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The future of construction is K-shaped: how crises are widening the gap.

Updated: Nov 14, 2022

In this article, we explore the trends that are shaping the future of construction. Although the housing market has been under pressure for quite some time, it is only since the COVID crisis that the construction industry started to crack under the weight of societal challenges.

Several trends and occurrences, among which the war in Ukraine, have unleashed a perfect storm upon this slow and conservative industry. A K-shaped trend is emerging and will only become more pertinent while challenges add up.

Introducing the K-shape model for the future of construction

Our trend analysis is inspired by the K-shape recovery model that was introduced during the Covid-19 crisis, which brought forth both “winners” (eg. online retail) and “losers” (eg. hospitality industry) who each reaped very different results.

A similar K-shaped pattern can be drawn for the construction industry. In this industry too, we can discern two distinctive paths that lead further away from each other and which are caused by a number of trends on which we will elaborate later in the article.

On the upper curve, we find properties that are built by a small group of big, professional firms, in a hyper-professional way (standardized, integrated with suppliers, and using technology for higher efficiency and less labor power). These properties of which we speak comply with the latest regulations and are thus future and climate-proof. Furthermore, because these properties are only recently built, they are of relatively high quality compared to older, outdated properties.

Power concentration of bigger contractors
Innovation & high-tech
High quality
Future & climate-proof

On the lower leg, we identify properties that represent outdated and old properties. These are being renovated by a highly fragmented market of DIY'ers and a variety of small, local contractors and handymen. Because of limited budgets, a lack of know-how, or the practical limitations of a renovation project, we detect a higher level of amateurism than in newly built homes. For the same reasons, these properties are usually less climate and future-proof. Construction or renovation methods are traditional and low-tech.

Highly fragmented market
Higher level of amateurism
Low tech
Outdated and old properties
Less climate & future proof

The trends that fuel this so-called “wicked problem” for the future of construction

Several trends that impacted this curve, were already happening before the COVID-pandemic. Covid-related evolutions unleashed the second wave of turmoil and recently the war in Ukraine has increased the divide.

Trend 1: Scarcity

Scarcity has been a multi-headed monster, impacting the housing market and construction industry in various ways.

Before the COVID-pandemic land scarcity was already driving up housing prices, having construction firms switch from "greenfield" (building from scratch, on a new, previously unused plot of land) to "brownfield" (upgrading or repurposing an existing site, often industrial by nature) development out of necessity.

Labor scarcity has been a pain point for quite some time as well, with rising labor costs tempered by the influx of foreign labor. At least, until the COVID-pandemic locked us all up and restricted border crossings.

Supply chain disruptions due to Covid regulations, followed by an economic revive, followed by the war in Ukraine pushed the construction industry into "damage control" mode.

Scarcity in construction materials followed and for the first time in a long time, skyrocketing prices now cause a cooldown in residential property transactions. Have housing prices finally reached a ceiling?

Trend 2: Purchasing power decrease

The Covid health crisis and the subsequent surge in unemployment unleashed a first decrease in purchasing power among certain income classes. In countries, with extensive support measures, the impact was less outspoken than in countries with little to no safety net. Some people were financially impacted and had to tap into their savings.

Due to the war in Ukraine the inflation rates reached their highest peak since the 1970s. Not only did construction materials become more expensive, everything became more expensive, leaving less budget for buying or renovating a home.

High real estate and construction prices combined with a shrunken budget have never left the housing market less accessible. Many have reluctantly put aside their dream for the time being.

Trend 3: Climate and sustainability (regulation)

Governments already had their eye on the construction industry in the light of sustainability goals and regulations. Not only is the construction industry responsible for over 40 % of all global CO2 emissions. It is also responsible for more than 50% of all raw material extraction and 30% of global waste generation.

Evidently, the housing stock and construction industry must transform to reach the Sustainable Development Goals. Two major principles are being stressed: transforming the industry into a circular industry, which would benefit the raw material extraction, waste creation, and the CO2 emissions, and renovating the housing stock to reach energy-neutral homes, which would also minimize emissions from heating.

In the light of the recent war in Ukraine, Europe has found itself in a delicate position, being dependent on Russian gas whilst supporting the Ukrainian cause. Suddenly, the energy transition and renovation wave have become an urgent topic on world leaders' agenda in becoming more independent and in curbing skyrocketing energy prices. To the surprise of many, ministers urge their fellow countrymen to "turn down their heating", "cook more with microwaves" or "insulate their homes" to support Ukraine.

Although this advice is well-intentioned and the actions badly needed, politicians seem out of touch with the reality of today's housing market.

Creating energy-efficient homes requires an extensive and thus expensive renovation. In a market where housing prices have increased 25% in only 5 years' time, people are left scoured and unable to afford an extensive renovation. Even if a decent budget remained, renovation costs have also gone up. In the US alone, a price increase of 50% was measured in 2020 compared to 2019.

The reasons? Scarcity, wage growth, and... consumer demand for labor fairness or sustainable products. A true sustainability paradox seems to be unfolding, where everyone is aligned and motivated to transform but is being held back by a lack of budget.

Trend 4: Work from home

The 2020 increase in the number of renovation projects and surge in renovation costs was almost entirely attributed to the COVID-pandemic and subsequent lockdowns. Not being able to leave their homes, many were suddenly confronted with all the little defaults and potential upgrades of their homes.

A refurbishment boom took off, while others took more drastic measures to improve their wellbeing: a mass hunt for apartments with terraces or houses with gardens, preferably in the countryside, took place, driving up property prices even more.

Trend 5: Investors are shifting to residential properties

And if the demand for residential real estate wasn't already high enough, investors suddenly shifted their money away from office and retail properties to a more safe and growing residential segment. Owners saw their shops and offices emptying, lockdown after lockdown, leaving them with headaches and evaporated margins.

Unexpected solutions for the future of construction lurking beyond the corner

When confronted with wicked problems, the solution is usually not straightforward. A holistic, out-of-the-box approach is needed to solve the housing crisis. Luckily, most solutions already exist, gaining traction as we speak.

Out of the ordinary business models (cooperative, communal, circular, as-a-service), innovation (contech, modular & prefab construction, 3D printing, …) and unusual partnerships appear to be the common thread.

At Scopernia, we follow the transformation of the real estate and construction market closely. We help industries and companies understand disruptions and system shocks, create a vision of tomorrow and define strategic priorities and roadmaps.

Call-to-action to contact Emily De Baets, managing partner at Scopernia

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