During the pandemic, almost every discussion about how busy the markets are, has had one large footnote: Residential is going gangbusters. It is true, but there are some nuances to the story.
Yes, construction of new units is up, and the number of new housing units put in place is increasing slightly faster than the average increase since the construction recession in 2009-12 era. There was a dip during the April 2020 shutdowns, but the market has recovered that and a lot more.
Employment in residential construction is a similar story, constant steady increase from the trough of 2011 to the shutdowns, when there was a significant dip in employment, also since recovered and exceeded.
The data from 2019 on gets interesting. Dollars spent on residential buildings have accelerated during the pandemic period, almost doubling in value, while employment and Unit counts are up only(!) 20-30%. This increase in construction dollars is clearly driven by higher quality and larger homes, not more units or higher labor costs. Those higher cost homes are due in part to material cost increases, but even a 100% increase in all material costs (this did not happen!), would only have increased costs by less than 50%.
This cost increase dynamic is driven by the changing priorities of wealthy residential buyers. This effect can also be observed in the real estate sales markets, where high cost homes are facing bidding wars while more modest homes linger on the markets.
How does this matter for commercial construction watchers? A couple of important points:
Residential contractors are busy and are keeping their workforce employed. They are also likely providing employment for some typically commercial tradesmen that are not able to find positions in commercial projects.
The increase is an increase in cost, not sales, so this data does not indicate a “bubble” with a risk of collapse similar to the 2008-9 event. Even the sales data, which indicates some speculation, is relatively low risk as it appears to be confined to a smaller segment of the market at the highest cost levels. (this isn’t to say that there aren’t other bubble type risks in the economy today)
Demand side competition for materials is intense. With the recent spikes in lumber pricing, the steady increase in steel and other construction commodities, and continuing disruptions in supply, material prices (with exceptions) show little sign of moderating.
Schedule risks are increasing – delivery delays and missed deliveries are cost risks for contractors, and bids with aggressive fixed schedules will face significant bid premiums as contractors quantify those risks.
Commercial contractors are bidding assuming the risks they see in the market, which include all of the above issues, and more