Canada, with most of those projects by colleges, universities and government buildings, including fire and police stations, according to Accountability Information Management.

"Life without data and the ability to process it becomes less rich, less fulfilling," said Nowakowski. "As long as people keep demanding it, and devices are talking more and more to each other, data centers will have a bright future."

Editor's note: This article is the third in a series looking at five of the country's hottest construction verticals. Click here for the entire series.

Ports from coast to coast are eyeing improvement projects to help alleviate supply chain issues that have plagued businesses since the start of the COVID-19 pandemic.

The focus on port projects in the recently enacted Infrastructure Investment and Jobs Act is part of an overall push from the Biden administration to help alleviate the clogged supply chain in the U.S.

"That bill is going to help improve ports that get our supply chains moving and speeding up deliveries and addressing shortages," said John Fumero, a shareholder at Nason Yeager, a Florida-based law firm that represents the Port of Palm Beach, Florida. "[It's] going to be providing significant funding for ports to undertake these projects to expand capacity."

But there's even more money for the sector beyond the $17 billion round of federal funding earmarked for seaports in the Infrastructure Investment and Jobs Act. Transportation Secretary Pete Buttigieg announced in December $241 million in grants via the United States Maritime Administration Port Infrastructure Development Program (PIDP). That money will go toward 25 projects in 19 states to bolster U.S. ports.

In addition to this funding, the PIDP will then nearly double that amount to $450 million in grants annually for the next five years via funds from the IIJA, – $2.25 billion total – for fiscal years 2022 through 2026.

"The effects of the disruption of the supply chain this past year have been felt by business lines and families across the country and the world," said Fitz O'Donnell, senior vice president of operations at St. Louis-based McCarthy Building Cos. "The image of so many ships waiting to call on our ports has served as a collective call to action to develop solutions."

The American Road and Transportation Builders Association (ARTBA) pegged port and waterway construction market activity to grow 6% in 2022, according to a 2022-2026 market analysis.

Similarly, the Port of Palm Beach will break ground on a $26 million port infrastructure development program in 2022, which will more than double the port's intermodal rail capacity, according to Fumero. 

"It's all about moving containers in and out of the port as quickly as possible," Fumero said.

The Port of Palm Beach is also undertaking a multimillion dollar investment to repair and upgrade its container yard. The project received grant funding and port funds which total $2.9 million for the initial phase of the project. Soil investigations will start in the next couple of weeks and project bidding is estimated to occur at the end of the second quarter this year, said Ron Coddington, director of engineering for the project.

"We have heard from several of our clients that they are actively working to accelerate their future capital improvement programs as the demand for marine terminal services continues to grow," said O'Donnell. "Projects that were scheduled for 2024 and beyond are being fast-tracked for permitting and execution."

Editor's note: This article is the fourth in a series looking at five of the country's hottest construction verticals. Click here for the entire series.

Markets across the country will see a surge in laboratory construction in 2022, with certain areas capturing a majority of activity, according to industry sources.

"The outlook is tremendous," said Raj Vora, a life sciences core market leader at DPR Construction, a Redwood City, California-based commercial general contractor. "It's going to be a big and growing market for the next probably four or five years before we see it even start to plateau."

Vora said the traditional cost-first, speed-to-market-second calculus for life sciences construction has now flipped. Although capital costs remain important, getting these projects up and running quickly has become top priority for developers and contractors.

The types of construction for these facilities is also changing, he said. 

For example, the production methods for RNA-based vaccines, which have been used in the fight against COVID-19, have spurred a move toward monoclonal antibody manufacturing, which requires large-scale, stainless steel vessels and high quantities of stainless steel piping. Those specifications translate into bigger facilities with more capital investment needed to develop them.

That change is being influenced by COVID-19 vaccine developments, as "we're starting to see more RNA manufacturing," he said. 

"We've found that these life sciences companies who have had tremendous growth over the last 10 years and our private developers in the life sciences market are returning to higher square foot, rentable user space," said Allen Lynn, vice president of operations at St. Louis-based McCarthy Building Companies. "[This] will help the demand to build as long as the market continues to grow."

