As we move into 2022 with a recovering economy, we are continuing to learn what it takes to be resilient. The construction and real estate (C&RE) industries have embraced the various challenges and environmental changes that have occurred over the past year and have opportunities to carry that momentum and resilience into 2022. In the following section, we will review current business challenges, economic conditions, and business goals for the coming year related to the C&RE industry from our 2022 Business Outlook Report.
The Rapidly Changing Business Environment
Top Business Challenges
Entering 2021, the pandemic was the top business challenge noted by a majority of businesses. The effects of the pandemic may continue to provide uncertainties and challenges for the industry during 2022, but generally, the pandemic is no longer viewed as the top challenge facing businesses. The U.S. and Tennessee economies both grew at strong rates during 2021. Many economic forecasts are predicting some slowing of the economy in 2022 compared to 2021, but most are predicting continued strong growth. As we move into a post-pandemic environment, materials, supplies and equipment cost, acquiring and retaining talent, and domestic economic conditions become the more significant challenges.
As reported in Construction Executive, the industry has watched lumber, copper, steel, aluminum and other prices of inputs to construction skyrocket nearly 21% over the past year, with natural gas and steel experiencing the highest increases. The U.S. remains the leading importer of raw materials, and the supply chain issues have disproportionately challenged enterprise. Beyond the cost and shortage of materials, the cost of transporting raw materials by sea was up 1,150% compared to pre-pandemic costs. These challenges along with rising labor costs are causing project owners to pay more to get projects completed. In other instances, project owners are postponing projects, exacerbating a growing backlog.
Many of our construction contractor clients are having to purchase much of their job materials and supplies up front to reduce the risk of project delays due to the continued disruption in domestic and global supply chains. As a result, contractors are experiencing greater requirements of cash flow at project inception, which is requiring them to rethink the terms of their contracts and the working capital requirements necessary to support operations.
The real estate industry is doing well in the U.S., and the Middle Tennessee market is thriving with many people and investors moving to the area from out of state. The greatest challenge throughout 2021 in Tennessee for real estate has been the lack of inventory and project delays on new builds due to land shortages, increased costs and permitting. Development delays have created a supply and demand imbalance.
U.S. import price indexes for industrial supplies and materials, 12-month percent change
Note: Shaded area represents recession, as determined by the National Bureau of Economic Research. Source: U.S. Bureau of Labor Statistics, https://www.bls.gov/charts/import-export/
Acquiring and Retaining Talent
Finding workers has been an ongoing challenge that escalated during the pandemic due to employee health and enhanced unemployment benefits. Our LEA Global partner firm noted 41% of executives are making finding and paying skilled labor a top priority and ranking labor shortages as the biggest threat to construction businesses. Based on conversations with our clients, we would expect this statistic to be even higher in Tennessee.
In April 2021, the number of available, unfilled construction job openings rose to 351,000, which is one of the highest readings in the history of tracking by the U.S. Bureau of Labor Statistics.
While finding skilled talent has been a challenge across industries, getting skilled laborers is particularly challenging in the construction industry. The pool of talent is lower, and the hiring costs are higher. Many contractors are seeking to engage young workers in high school as a potential solution.
Members of the youngest generation of the workforce are especially averse to the notion of taking on student debt. Accordingly, members of this generation may be more open to the types of pathways to the middle class that the construction trades offer. We are finding that they are more open to a variety of pathways that construction trades offer in 2022.
Available Construction Job Openings, January 2005 – October 2021
Source: U.S. Bureau of Labor Statistics
The U.S. needs 1 million new construction workers in the next two years. The average U.S. construction worker is 43 years old, and young people aren’t lining up to work in construction. The construction industry shut down for a few months during the pandemic — but was quickly deemed essential, allowing paused projects to continue. In that short shutdown time, the sector lost more than 1 million workers. The industry has recouped nearly 80% of its workforce since then but is still down 238,000 workers from pre-pandemic levels as of June, according to the Labor Department.
To address the challenge of attracting and retaining talent, the industry is offering paid apprenticeship training programs and vocational skills training programs. The Associated Builders & Contractors (ABC) members reportedly invested $1.3 billion in 2020 alone to train talent.
In addition, engaging younger workers is a focus of many groups such as Associated General Contractors (AGC) and ABC, and this strategy will be critical going forward. Companies are getting creative in how they attract workers and are beginning to partner with high schools and community colleges to create their own training programs to help mitigate the labor shortage.
The labor issue in the construction industry has opened a door for more opportunities for women and minorities. According to the U.S. Bureau of Labor Statistics, women occupy only 10.9% of construction industry jobs. Austin Woman magazine reported that only 13% of construction firms in the U.S. are owned by women.
In a September 2021 article on WTVF, Metro Nashville announced that it’s trying to hire more women-owned and minority businesses to do city work. In 2021, they made a goal of spending $224 million with such companies. As part of the program, $99 million went to women-owned firms and $125 million to other minority-owned firms.
