By Richard Branch, Chief Economist
As the calendar turns over to a new year, the recovery in construction starts is gaining traction. Through the first 11 months of 2021, total construction starts are up 13% on a year-to-date basis over 2020. Nonresidential building starts are up 11% thanks to gains in warehouse, recreation, and manufacturing starts. Residential building starts have risen an incredible 20% on a year-to-date basis as multifamily construction picks up speed, while single family pauses. Nonbuilding starts, meanwhile, are up a very tepid 1% due to mostly flat federal funding levels.
However, just as optimism mounts the Omicron variant and aggressively rising material prices threaten to put a halt to the fledgling recovery.
In November, the Producer Price Index for construction materials rose 35% over last year — that’s the fourth consecutive month where material prices posted a 30% or higher increase over last year. Meanwhile, rising COVID cases have halted in-person college at many institutions and have further derailed return-to-office plans for a growing number of companies.
Looking ahead though, I still think there’s reason to be hopeful. On the pricing front, underlying manufacturing data for construction inputs point to producers slowly getting back to pre-pandemic output levels. So as long as we see improvements at ports and in shipping and logistics, we should start to see inflation start to cool somewhat in the second half of next year.
There is still, however, a great deal of uncertainty over Omicron. I think it’s still too early to say definitively what impact Omicron will have on construction starts. One thing is clear, however: Those project types that require people to congregate, like offices and hotels, will face increased uncertainty over the medium term.
While it’s easy to focus on the near-term negativity, by doing so you could miss out on the incredible opportunity at play in 2022. On the nonresidential building front, the Dodge Momentum Index tells us that the dollar value of projects in the early stages in planning is near a 14-year high and the first phases of funding from the $550 billion in new infrastructure spending will start flowing over the next few months.
While uncertainly clouds the outlook for the construction sector in 2022, we continue to believe that the Grinch woke up on Christmas morning to find that his heart has indeed grown three sizes, allowing the recovery in construction starts to continue.