That growth isn't just centered around building new facilities, either. Due to less demand for office space during the pandemic, there has been a parallel push among owners and landlords to repurpose existing offices into lab space. 

Doing so can be particularly advantageous in the high barrier-to-entry markets where life sciences facilities are typically located, according to Kaitlin Kincaid, senior managing director at Keller Augusta, a Boston-based executive search firm specializing in real estate development and construction.

"Office owners and landlords are repurposing vacant spaces," said Kincaid. "Original projects seek to lure lab tenants and startups with best-in-class workplaces and state-of-the-art amenities such as restaurant spaces, fitness centers and outdoor gardens."

Indeed, according to Lynn, repurposing existing assets in those markets may be a larger opportunity than pulling a brand new facility out of the dirt. 

"We see the trend in the near future that existing building remodels will be more prevalent than ground up construction," said Lynn. "There are many out-of-state developers acquiring property along with local developers that have made… speed to delivery key."

Boston, the San Francisco Bay Area and San Diego, which are the strongest life sciences hubs in the country, experienced the strongest uptick and tightest space availabilities, capturing 70% of all venture capital in the U.S. last quarter, according to data from JLL, a Chicago, Illinois-based global commercial real estate services company.

Kincaid added in 2022, emerging markets such as New York City, Washington, D.C., Denver and Seattle will experience a surge in laboratory construction, yielding an increase in project opportunities and construction jobs in those markets.

That said, Boston will continue to be the center of the life sciences universe, "given its cluster ranking and market opportunity relative to talent and lab real estate dynamics," said Kincaid. Vora said the demand for lab space in the Boston area is around 30 million square feet, compared to just 8 million square feet of lab space in the pipeline for 2022.

"We are definitely expecting continued growth in this sector in 2022 and beyond," said Lynn. "With the top talent coming out of local colleges and the demand in tech and life sciences research that was fueled by the pandemic, this market sector will continue to grow in the years to come and be a larger market in 2022 than it was in the previous two years."

Editor's note: This article is the last in a series looking at five of the country's hottest construction verticals. Click here for the entire series.

Industry sources expect renewed commitment from the federal and state governments on infrastructure, sparking optimism for the industry overall in 2022. 

But that optimism hinges on what Washington, D.C., can deliver.

"I think there's a lot of hope about the amount of infrastructure work that obviously needs to be done and can be financed," said Peter Dyga, president and CEO of Associated Builders and Contractors Florida East Coast Chapter. "But unfortunately, politics often screw that up. So, I think that's the unknown going into 2022… Probably the first quarter or the next few months will certainly tell about which direction we're headed."

The majority of money from the $1.2 trillion infrastructure act will be distributed to states, which are charged with deciding which projects to fund and executing them. Other sums will be disbursed through federal grants for specific projects.

The first major infusion of funding in 2022 is heading to states, tribes and U.S. territories, the Biden administration announced on Dec. 2. The EPA will distribute $7.4 billion to remediate ailing water infrastructure and lead pipes.

Highway bridges will be the next type of infrastructure to receive major funding from the IIJA. The Bridge Formula Program will allocate $26.5 billion to help repair, replace and construct approximately 15,000 highway bridges over five years, according to a Federal Highway Administration press release. About $825 million will also be available for tribal transportation facilities.

Just last week, the U.S. Army Corps of Engineers announced it had received $17.1 billion from the legislation for new and existing civil works projects across the country, according to a USACE press release.

A waiting game

Although the industry is hopeful for significant aid from the federal government, a boost in infrastructure work is not guaranteed for every construction firm, Dyga said. For example, in the past, Congress has stipulated the use of project labor agreements in government contracts, which typically call for union contractors to be used on projects.

In Dyga's home state of Florida, however, only about 3.4% of contractors fit that bill, compared to 13% nationwide, according to the Union Membership and Coverage Database. 

And through December, the infrastructure category is the only one that is down year-over-year, dropping 1.6 months since 2021, compared to the commercial & institutional and heavy industrial categories, which posted gains of 1.2 and 3.5 months, respectively, according to ABC data.

