Supply chain issues continue to impact the economy, and one expert said many builders are reacting to the changing stresses of the economy in real-time.
Dr. Chris Jones, an economics professor at the University of South Florida and President & Chief Economist of Florida Economics Advisors, LLC, said builders have reduced the scale of the projects they are building in today's market.
"Instead of building 1,000 or 2,000 home communities, today they are building 100 and 200-unit projects. While building at a smaller scale reduces market risk, it increases input prices because construction materials can't be acquired in large enough volumes to enjoy economies of scale by bulk purchasing. One way for builders to offset that cost increase is to acquire one or more of their materials suppliers, lowering costs via vertical integration."
The construction sector, noted Jones, is divided into residential, non-residential, and infrastructure – roads, bridges, dams, and other structures. All three require large amounts of input to keep projects on schedule.
Jones stressed that the supply chain problem goes back to the 2008-2009 recession.
"In the mid-1990s, we had a gigantic residential boom," he said. "Virtually anyone with a pulse could buy a new house because of the lax standards that fueled a demand. Residential community developers had a 'wild west' platform to build. Some were executing communities of 3,000 units. When you have that degree of demand for raw materials, there were advantages you could gain in terms of economies of scale for concrete, steel, wood, and other items.
"After the market collapse and several years of little economic to no growth in the housing sector," he added, "we have a building rebound today, but developers are no longer building on that grand scale because they can't take that financial risk – they understand that only a certain segment of the population can afford to purchase new homes."
New non-residential construction had been declining for several years.
"Brick and mortar retail was declining due to the online Amazon shipping effect," said Jones, "and in the office space sector, this is very COVID-driven—a transfer of business activity from face-to-face to a more visual environment, such as Zoom meetings, which has reduced the demand for new office space and office buildings."
He added that infrastructure spending for roads and bridges depends on the government, much of it via borrowed money and rising costs for materials that make such projects more expensive.
"There is more competition for identifying the projects that are going to be built," said Jones. "It makes it hard to justify where there is a demand for three, four or five miles of new road. It all comes down to scale - the lower the scale that is demanded, the higher to get these unit costs for inputs."
The critical point, says Jones, is that all three construction section sectors are chasing similar inputs.
Texas, which is experiencing a population boom, is building more highway infrastructure and is witnessing serious new construction in the residential and non-residential sectors. Tennessee is also seeing growth in residential and non-residential construction.
"Every state is different," said Jones. "Tell me about the construction boom in California, New York, and Michigan? You can't because it doesn't exist. We do have population shifts within the country with better affordability indices. Texas is a gigantic state, and there is no state income tax. It has a lot of land to expand upon and grow, and is still affordable."
Being able to secure aggregates locally or from neighboring states helps lower costs, but Jones says imports were also inexpensive.
"Prior to the supply chain issues of today," he explained, transport costs for many of these raw materials were lower, so going international was easier. We have a very high labor cost in regards to production."
This system has worked for a long time, but it has broken down in the last couple of years because domestically and globally, companies depend upon 'Just-In-Time' (JIT) delivery.
"Supply chain issues, resulting largely from a failure of the JIT inventory system created by the massive demand shocks at the initial and later phases of the COVID pandemic," said Jones," have disrupted nearly every segment of the market for consumer and business products. These shocks revealed a problem that had been festering in the U.S. economy for several years, and illustrated a systemic weakness in the manufacturing and distribution systems that exist globally. Rectifying this problem could take years and will likely involve the construction of billions of square feet in additional warehousing space.
"I don't want to say JIT is a house of cards," he added. "It has to work perfectly to be effective. It relies on a system where everything in terms of scheduled delivery, materials processing, production, and transportation has to work in an exact manner that the end retailer and user of the product need it to work."