Trends in the Ninth District’s construction industry are splitting along clear lines: For industrial and infrastructure projects, business is up. But the same can’t be said for residential and commercial construction, according to a recent Minneapolis Fed survey.
“There has been a real drop off in single family homes,” a concrete subcontractor in Greater Minnesota said. High interest rates have made homes much less affordable for many people, he said.
The residential sector began to diverge from the other sectors in the middle of 2022, around the time interest rates began to soar.
Yet, the same survey respondent expects work to pick up outside of housing. Federal and state governments are “dumping a lot of money” into public works projects, he said.
In the residential and commercial construction sectors, more survey respondents reported lower revenue than higher revenue. But the opposite was true in the industrial and infrastructure sectors.
The survey was conducted in partnership with dozens of construction and other trade organizations in early November. More than 300 respondents took part in the survey.
Who’s growing, who’s not
Compared with a year ago, revenue decreased for 61 percent of the residential sector and 41 percent of the commercial sector (Figure 1). Only about a third of the industrial and infrastructure sectors said the same.
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The residential sector began to diverge from the other sectors in the middle of 2022, around the time interest rates began to soar, according to earlier Minneapolis Fed surveys. The commercial sector soon followed (Figure 2).
Revenue changes in recent months
Share of survey respondents in each construction sector
Source: Federal Reserve Bank of Minneapolis
Survey responses suggest that homebuyers and commercial developers are more sensitive to interest rate hikes. One reason the infrastructure sector is less sensitive is that the clients are often governments.
A Twin Cities architect said most of the revenue growth her firm has enjoyed has been from out-of-state federal government contracts. “If it were not for those we would be sorely under sales and profits, and likely considering layoffs.”
In some areas, government spending incentivized private spending. A supplier of construction materials in western South Dakota said commercial buildings and hotels are being built in anticipation of growth at Ellsworth Air Force Base. The Air Force plans to house its new B-21 stealth bombers there in the next few years.
The challenge of labor
When survey respondents were asked to name their top challenges, 66 percent in the residential construction sector pointed to high interest rates.
Far fewer respondents in commercial, industrial, and infrastructure sectors considered interest rates to be so challenging. In those sectors, labor availability was the top challenge for the largest number of respondents. Even in the slower-growing commercial sector, 44 percent said labor availability is a top challenge while 42 percent identified rate hikes.
This difference likely stems from hiring challenges. A majority of respondents in all sectors except residential said their firm is still hiring (Figure 3). These positions include new permanent workers, seasonal workers, and replacements for workers who quit. Workers in skilled trades are more in demand than those without specialized skills; respondents said skilled workers received bigger pay hikes.
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“This is the biggest challenge we have had for the last three years that I can remember,” said a South Dakota general contractor specializing in commercial construction. “Wages are going up and people’s skillsets are declining.”
In the residential sector, less than half of respondents said their firm is hiring. Despite some warnings of potential layoffs, the majority of those not hiring are hanging on to the workers they have.
Inflation was a top challenge a year ago for a majority of respondents in all sectors. In this survey, it was only a top challenge for a majority of the residential sector.
Pessimism in the residential sector
Looking ahead over the next six months, optimism outweighs pessimism in all but the residential sector, where 46 percent don’t expect business to improve. The infrastructure sector reported the best outlook, with 48 percent expressing optimism. In the commercial sector, optimism narrowly beat pessimism 39 percent to 35 percent; the remaining responses were neutral.
The outlook is gloomy for homebuilders, because many may soon run out of work and new contracts are scarce. Sixty-seven percent of the sector said their project backlog had decreased. Sixty percent reported fewer requests for proposal (RFP) from private clients, who dominate the sector.
“We have no backlog currently. In years back we had 10 to 20 houses in our backlog, which makes up about 10 to 20 percent of our yearly sales.”
“We have no backlog currently,” said a Montana homebuilder. “In years back we had 10 to 20 houses in our backlog, which makes up about 10 to 20 percent of our yearly sales.”
Other sectors also reported decreased prospects for future work, but not to the same extent. In the commercial sector, for example, 44 percent said backlogs decreased and 51 percent said RFPs for private projects are fewer. The bulk of projects in the commercial sector are funded by private developers.
Public projects are much more stable. A majority of respondents in all sectors reported the same or greater number of public RFPs. That’s a boon to the infrastructure sector, where a large amount of public funding goes.
In North Dakota, a general contractor specializing in infrastructure said, “We can pick and choose our projects.”