Domestic Economic Conditions
Most economic forecasts are predicting continued growth in 2022. However, supply chain issues, talent shortages, and inflationary pressures continue to present headwinds. In addition, with an increase in interest rates likely, the C&RE industry will be wise to pay close attention to policy in the next year.
In real estate, we are seeing an increase in multi-family housing investments, and an increase in the use of HUD financing for these developments. We are serving several of our contractors by performing job cost certification audits required by the Department of Housing and Urban Development for those multi-family housing projects. The Nashville housing market is one of the hottest markets in the U.S. Experts typically consider a market to be healthy and balanced if there is a six-month supply of homes. Nashville has never been this tight with barely over a month’s supply of inventory. According to brokers, Nashville is witnessing a record number of out-of-state purchasers primarily driven by significantly lower taxes.
While the pandemic led to less activity overall, project sizes varied. About a third of companies reported completing larger jobs with 22% reporting smaller jobs. As pandemic related uncertainty levels out, larger jobs will pick up steam, which could lead to additional pressure on the workforce and supply chain. The same survey found that executives are watching the economy with caution, with a majority (77%) managing cash flow to be prepared for a possible recession. Just over half are focusing on sales and marketing to get ready for what’s to come.
Most of our Tennessee C&RE clients performed well during 2021 and continue to have strong backlogs going into 2022. The majority are optimistic they will achieve revenue growth in 2022, despite the challenges of finding the right talent, managing the supply chain, and rapidly increasing costs.
Business Performance/ Strategies
Sales & Profitability Strategies
When it comes to strategy for increasing profitability, C&RE companies are most focused on improving their productivity and efficiency in 2022, followed by increasing margins and revenue. Regardless of the pandemic, some C&RE companies were still able to record a banner year in 2021. C&RE companies expect to grow in their current market over the upcoming three years (79%), with more than half (54%) believing their company will have more opportunities available. A majority (84%) of C&RE companies expect the same or more opportunities over the next three years outside their current markets. Meanwhile, 39% of C&RE companies are prioritizing new market opportunities as a top priority.
Strategies for Increasing Profitability During 2021
We are seeing increased confidence in construction capital spending moving into 2022. In early 2021, only 11.9% of C&RE companies planned to increase capital spending. However, looking ahead to 2022, 31% plan to increase spending while the remaining 57% plan to hold steady.
Through 2021, 88% of construction executives said their ability to obtain financing remained the same. Banks were able to service their clients because of PPP loans allowing for limited disruption in spending.
FOUR TOPICS CONTRACTORS SHOULD DISCUSS WITH THEIR TAX ADVISOR
Key Business Topics
The increased use of technology could improve the industry’s productivity as much as 60% and deliver as much as $1.6 trillion annually in incremental value.
Unlike most industries, C&RE companies are more likely to manage their business technology by replacing systems rather than improving existing ones. We expect more than one-third of C&RE companies manage their business technology by replacing existing systems (36.4%). Most other industries in this study selected improving performance of existing systems as their top choice. And when they invest in technology, C&RE companies are most interested in cloud technologies.
More important than ever is the ability to track and measure projects to see if they are on time and on budget. Having modern cloud accounting solutions, document management automation, and a secure IT environment enables businesses to access real-time data and deliver clear and measurable results.
The industry’s relatively low technology investment rates could represent a golden opportunity to build a competitive advantage. Investing in the right technology can dramatically increase productivity and strengthen the bottom line, which is a top goal of C&RE companies in 2022.
Current Strategy for Managing Business Technology
Cybersecurity is reportedly not a high priority among C&RE companies, with only 13% of respondents in this industry prioritizing cybersecurity. This statistic was the lowest among all industries in our study. Over the next 12 months, of those C&RE companies that prioritize cybersecurity, two-thirds plan to implement new software security tools.
Given the rapid increase, sophistication, and cost of ransomware attacks, IT security issues should be viewed as now operational issues that can halt the ability to conduct business. Without proper preparation and investment in cybersecurity protections, a company’s bottom line can be greatly impacted.
Cybersecurity Strategies/Actions During 2021
“The C&RE industry often flies “under the radar” for cybersecurity because there are fewer regulations in place to obligate these entities to implement cyber protections. However, these companies still have lots of sensitive data that should be protected, and as such, they would be well-served to evaluate their cybersecurity risks and take actions to address the risks that are deemed significant.”
MARK BURNETTE, CPA, CISA, CISSP, CISM, CRISC, CCSFP, QSA, SHAREHOLDER-IN-CHARGE, INFORMATION SECURITY
WHAT IS YOUR NEAR-TERM OUTLOOK FOR LBMC?
The growth opportunities within C&RE companies are expanding, but there will be ongoing challenges to navigate within the supply chain, labor shortages and technology sectors through 2022. We are working with clients in 2022 on overcoming these challenges that will require strong strategy, planning and risk management that could potentially be unfamiliar territory for most C&RE companies.