On a month-to-month basis, ABC's overall construction backlog indicator for all sectors in December slipped by 0.2 months from November, but was still up up 0.9 months from December 2020.

At the same time, ABC's construction confidence index readings for sales, profit margins and staffing levels all increased in December. That indicates expectations of growth over the next six months, according to an ABC release.

Meanwhile, with pending infrastructure jobs on contractors' books lower now than 12 months ago, firms are having to wait for funds to reach the states, and then get allocated from there. That process will take time, construction watchers say. 

The law is not a quick-hit stimulus package, according to Brookings Institution analysis. Rather, it's a longer-term investment, and much of the funding will be disbursed annually in set amounts for a period of five to 10 years.

"Backlog fell in the infrastructure category, but activity in that category is set to heat up in 2022 as federal infrastructure funds tied to the Infrastructure Investment and Jobs Act of 2021 begin to flow," said Anirban Basu, chief economist at ABC.

Over the past year, the apartment industry has experienced one of the strongest runs anyone can remember.

After the multifamily industry struggled because many residents were unable to pay rent due to COVID-19 in 2020, the market stormed back in 2021, with 673,000 units rented for the year, according to Richardson, Texas-based data analytics and property management software provider RealPage. That beat the previous high in units rented in 2000 by 66%.

"The recovery was the quickest I've ever seen," said Steve Hallsey, executive vice president of operations for Atlanta-based Wood Residential Service, who has been in the apartment industry for almost 40 years. "I've never seen demand as strong as it is right now."

RealPage tracks 300 markets across the country, many of which have ultra-low vacancy rates. Out of those 300, only six have vacancy rates above 6%, while the national apartment market hit an all-time occupancy level of 97.5% in November.

Strong Southeast performance

In particular, markets in the Southeast have exploded during the pandemic, with rents rising more than 20% from November 2020 to November 2021 in cities like:

• West Palm Beach, Florida
• Orlando
• Fort Lauderdale, Florida
• Jacksonville
• Atlanta
• Raleigh/Durham, North Carolina
• Miami

That growth should continue in 2022. In its recently released Multifamily 2022 Outlook, Freddie Mac lists "high-growth Sun Belt markets and lower-priced alternatives to gateway markets."

Even with rental increases in these Sun Belt cities, industry executives argue that they still represent relative values compared to coastal cities (even with declines in those markets). 

"Some of that [rent increases in the Sun Belt] is a result of migration and demand," said Matt Ferrari, co-chief investment officer and head of acquisitions and East Coast asset management for California-based TruAmerica Multifamily. "There are more people moving to these places because they're affordable."

In the West, Phoenix and Las Vegas are also expected to be strong performers. Those metros still provide urban amenities but are cheaper than the coastal markets.."We saw a lot of out-migration from the West Coast," said Jay Hiemenz, President and COO of Scottsdale, Arizona-based Alliance Residential. "And the markets that captured a lot of that were Denver, Phoenix and Las Vegas."

Coastal troubles

When COVID-19 hit in the Spring of 2020, scores of urbanites left coastal cities like New York and San Francisco for more space and affordability. While these markets are recovering, rents aren’t growing nearly as fast as in the Sun Belt.

"There are some markets that are still suffering," Hallsey said. "We're not doing as well as we would like in San Francisco and Oakland and some of these other coastal markets. But the rest of the country is just on fire."

But there are deeper issues than the pandemic in some Northern markets that are projected to have lower growth in 2022.

"Many of these markets are found in the Northeast and Midwest of the country, both of which are facing an aging population and experiencing outmigration," Freddie Mac said in the report. "Three of the bottom 10 markets are located near New York City, which is intuitive because the pandemic impact there has been meaningful since the onset of COVID-19."

But the New York metro could turn around quickly if employers start calling workers back to the office. 

