Two Alarming Trends In Construction
Welcome to the Real Estate Espresso podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re taking a look at the latest research on new construction and whether there are constraints that are driving costs higher, even as fewer projects are getting built in the current environment.
But first, I’d like to invite you to learn more about an exciting new opportunity located in Bradenton, Florida. Bradenton is next to Sarasota for those of you who are familiar with Florida. This market has an industrial moratorium, that’s driving one asset class to new heights specifically light industrial. This 35-acre property right in the middle of Bradenton has an existing charter school on 11 of those acres and 24 acres of land that we are developing with my development company, Y Street Capital. We’re hosting a webinar on Wednesday, October 8 at 7 pm Eastern time. This opportunity is only open to accredited investors residing in the US in compliance with US SEC regulations. Click on the link in the show notes to learn more. We look forward to seeing you on Wednesday evening at 7 pm.
On today’s show, we are taking a look at the latest research on new construction and whether there are constraints that are driving costs higher even as fewer projects are getting built in the current environment. Specifically, I am summarizing research from four papers on the topic, which come from the Associated Builders and Contractors Association, another from the end of last year from the Associated General Contractors Association, and a paper from the Home Builders Institute. The links to these papers will be in the show notes so let’s get started.
If there’s one thing that appears to be driving the industry, it’s the need for increased automation. Stick building, the way it’s been done in the past, simply doesn’t make sense anymore. That drive for automation is a response to chronic labor shortages. The US construction labor market is facing a severe and persistent imbalance where high project demand consistently exceeds workforce availability. The slowdown in construction, despite strong marketing indicators, is still resulting in a shortfall in many key skills. Even though companies have laid off staff and paused their hiring, a very large percentage of firms have plans to increase hiring in the near future once this cycle recovers.
A staggering 77% of firms report difficulty filling some or all of their salaried or hourly craft positions. That high difficulty rate has remained largely unchanged, and it signals a deep, inelastic constraint on the availability of labor that prevents immediate resolution through standard market mechanisms. The industry’s primary defensive strategy against this scarcity has been to increase pay aggressively. In 2023, 63% of construction firms reported increasing base pay rates more than in the previous year, and 25% provided additional incentives and bonuses to attract and retain skilled workers. The competitive pressure translated to an average increase in compensation for subcontractors by 72%. The reliance on specialized talent is critical, with residential specialty contractors accounting for 2.4 million jobs within the residential sector alone.
Another major trend relates to subcontractor competitiveness. It used to be the case that picking the lowest bid was the most important thing – today the primary measure of competitive differentiation is the ability to accurately price working capital risk. Subcontractors who successfully account for the cost of working capital in their bids gain an average of 11% larger profit margins. That strategic pricing is directly correlated with superior growth, and nearly a third of those financially astute firms reported a year over an increase in revenue exceeding 20%.
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