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Equipment Leasing & Finance
Executive Perspective

Despite Challenges, Construction Industry Remains Optimistic

May-June 2022

ExecPerJimHeronOver the past two years, the construction industry has experienced many shifts. It’s had to adjust rapidly while bouncing between extreme economic challenges and profitable opportunities. However, the industry faced adversity with strength and determination, and it has done an excellent job managing through and coming out stronger. 

Wells Fargo has talked with many construction industry executives to reflect on the prior year and look ahead at what the next few years might bring. As a result, in January 2022, Wells Fargo released the results of its 46th annual Construction Industry Forecast. The results showed a 44% increase in the Optimism Quotient over the previous year with a score of 112, indicating strong optimism. Despite the strong optimism, the industry remains cautious as growing economic factors continue to affect it. 

As city and state pandemic regulations eased, contractor work began to flood in fast. So much so that many constructors had to be selective with the types of jobs they bid due to skilled labor shortages, unavailability of product, and the rising costs of goods and raw materials. 

As we entered 2022, contractors not only started the year with a hefty backlog of projects due to supply chain and labor issues, which we believe will remain challenging for a few more years, but they also have issues sourcing basic materials and the substantially high costs of those materials. 

In spite of these difficulties, and other imminent risks and concerns that impact our economy, demand for projects continues to increase and look profitable for the industry. 

ConstructionSurvey

Here are key findings that stem from the industry leaders’ sentiment when surveyed:

Industry optimism
• Residential rental properties expect to maintain high utilization rates on their current rental inventory while adding to their portfolios in 2022.
• Contractors and distributors have similar expectations in 2022 for non-residential construction activity, with over 50% predicting activity will increase.
• Over half of executives predict there will be industry expansion two years from now. While this estimation is consistent with the previous year, the passage of the Infrastructure bill could have the ability to strengthen this optimism. 

Equipment rental and purchases
Our survey reveals that both equipment manufacturers and dealers expect to sell more equipment in 2022 than they did in 2021. This is interesting because as the costs of new and used equipment are going up, there is limited inventory due to supply chain issues.  

Inflation, financial concerns and risks 
Construction industry executives told us that the greatest risks to the construction industry are the availability of skilled workers and supply chain disruptions. The ability to hire qualified workers is the top cost concern among 53% of contractors; followed by materials costs, employee wages and other benefits. 

In addition, inflation has resulted in escalating costs across the board. The U.S.’s year-over-year inflation rate as of October 2021 stood at 6.2 percent and construction material costs were up 23.1 percent, almost four times the market benchmark. Major construction materials such as steel mill products and lumber are up well over 100 percent year-over-year. Plastics, gypsum, copper and aluminum, all key elements in a project, also range from 16 to 45 percent increases. 

This type of volatility in materials has been unprecedented and has led to cancelation and postponement of some projects because the project is no longer economically feasible. Overall, input costs for a project have increased at four times the rate of the U.S. economy.
However, most executives remain positive about profitability in 2022 with significantly more (52% vs. 40% last year) expecting it to increase. As many remained resilient and strong during some turbulent times in Q1, the demand for projects continues to increase and we are expecting 2022 to be a good year for the industry.  

You may download the full report at 2022 Construction Industry Forecast (wellsfargomedia.com).

 

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  • VERTICAL MARKETS