It’s hard to believe we’re reaching the end of another year and looking ahead to see what’s coming next. When I sat down to write the 2021 industry outlook last year, we were just starting to see the ripple effects of 2020 and the COVID-19 pandemic. Some of those effects — supply chain impact, labor shortage, volatile material costs — are still holding strong and impacting our industry. But our industry has not only stayed resilient, we’ve adapted and had some incredible success stories in the face of unprecedented conditions. Based on what we experienced this year and the conditions we’re seeing now, here’s what I predict will be the big stories in our industry in 2022:
Supply Chain Fatigue
Are you tired of hearing about the supply chain challenges? You’re almost certainly tired of dealing with the delays and impacts they cause. Last year, when we first started seeing slowness in the supply chain, the demand on the construction side was through the roof. That demand has only increased. If you want to focus on a positive, I think that’s a great one. I firmly believed at some point that demand would top off, the supply chain impacts would stall projects, or the other challenges from the pandemic would lead to projects not getting financed. But we’re just not seeing that. The market fundamentals are really strong right now in the commercial real estate world. Rent rates are up and capitalization rates are down which is leading to more developments getting financed.
It has to be noted that the positive market conditions in the real estate world are driving even more challenges for construction. It’s a good problem to have though, given the alternative. The demand has driven builders to continue to get even better at what we do — earlier planning, enhanced preconstruction, creative construction solutions, etc. That’s something we as an industry will have to carry into 2022, because we are not done fighting the supply challenges brought on by an active industry and high demand, and I don’t think we’ll be done for another year or two. I do think within that time frame we can expect to see some improvements in the domestic supply chain as there is ongoing development in the industrial and manufacturing market sectors — Nucor and US Steel both announced plans to begin construction on multi-billion-dollar plants next year. However, the international supply chain will continue to be a challenge for the foreseeable future.
Market Demand
As we head into 2022, there is still a high demand for new multifamily properties as the population continues to rise in the Sunbelt, specifically in cities like Nashville, Charlotte, Tampa, Austin, and Atlanta. As a result, rents are increasing in all those markets, which is supporting more development and cap rates are lowering. That combination is making multifamily deals financially viable and will continue to create new opportunities and projects in 2022.
The industrial market is also booming in large part due to Amazon’s impact on the industry. In fact, 8 of the 10 largest industrial projects of 2021 are Amazon distribution centers. In addition, the electric car strategy is driving automotive companies like Ford, GM, and Tesla to continue to expand their operations to keep up with the demand.
The amount of new healthcare projects planned for 2022 is the biggest uptick we’ve seen in the last 10 years. Healthcare clients are building bigger hospitals than we’ve seen in a while in addition to freestanding emergency rooms, rehabilitation hospitals, new bed tower additions, and senior living facilities — to meet both the aging population and the demand of patients who want convenient accessible healthcare closer to where they live.
Creative Methods and Solutions
One very exciting change that has come out of the challenges we’ve faced over the last two years is the increased acceptance of technology and creative, lean building solutions. Modular construction is something we’ve all been looking at for a long time, but the building method really makes sense under the current conditions. Our healthcare clients have especially embraced modular construction as a way to increase speed to market to serve patients sooner while also overcoming the volatility in the supply chain and ongoing labor shortage. We’re building our first full modular patient expansion right now at Encompass Health’s Katy Campus. Our team on the Dell Children’s Hospital in Austin, where labor is extremely limited, has been building the bathrooms, exterior wall panels, and MEP components offsite in different, less active cities. We’ve been able to shorten the project schedule and provide some certainty in an uncertain market.
I think you can expect to see modular construction expand into other markets like hospitality, multifamily, and cities where the labor is tight — which is most cities right now. We’ve always known modular construction can be faster, but a huge benefit right now is the ability to build components in warehouses in cities where the labor is available. When project teams can reduce some of the volatility and uncertainty that exists from labor shortages, cost escalation, and supply shortages, in addition to increasing speed to market, they can offer serious value and improved certainty to clients.
It’s also exciting to see newer construction techniques taking off in the U.S. Mass timber construction is a new/old technique, used fairly widespread in Europe, that is now emerging as the latest building innovation making waves in the industry, particularly in the office building sector. We broke ground this year on our first mass timber project, an office building in Nashville, and have several other clients interested in pursuing projects with mass timber in 2022. With mass timber buildings, the upfront cost of construction may be more expensive than steel or concrete, but the benefits overcome the cost in terms of overall proforma and the positive environmental impact of building with a renewable resource. The finished buildings are unique and look great, and we’re seeing better rents in timber projects in some markets than we have for steel or concrete office buildings.
Success and Next Steps
One success story that has remained true since the onset of the pandemic is how adaptable our industry is. I’ve said it before, but it really makes me proud to see how builders, architects, trade partners, and owners across the construction industry have worked together, overcome challenges with creative solutions, embraced technology to communicate when we couldn’t face-to-face, all to remain essential and continue to build projects that impact communities across the country. One of our company’s core values has always been the relentless pursuit of improvement, and I’ve seen real, measurable improvement across the industry this year that’s driven by resourcefulness and creativity. When bar joists and deck materials were in high demand but scarce supply, project teams pivoted and identified alternative framing systems like using more tilt wall or timber frame options. The challenges from the pandemic, from the heightened safety and social distancing required to keep teams safe to the aftershock it caused to the supply chain and construction costs, were hard enough to bring progress in our industry to a screeching halt. But that didn’t happen. We remained essential and active and are even busier than ever in many markets. That’s a true testament to the resiliency of the people who work in every facet of the industry.
So, how do keep going and improving? I think the first step is to seriously improve our ability to recruit new talent from diverse backgrounds, work experiences, schools, and locations. Our industry is behind in diversity and inclusion efforts. There were 321,000 unfilled jobs in the construction industry in July. Nearly 90 percent of the people employed in construction are white, and just 11 percent are women. That clearly shows that we have an incredible opportunity. Our industry celebrated the first-ever Construction Inclusion Week this Fall. I’ve seen more contractors, including our own company, making efforts to expand recruitment efforts and enhance inclusion within the industry. There are limitless possibilities across a variety of fields in this industry — project management, technology, marketing, business development, financial, skilled labor, field leadership — and we have too many open positions and not enough talent to fill them. If we can diversify the industry, show more people the opportunities available, and strive to make more people feel included and comfortable pursuing a career in construction, we’ll not only be improving the industry, we’ll finally make strides towards solving the significant and ongoing labor shortage challenge. If we can take that step while keeping the same resiliency and adaptability that has kept our industry active these last two years, I can’t wait to see what we’re capable of in 2022.