"What I've heard in New York is a lot of people starting to migrate back in the offices," said Doug Root, co-founder and managing director of Arlington, Virginia-based apartment owner Blackfin. "With that, all these people who probably packed up and went to Wilmington or wherever are now, 'My employer actually wants me to be like in the office. Now I need an apartment again.'"

With COVID-19 still dominating headlines in 2022, real estate experts forecast which sectors are best positioned to overcome upcoming challenges and ultimately take advantage of opportunities in the next year.  

For instance, multifamily and industrial remain the preferred asset classes in the real estate industry, but where does that leave the hospitality and office sectors?

Here are the five commercial real estate trends shaping market activity in the new year, according to a new report from Taylor Johnson, a public relations firm focused on commercial real estate. Since 2006, the firm has been distributing this annual look at the real estate market, which is a compilation of its clients’ predictions for the year ahead.

Will the office finally bounce back?

Ever since remote work became the norm for white collar workers, the return to the office has been forecasted, but delayed over and over again. In order to convince employees to return to their desks in 2022, trends in the office market point to prioritizing health and wellness, embracing in-person collaboration and anticipating the many logistical challenges associated with hybrid work schedules, according to the report.

For example, the Fulton East office development (pictured above), a new 12-story mixed-use building in Chicago's Fulton Market District, offers its employees hospital-grade ventilation, hands-free elevators and antimicrobial surfaces, along with floor-to-ceiling windows, outdoor terraces on every floor and an 8,000-square-foot landscaped rooftop. 

NAI Hiffman, an Illinois-based real estate services firm, secured the International WELL Building Institute's WELL Health-Safety Rating for 15 office buildings under its management, granting peace of mind to its building occupants that steps have been taken to reduce the risk of transmitting COVID-19 and other diseases, according to the report.

Hospitality expected to rebound

Business travel is expected to catch up to leisure travel in 2022, according to the report, which should bode well for the hospitality sector. In order to prepare for this expected travel boom, luxury hotels will "continue undertaking major renovation projects," according to James McHugh Construction, a Midwest commercial contractor with a focus in high-end hospitality. 

The report also mentions that due to this expected increase in business and leisure travel, hospitality projects that were on the drawing boards before the pandemic are finally moving ahead in the construction process. 

For example, plans for 525 South Wabash, an apartment, retail and hotel development in Chicago, designed by Washington, D.C.-based architecture firm BKV Group, were approved by the City Council. The development will replace an existing parking structure, and will include 405 hotel rooms in a 24-story tower, connected to a 36-story residential tower by a retail and amenities podium.

The approval shows not only a bounceback from city centers, but also interest from hotel brands in incorporating mixed-use components to their projects, according to the report.

Finding solutions to supply chain woes

Users across industries are retooling supply chains, according to the report, meaning manufacturers, retailers and third-party logistics companies are gravitating to sites near population centers, highways and airports. 

As space near seaports is extremely limited, developers will be looking to move inland, while at the same time trying to offset rising transportation costs, according to the report.

For example, CRG, a St. Louis-based real estate development firm, is developing Class A warehouses in Bryan County, Georgia, about 25 miles from the Port of Savannah. With an expansion of the port expected to significantly increase capacity, the development project is "strategically positioned to address the resulting demand for industrial space," according to the report.

Supply chain challenges at the beginning of the pandemic are just affecting real estate now, said Adam Roth, executive vice president of NAI Hiffman. Rising transportation costs, rail changes and insurance costs are making manufacturers rethink their operations, either by adding distribution and logistics facilities or producing locally.

For example, in announcing its 157,656-square-foot, full-building lease at HSA Commercial's Bristol Highlands Commerce Center in Bristol, Wisconsin, candy manufacturer Haribo of America cited the importance of the new warehouse – located just two miles from the firm’s first-ever North American production plant – in unlocking a logistics and supply chain capacity expansion throughout the U.S., according to the report. 

A rising preferred asset class

COVID-19 vaccines along with other drug developments spurred activity in the health sector the last couple of years, a trend that should continue in the months ahead, according to the report. With many offices and retail spaces still not being used, those buildings could be re-adapted into life science-type spaces.

