The Lancaster County construction industry expects a year of growth with lower profits Local business

At ABC Keystone’s annual economic breakfast last month, economist Anirban Bassu told hundreds of Lancaster County construction industry experts that 2022 will be a year of growth.

Bass from Baltimore-based Sage Policy Group Inc. noted that apartment building, warehousing and manufacturing is and will continue to be strong in central Pennsylvania. Health facilities and housing for the elderly are also strong, Basu said.

Bassu said construction of hotels, shopping malls and office buildings would be weak, at least in part due to changes made by the pandemic.

But the war in Ukraine has somewhat changed this forecast.

“Russia’s invasion of Ukraine will not help,” Basu said in a March 1 analysis. “Prices for oil and other key raw materials are rising, which puts additional pressure on the cost of providing construction services. These increased costs have already forced some project owners to postpone projects in hopes of getting better rates in the future. Prices for steel, copper, aluminum, neon and nickel are all linked to the start of the war, and sanctions against Russia and restrictions on its exports will remain in place long after the end of hostilities. “

A look at the numbers

According to an analysis by the U.S. Census Bureau on March 1, national spending on non-residential construction rose 1.3% in January. Year-on-year expenditures on non-residents amounted to $ 838.9 billion per month.

Expenditures increased monthly in nine of the 16 non-residential subcategories. Private expenditures on non-residential construction increased by 1.8% in January, while government expenditures on non-residential construction increased by 0.5% compared to the previous month.

“Typically, one could look at the numbers in the headlines that show that investment in construction in America has grown as a cause for joy,” Bassu said, releasing a new analysis. “But the data on construction costs have not been adjusted for inflation, and in real terms, construction costs have probably fallen over the month. Total construction costs increased by more than 8% compared to last year, but material prices rose by about 24% over the period. Compensation costs to workers also grew rapidly. As a result, contractors ’profit expectations have deteriorated in recent months, according to the ABC Construction Confidence Index.

“The worst circumstances are in the non-residential segment,” Basu said. “While construction costs increased by 13% in the residential component of the industry, non-residential expenditures increased by less than 4% compared to the same period last year. In some categories, costs are reduced in both real and nominal terms.

According to Bass, the reduction in construction costs associated with the pandemic has led to a 35% reduction in the public safety segment year after year. The financial impact on the education sector as a result of the pandemic has led to a reduction in construction-related construction costs by 7% per year. Expenditures in the besieged housing segment fell by almost 25% excluding inflation.

Reasons for optimism

However, the mood of many construction companies is positive.

The Momentum index, which measures non-residential construction projects in national planning, increased by 4% in February compared to January. Growth was a rebound after three consecutive monthly declines that followed a 14-year high in October 2021.

Much of the revenue in February was due to a significant jump in the institutional component as more education and health projects went into planning, according to the Dodge Construction Network, which calculates the index.

The Philadelphia Federal Reserve’s beige book of March 2 says home builders are reporting ongoing contracts and construction work, but continue to cite problems with supplies of materials and manpower, as well as rising costs for both.

The Fed’s report, based on pre-war research in Ukraine, said construction activity and leasing activity in most segments of non-residential real estate remained stable. He named apartment buildings, institutional projects and industrial / warehouse space as the strongest markets. The prospects for office space and retail in the city center will become clearer once workers are constantly returning to offices, the Fed said.

Success Strategies

However, with rising inflation and rising wages, the question remains: how can construction be profitable in 2022?

“How do you satisfy customers and keep profits when cost equations are growing so fast?” Bassu asked in an interview. “It comes down to operational perfection. It comes to the proper design of the details. What to do at project prices? It’s really hard stuff, so I do what I do. “

Bassu said in polls he conducted, the construction industry as a whole is optimistic despite the challenges. There has been some consolidation in the industry.

“It will be a year of growth,” Bassu said in his presentation. “But the economy will remain unbalanced and supply will be struggling to keep up with demand. Along with rising wages amid the Great Resignation, this means that in 2022, inflation across the economy is above average. ”

Bassu predicted even before the war in Ukraine that interest rates would rise.

“Beware of a rapid decline in commodity and asset prices at some point in the 22nd,” he said at a breakfast forecast for the economy.

Firms with larger balance sheets and better banking relationships have an advantage in this atmosphere.

“In general, this is a difficult time,” said Michael Funk, senior vice president of Wohlsen Construction in Lancaster. “We are very positive about the market and we have a good backlog (projects).”

One of the tricks to profitability, he said, is getting materials at better prices by ordering earlier and even earlier than they will be needed.

“For us and for the construction industry (that means) work on capturing and obtaining our materials as soon as possible when we get permission for the project.”

Funk said Wolsen created a database of tracking materials to design the time the materials were received and take this into account in project management and bidding.

For example, according to him, it takes up to a year to get electrical switchboards, where they used to last about 20 weeks. It also means ordering raw materials, such as two by four, just to have on hand.

Back to top button