From residential to commercial, strong growth in the construction industry is on pace to continue this year and beyond—which means there are plenty of opportunities for agents in the builders risk space.

But there are also several factors impacting the construction sector that could influence business in the immediate term, including inflation, rising interest rates, supply chain issues and the need for skilled labor. However, agents in this space who take the long view will be well-positioned to ride out any short-term bumps in the road.

Residential construction continues to be a boon for the segment, with demand for housing across the country much higher than inventory. Overall, housing starts increased by 6.8% in February to 1.77 million units―more than 22% higher than a year earlier, “despite production bottlenecks and rising construction costs," reported The National Association of Home Builders (NAHB) in March.

“There are now 799,000 single-family homes under construction, a 28.3% year-over-year gain," NAHB said.

Nationally, residential construction has consistently outpaced commercial construction over the last 18 months, but there are indicators that nonresidential construction is closing the gap as people begin returning to the office. Nonresidential construction spending rose 1.3% in January, according to the Associated Builders and Contractors (ABC) “Construction Confidence Index," with private nonresidential spending increasing by 1.8% and public nonresidential construction spending up by 0.5%. However, ABC still classified spending as weak, noting that when adjusted for inflation it was likely down as the cost of materials is up approximately 24% since last year.

Unfortunately, global supply chain issues are still an issue that may be worsening slightly, delaying construction starts and projects that are currently underway. NAHB said “ongoing lumber and building material supply side constraints" helped fuel a two-point dip in builder confidence in March, the third month in a row that builder sentiment declined despite builders reporting “solid buyer traffic numbers" as well as “historically low existing home inventory and a persistent housing deficit." Inflation also appears to be influencing the pace of home sales with NAHB reporting that sales of new homes were down 2% in February, thanks in part to higher mortgage rates and construction costs.

However, easing pandemic restrictions and shutdowns should aid the production of building materials, making supply more readily available and eventually bringing down construction costs. Meanwhile, buyer demand for housing should remain strong due to a 10-year shortage of housing units where local jurisdictions are turning to large multi-family and mixed-use developments to help address the shortfall.

There are other reasons for long-term optimism as well. The Infrastructure Investment and Jobs Act (IIJA) includes $550 billion over five years for infrastructure work across the country, and will “propel some growth" in nonresidential construction projects, according to Deloitte's “2022 Engineering and Construction Industry Outlook." Deloitte said other tax incentives in the bill will “promote partnerships with cities and states and encourage private investments."

Additionally, the hot housing market has caused construction wages to increase, positively affecting the sector's skilled labor shortage. NAHB said February residential construction jobs increased by 31,000 and nonresidential construction added 29,400 jobs. Total employment in both sectors increased to 7.6 million. Increases in wages across the construction industry will continue to bolster the employment outlook and help construction projects move forward.

In this market, independent agents should ensure their clients have the proper builders risk coverage so they don't face costly claims or contribute to project delays.

Alan Ferguson is president of US Assure, where he leads corporate strategy and the day-to-day operational decisions for the company. US Assure exclusively distributes, underwrites and services Zurich's builders risk insurance program across the U.S.