For example, Jim Adler, executive vice president of the office services group of NAI Hiffman, recently represented Mira Care in the sale-leaseback of a 48,000-square-foot office building in Illinois that is being converted to a 30-bed acute psychiatric hospital and outpatient center. The report mentions to expect to see more reuse projects like this in the coming year.

Cash at the ready

During this latest period of market volatility, private equity and real estate investment firms have been stockpiling cash, according to the report. That makes the 2022 environment much different than the economic environment during the Great Recession. 

Investors will be looking to deploy that capital while the cost of borrowing remains low, so while popular asset classes like multifamily and industrial could see loads of cash, expect investors to give the retail and hospitality sectors another look as well, according to the report.

Mark Perkowski, vice president with the commercial finance group at Draper and Kramer, a Chicago-based property and financial services company, said he expects to see "more capital available for financing retail centers," adding that retail properties that remained successful through the lows of the pandemic will be pursued by lenders in deals "they wouldn't have 12 months ago."

He added lenders that typically preferred flagged hotels driven by corporate travelers now favor boutique resorts and extended-stay properties that performed particularly well during the pandemic.

In late December, Deron Brown was having trouble finding a hotel room in Phoenix for a January conference. And from his perspective, that was a good thing.

As president and chief operating officer of U.S. operations for Edmonton, Canada-based PCL Construction, Brown constantly tries to read the tea leaves of where construction markets are headed.

As 2021 turned into 2022, many of those signs indicated it was at least in the right direction.

Beyond the lack of hotel rooms in Phoenix — a signpost for Brown that "people are getting back out there and doing things" — he's noticed a distinct change in the tenor of PCL's clients across its buildings, industrial and civil divisions. Namely, they're no longer lollygagging when it comes to committing to projects.

"The key is whether people are actually pulling the trigger and signing contracts," said Brown. "Over just the last couple months, we see people doing that." For example, while hospitality construction has been one of the hardest hit sectors of the pandemic, PCL had at least six hotels in various stages of development and construction at the beginning of 2022.

"We have a lot of developers and hoteliers who are wanting to build," Brown said. "Their estimating and pre-con departments are very busy."

Indeed, across the four regions where PCL operates — Canada, Australia, the Caribbean and the U.S. — the firm had a record backlog at the end of 2021. For Brown, it all adds up to a robust outlook for the year ahead.

"We do see a strong construction market for 2022," said Brown. "Some areas are still hurting, but a lot of other areas are very strong."

Brown and PCL aren't alone in that tentative, but rebounding, new year's forecast.

Nervous optimism on pricing

Construction pros and economists are taking a cautious but more hopeful view on the year ahead, even in the face of the highest rate of inflation since 1982, material price surges, continuing supply chain snarls and the exploding COVID-19 omicron variant.

While these market observers still see plenty of challenges ahead in the sector — the endemic labor shortage being top among their concerns — their perspective at the beginning of the year marks a return, if not to normal, at least a resemblance to the pre-pandemic world.

"Looking at 2022, I would say I'm nervously optimistic," said Ken Simonson, chief economist for the Associated General Contractors of America. "Nonresidential construction, by and large, seems to have passed the low point and is on an upswing."

For Simonson, that nervous optimism is based, at least in part, on some commodity prices coming back down at the end of 2021.

He pointed to copper's 10% dip in December – though it started to blip up again in January – and hot-rolled coiled steel giving back 20% since its peak in September. Lead times for deliveries of materials were also shrinking, he said, a factor that should put further downward pressure on prices.

"I've gotten more optimistic about material prices," Simonson said. While he doesn't expect them to return to pre-pandemic levels, he anticipates more up and down volatility, which is better than the exclusively upward cost trajectory many material prices took through to the summer of 2021. 

His bigger concern is continued threats from COVID-19, including omicron, the ever-changing vaccine mandate landscape and heightened vaccine hesitancy among construction workers, compared to other industries.

"It means there is a much greater risk for severe illness from COVID, and depending on what mandates are in effect, it adds to the difficulty construction firms will have fielding a full, healthy and eligible workforce," Simonson said.  

