In 2018 my friend excitedly mentioned that he and his wife were looking to buy a house. Finding a new home would end up taking them another 24 months.
Maybe those of you who are living in the San Francisco Bay Area have had a similar experience involving an excruciatingly painful journey to bid, get outbid, and eventually pay a handsome price to procure a property. The population of the Bay Area is growing fast, and over 2 million new homes will be required by 2070. The deficit over the past years is already standing at 700,000 units. This scenario occurs as a result of some 232,000 and 332,000 unfilled construction job vacancies at the peak of unemployment rate of 15% in 2020 and about the same when unemployment was only at 4.1%, according to Bloomberg.
Historically low interest rates are fueling high housing demand
The housing shortage is not unique to the Bay Area. As of December 2020, the US housing inventory sits at 4.3 month’s supply, nearly three times lower than the 12.2 month’s supply during the height of the Great Financial Crisis. In other word, it would take a little over a quarter of a year to sell all the houses available in the market, as opposed to over a year.
Over the past decade, the US has suffered from a severe housing shortage. Low interest rates have increased housing demand that caught up with and eventually surpassed housing supply, resulting in housing inventory shortages. Freddie Mac, has estimated a shortage of over 3.3 million units across 29 states with housing deficits. Some states have a housing surplus but this does not help faraway places.
Half a century old infrastructure requires a $2 trillion infrastructure budget
There are 614,387 bridges in the US, and over 30% are more than 50 years old. Unsurprisingly, the American Society of Civil Engineers (ASCE) gave US infrastructure a D+ in its most recent evaluation report. The Biden Administration has proposed spending $2 trillion on infrastructure improvements, ranging from roads, bridges and tunnels as the top priorities. This budget, if passed, would create a surge in construction demand, adding even more pressure to rising construction labor costs.
A $400 billion market forced into disruption
Between 1985 and 2015, the average age of construction workers increased from 36 to 42.5, while those aged 55 and older increased from 12% to over 20%. Construction workers face significant challenges as their age increases, while the industry struggles to attract younger workers. The 2018 Population Survey conducted by the Census Bureau found that workers aged under 25 comprised 12.3% of the overall US labor force, compared to 9% in the construction industry.
Productivity in the construction industry has remained static since 1995, primarily driven by the aging demographic of the existing labor force, the apprenticeship nature of the job and difficulty in attracting and retaining new workers. In short, there is insufficient labor to do the job, while existing staff are becoming increasingly less productive as skilled workers that have accumulated decades of experience in their crafts are lost due to retirement.
This trend is also reflected by rising wages. The shortage of construction labor has increased pressure on hourly earnings that averaged $30.73 in 2019 as 10.1% higher than the private sector average of $27.90 (Associated General Contractors of America).
The estimated value of the US construction industry is $1.3 trillion, of which about $400 billion is made up of construction labor and thus prone to disruption. As the workforce demographic continues to age, productivity growth will remain static and labor costs will rise. The only alternative to curb these impacts is adoption of novel technologies.
In Part II of our series on automation and labor shortages, we will analyze market opportunities by dissecting the industry into job, process, and stakeholder. Part III will look at construction analytics and how they can be used to curb the effect of cost and time overrun as a result of labor shortage. We will discuss the most lucrative opportunities and the market dynamic that challenges technology adoption. We will share our views and examples of companies in this space to paint a more concrete picture of how we can exploit the opportunities created by the macro environment discussed in Part I. Stay tuned.
This is the first post in a series on the topic of Automation and Labor Shortages. To read the Introduction to the series click here.