Economic Pulse

It’s a “Tale of Two Cities” right now between commercial and residential construction

Sabri Ben-Achour and Jarrett Dang Sep 23, 2022
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Demand for residential construction projects has slowed while commercial projects have largely remained steady, says Maurice Rahming, President of the O'Neill Construction Group. Eduardo Munoz Alvarez via Getty Images
Economic Pulse

It’s a “Tale of Two Cities” right now between commercial and residential construction

Sabri Ben-Achour and Jarrett Dang Sep 23, 2022
Heard on:
Demand for residential construction projects has slowed while commercial projects have largely remained steady, says Maurice Rahming, President of the O'Neill Construction Group. Eduardo Munoz Alvarez via Getty Images
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Lots of industries aren’t feeling great about the economy right now amid rising interest rates, ongoing supply chain troubles, and labor shortages. Construction has been impacted by all three of these factors — U.S. homebuilder sentiment recorded its ninth straight month of decline on Monday.

Yet the pain hasn’t been felt much on the commercial construction side. For today’s Economic Pulse, we checked in with Maurice Rahming, president of the O’Neill Construction Group in Portland, Oregon, who said that commercial contracts are going strong despite a shortage of skilled laborers, high goods costs, and other sore points.

“On the residential building side of it, we have seen it slowing down…and we’ve also seen just a pretty decent pickup on the commercial side,” Rahming said in an interview with Marketplace’s Sabri Ben-Achour. “So it’s kind of like ‘a tale of two cities’: we see one sector that is slowly starting to struggle, and we see the other sector that doesn’t seem like there’s a really stop in sight.”

The following is an edited transcript of their conversation:

Sabri Ben-Achour: So, will you remind everyone what kinds of stuff you build?

Maurice Rahming: So we do mostly commercial/industrial work. We also do affordable housing — we have a quite diverse portfolio. And we also have specialty areas as well, electrical. So we do electrical contracting, as well as masonry. And general construction throughout the state

Ben-Achour: Wow, so a little bit of everything. So background here, the Fed is trying to fight inflation, it’s raising rates. That’s raising mortgage rates, people don’t want to buy or build as many homes as much. Surveys show home builders are feeling kind of low. How are you feeling?

Rahming: Definitely on the residential building side of it, we have seen it slowing down. And we’ve also seen just a pretty decent pickup on the commercial side. And those federally-funded projects or state-funded projects, we’re still seeing that kind of moving along. So it’s kind of like a tale of two cities, we see one sector that is slowly starting to struggle, and we see the other sector that doesn’t seem like there’s a really stop in sight. So it’s an interesting place to be in construction right now.

Ben-Achour: Yeah. Why do you think the commercial side of things is picking up?

Rahming: So I think, yeah, one of the things that we have is we still have a labor shortage. And so I think what you were seeing is, the people are still trying to get their projects complete. I think that the ones that have a bigger bankroll, we’re seeing them where they’re actually willing to pay a lot more to get their project done. They’re actually housing people from other areas for staying in hotels and paying them per diems and just a larger wage to actually come and do the work. Where on the same side of it, you see the residential side where in the interest rates, it’s just, it’s bogged down. So it’s a unique dynamic, but we are seeing just projects that people want to get done getting done as far as for the probably the more wealthier, larger corporations. I haven’t seen too much of a slowdown there.

Ben-Achour: You mentioned labor — what is the labor situation like on your end? I think last April, you mentioned you guys had a shortage of workers too.

Rahming: Yes, it’s still bad. What we’re seeing is that [the] labor shortage continues to be a challenge. We are seeing better pricing on our durable goods. So we are seeing copper prices going down a bit. So that’s good. We’re having some pretty significant logistics problems with, basically, equipment to build our projects, whether gear, we’re seeing lead times as long as one year, we actually getting phone calls from some other people saying, “Hey, do you have this because we’re short.” And other people [are] calling also saying, yeah, it’s holding up their ability to get occupancy for some of their buildings because they just don’t have the material to final out the building, and make it to that point where people can actually move in.

Ben-Achour: Wow. So you’re still dealing with supply chain backups when it comes to getting the major big equipment that you need to build?

Rahming: Yeah, we’re seeing too that is just one of the biggest problems that we’re running into. We’re also seeing there has been a shift in the way buildings [are] being built. So for example, natural gas, we’re seeing a lot [of] movement from natural gas to all-electric appliances. We’re seeing a lot of EV charging stations. And so this changes the size of the equipment and the types of equipment. And I don’t think the manufacturers have been able to respond quick enough to that really quick change. And that’s what’s causing a lot of the delays in equipment and material. So we’re just seeing significant material shortages, to the point where we’re telling some of our customers that the product is not going to show up for a year. These are projects that usually take about six months to build. So it’s significant.

Ben-Achour: What’s causing that shortage of equipment? Is it just manufacturers having trouble adapting? Or is it sort of supply chain problems, COVID lockdowns in China, that sort of thing?

Rahming: I think that basically what the manufacturers, I think the reason why they’re having such challenges is because the type of equipment that we’re used to asking for, it’s changed, right, it’s significantly bigger. I also think that it’s advanced manufacturing. And I think advanced manufacturing is running into the same problems that we run into with construction, right. And so you need a trained labor force. It’s not something that we could just pull someone out of high school and say, okay, you’re going to be an advanced manufacturer or installer in building this equipment. So the training part of that, I think they’re running into the same problems that we’re running to where they have this skilled labor shortage on the advanced manufacturing side, which then [exacerbates] the problem as we look at different products that we’re asking them to provide us.

Ben-Achour: If you had a magic wand, I mean, what’s the solution to that labor shortage for you?

Rahming: So the solution to labor shortage for me is, I don’t think that we’ve done a good job of educating our educators on the opportunities in both advanced manufacturing construction, to say that these are livable wage jobs. These are jobs [where] you don’t have student debt at the end of it, you go through an apprenticeship and you’re making decent money. And so because of that information gap that young people are unaware of the opportunity, what occurs is that we get people that enter into the market well after they’ve either had a degree in something else, right? And so if I could wave a magic wand, I would sit there and say, allowing young people to have the understanding that there are multiple different opportunities out there and this is just one of them. And so that way they can make educated decisions early on. And I think those educated decisions will help to increase the ability for people to do this work.

Ben-Achour: What’s your outlook on the economy, generally, next few months, next six months?

Rahming: What we’re looking at, and what we’re kind of seeing is we’re seeing a slowdown in the single-family, the smaller projects we’re seeing, those are gonna struggle. We are seeing the larger projects that have a little deeper pockets, we’re seeing them being able to gobble up, basically, the little bit of workers that we have. So I see if you’re doing any type of civil infrastructure projects, large projects that are usually occurring in densely populated areas, I think that you’re not going to see as much of an impact. If you’re further out into smaller cities or smaller towns, I think you’re gonna struggle to A) get workers and B) get work.

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