Those challenges add to the already endemic labor shortage in construction, where there were 345,000 unfilled jobs at the end of November. That was actually down from October, when openings hit an all-time high of 455,000, but up from 261,000 a year earlier, a 32% jump, according to the Bureau of Labor Statistics.

The benefits of inflation

Yet, as some of construction's biggest challenges converged in 2021 — namely rising prices and fewer workers — there's also reason to believe that they might conspire to contractors' benefit in the year ahead.

That's the view of Anirban Basu, chief economist at Associated Builders and Contractors, when he looks at surging inflation in the economy as a whole — it rose 6.8% year-over-year through November 2021 — and the number of workers who are still sitting on the sidelines.

"Inflation is real. It's not particularly transitory," said Basu, countering the Federal Reserve's view for much of last year that rising prices were temporary, before it pivoted to a more hawkish stance in December and signaled it would start increasing interest rates in 2022. "More and more people will have difficulty paying their bills."

The silver lining of those increases is that they may very well force people to go back to their jobs. "That might induce them back into the labor market, which I think would be a positive," Basu said. "It's time to get back to work." 

Another looming advantage of rising prices is that it has put pressure on developers to lock in contracts now, before costs can go higher, and get their projects in the pipeline while contractors still have bandwidth. That's a factor that Brown sees incentivizing his clients to move forward as well, especially as the pandemic recedes.

"There's some confidence that we don't have this thing beat yet, but we're moving in the right direction," Brown said in reference to COVID-19. "And to build a project, you don't build it in a day — you build it in a year and a half, or two years. So people are starting to think that if they wait, they may miss the right opportunity to build their project."

Manufacturing's long journey home

For Richard Branch, chief economist at Dodge Data & Analytics, labor also figures into the biggest challenges facing construction in 2022, a trifecta he calls the "3 Ps" of "people, prices and productivity," with the last hurdle referring to trying to do more work with fewer resources.  

But he also sees evidence that construction might enjoy some tailwinds due to adjustments firms have made due to the very challenges COVID-19 has thrown at the country.

A case in point is manufacturing, where a movement toward "onshoring" to overcome far-flung supply chain tangles overseas has led producers of goods not only to start ramping up their existing production volumes, but also to build new facilities to pump out more product.

Indeed, it was the manufacturing sector — not warehouses, not healthcare, not other nonresidential buildings — that blew the doors off construction starts in 2021, increasing by 86%, according to Dodge's data.

"The good news is we are starting to see factory output come back to close to where it was prior to the pandemic," Branch said. "That should help the supply side, and if we start to see some improvements with the log jams at ports, perhaps by the back side of 2022, we might see some reprieve from these higher prices."

More hoarding ahead?

Until that comes, however, there's another outlier that concerns construction watchers, and that's an increase in stockpiling of materials in yards and warehouses by contractors, simply to have them, should a job materialize where they can be used.

It's a trend Brown has picked up on as he goes out to compete for the increased amount of contracts he's seeing in the marketplace.

"Remember when the pandemic hit and everybody stockpiled toilet paper? That's happening today with businesses and materials," Brown said. "People are stockpiling three months of piping, or whatever it may be."

That has compounded the problem of availability and delayed deliveries.

"Some of it is a shortage, and some of it is shipping, but some of it is still a little bit of fear, where people are buying products to try to protect themselves," Brown said. "That's driving up the demand, which does not help the overall industry."

Craig Tappel, chief sales officer in the construction practice for Chicago-based surety brokerage Hub International, said he's seen that among his clients as well.

"They're trying to build stockpiles so that they have their own supplies, and that's adding to the shortages," Tappel said.

It also introduces another element of risk that contractors need to be aware of.

"If it's not assigned to a particular jobsite, and it's not part of materials headed toward a particular project, it's not automatically covered under that builder's risk policy," Tappel said. "So you've got to think about that. What are you doing to mitigate that risk?"

It's a question contractors will need to answer as they as they navigate the tenuous recovery expected for 2022.