Building the Future, Learning from the Past

We all saw the signs, we merely chose not to read them. In the early to mid 2000s, banks were giving loans to anyone. Home values were inflated and continuously growing. Housing inventories and manufacturing capabilities rose 15 and 10 times faster than population growth, respectively. Times were good. Crazy good. Too good.

As we each put together our strategic plans, we knew that things were too good to be true, yet all of us continued to bake in ridiculous growth rates and CAPEX spends (capital expenditures). There was no one slowing down long enough to look at all the signals that told us this logically couldn’t last — that the bottom was about to fall out. And it fell out by more than 75%. That is, residential housing starts dropped from 2M to 500K over a very short period of time.

Well people, it’s time to read the signs of today.

Small Signs

The residential new construction sector, which includes single family as well as multifamily, is forecast to slow down by the early 2020s. The multifamily industry projects the slowdown to be at least 30% of the total starts. While we’re all happy that starts continue to grow at least 5% every year, loading our manufacturing lines, the trend is about to change.

One forecast to keep in mind is that the repair and remodel (R&R) sector will continue to outpace new construction as there continues to be untapped potential. As you put together your strategic plan, make sure you’re preparing for the new construction softness by immediately putting additional resources on R&R. You have no one to blame if you don’t listen to and address the looming signs.

Big Signs

There are 9.6B reasons we should be thinking differently about the housing industry. By 2050, it’s projected that more than 2B people will be added to today’s world population. In the US alone, our population of 328M is forecasted to increase every year by 2.3M people until 2030, surpassing 400M sometime shortly after 2050.

Housing a Growing Population

To house these additional people, we will need nearly 800M more housing units across the world (assuming a current 2.6 people per unit average). In the US, the 72M incremental population growth will require 27M more homes (not including homes that deteriorate to be non-occupiable within that roughly 30-year timeframe.) Today, the US struggles to find enough labor to even build 1.3M homes and remodel several million more. And we currently struggle to find the land for builders/developers that can afford to develop it.

I learned early in my career, focus on what you can control, and it will make solving the challenge easier. We know there is nothing we can do about the population growth (unless we take China’s approach.) That’s why we must address the approaching housing shortage and make it part of your long-term strategic planning process so you can address how to leverage the opportunity it will most definitely create.

Finding Locations for a Growing Population

We know the population increase is coming. And forecasters have identified several areas that will be the most impacted. These include high growth areas like Utah (21%), Colorado and Nevada (17%), Arizona, Washington, Idaho, Oregon (15%) and Florida (13%). As well as low growth areas like New York and Mississippi, Pennsylvania (2-3%), and Connecticut, Illinois and West Virginia (0-1.5%)

Land is available in certain locations; the industry just needs to identify how people want to live. It’s forecast that multifamily, especially in urban living environments, will continue to grow. By definition, this means that multifamily housing will increase given the land locked areas available in urban locations. Experts forecast that mix to continue and perhaps grow with the changing demographics on both sides, including more Boomers downsizing to walk-able communities and more Millennials wanting less square footage and walk-ability to shops and entertainment.

Combating the Labor Shortage

One of the biggest concerns we continue to face is labor. There’s a massive labor shortage in North America and that means that builders and contractors are forced to turn down projects left and right. Some have even stopped answering their phones. A shortage in labor means that many trade professionals can only take on the most profitable and easiest projects for their crews. I don’t blame them. It’s what all of us would do as business people. But it doesn’t solve our looming labor shortage issue.

Another issue around labor is the impending age population gap, which affects both blue- and white-collar positions. Unfortunately, the construction industry has an image issue and needs a makeover if it has a chance to attract the hardest working and smartest talent available. Very few young people want to enter the industry, either as a laborer or as an entrepreneur to take over their parents very profitable business.

As a result, we need to address the labor issue by thinking of possibility in a different way. A way we can control.

We must find new and different ways to fill the 800K jobs that are forecast to be added to the construction industry by 2024. The industry must show the estimated 35% of high school graduates that don’t go on to college that they can make nearly $37K a year as a siding installer. Ironically, this is the same as the average debt for college graduates. We can also help the 20M retired veterans or 900K refugees find their way into the construction industry. We have to stop talking about it and actually put together as structured approach for these and other viable groups that fit our requirements.

Impact of Building Best Practices

We’ve built homes virtually the same for the last 100 years. One of the only major differences is that we were using 2x4s that were actually 2”x4” before 1950. Now, even those staple items of construction have been reduced down by more than 20% (to 1.5”x3.5”.) While this industry has been historically very slow to change, it has no choice.

We don’t want to be Kodak. They invented digital technology and had the first digital camera, but they didn’t think the standard film industry would change. As a result, they never launched their digital camera leaving the competitors to redefine the category.

We can also take a note from the transportation industry. As there are more ride share companies like Lyft and Uber, younger generations will no longer need, or even want, to own a car. New multifamily buildings are being constructed with the knowledge that existing parking garages will need to be easily transformed into social and tenant space as cars go away.

Construction practices will change, with or without you. Standard (100 year) building practices will be replaced within the next three to five years for no other reason than they have to be. One area to pay close attention to is that “pre” is the future. There will be more pre-formed, pre-manufactured, pre-cast modular construction solutions that will dramatically address and solve the labor shortage. Constructing units before they arrive to the site also allows for more exacting and purposeful design. This means these newer construction approaches can more easily solve for new codes and sustainability goals. If you haven’t yet accounted for these construction trends in your long-term planning, you should. I’d be very concerned if the products you manufacture today don’t have a place in the pre-construction future.

The future is upon us, and there are many people forecasting big change. It’s your job to identify where the change may be going in your industry and then prepare your organization to take advantage of what the future holds.

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