How is the construction sector faring in Europe, the Middle East and North America?

How is the construction industry weathering macroeconomic challenges? A panel of experts from the UK, Continental Europe, the Middle East and North America give their thoughts in a recent webinar.

RICS market survey overview

Infrastructure continues to display the strongest outlook across the globe, while private residential is more mixed, says RICS Senior Economist Tarrant Parsons, drawing on the results of the RICS Global Construction Monitor Q2 2023 survey.

According to the survey’s respondents, material costs are still the most significant factor hindering global markets. However, while projections for material cost inflation have come down, forecasts for skilled labour costs appear a little more resilient. ‘We’re now seeing a shift away from material inflation being the main cause of concern towards skill shortage issues’ says Tarrant Parsons.

Skill shortages in the Middle East

Amid the construction boom in Saudi Arabia, labour shortages and cost fluctuations are the big challenges. This is driven by the number of mega projects taking place, with most contractors and consultant engineers struggling to hire the required skills, says Laeeq Hassan FRICS, Associate Director at Mace. The shortages include trades such as carpenters and masons, and professions such as project managers, quantity surveyors and estimators. The near simultaneous start of these projects, along with construction work in Qatar for the FIFA World Cup in 2022, has also led to increased material prices, which have significantly affected project budgets, he says.

Infrastructure, 5G and data centres in Europe

Continental Europe is a mixed picture, explains Edna Benavides MRICS, Associate Director at Gleeds Europe. Countries closest to Ukraine have been hit hard by inflation since the outbreak of the Russia-Ukraine war. In Hungary, inflation was at around 20% in June and 17% in July 2023. In Western Europe, countries have been able to make use of the EU Recovery and Resilience Facility, instigated following the pandemic and due to expire in 2026. Under the scheme, countries are investing heavily in infrastructure projects, she says. Many projects will require or lead to some private investment. There has been significant investment in 5G networks, she adds, with Italy seeing a large proportion of funds allotted to this area. One of the scorecard requirements under the scheme was modernising digital capabilities, requiring a further push on data centres, she says. But high demand in electricity has led to some countries limiting supply commitments, stalling construction in this area, she explains. Development in Europe has also been affected by labour shortages.

Impact of interest rates

High interest rates are affecting the residential market in Spain, but a bright spot has been large-scale renovation in the hotel industry. However, this has led to a shortage of skilled engineers, consultants, and quantity surveyors, says Edna Benavides.

In the UK, high interest rates have made funding more challenging, compounded by less credit being available, says Justin Sullivan FRICS, RICS Senior Vice President, and Founder and CEO at Adair. ‘There has been a longer gestation period for projects and that has been building since Brexit, after which there was COVID. It now takes a lot longer to get the deal over the line’, he says. Residential house prices are coming down and there is a shortage of rental properties, with landlords leaving the sector and preferring to invest in the stock market.

Outlook for North America

Financial concerns are also prevalent in North America. ‘All projects that are currently in play had their business plans set many moons ago, and now we are having to revisit them so we can adjust our forecast accordingly to what we are seeing in the market’, says Shoshanna Fraizinger, President of Shoshanna Fraizinger Consulting Inc. While the cost of materials is easing, the supply chain is still in a state of flux. Materials are still costing more and not arriving when expected, which is impacting the timeline for projects, she says. The profusion of construction work has resulted in a seller’s market and exacerbated skill shortage issues among both trades and professions says Shoshanna Fraizinger. The nuclear industry in Canada is experiencing a renaissance and there are several major projects on the books, she noted. Two nuclear operators in Ontario have developed a resource pipeline programme to train and upskill workers for the 20–40-year nuclear energy programmes that are coming.

Addressing the skills shortage

In the Middle East, Laeeq Hassan, who is also chair of the RICS KSA Market Advisory Panel, explains steps taken by the RICS–KSA Chapter to address skill shortages. These include offering in-house training to prominent clients and consultants.

The Chapter works with leading universities to provide information to students about the various pathways to achieve RICS memberships. They also promote and provide RICS-accredited training to local graduates. Laeeq also mentions that the use of construction materials can differ across regions because of climate variance and that several associations and institutions are providing relevant training to overseas workers.

A requirement of the EU recovery and resilience funding is to provide pathways to new jobs. Both France and Germany foresaw the need for skilled labour due to the extensive construction projects outlined in their respective plans. As a result, they have invested at government level to upskill and bring new people into the trades, says Edna Benavides. For example, the importance of timber in construction in Germany led the government to invest in modernising the skills in their timber industry.

Mental health is a huge problem in the construction industry, especially among the trades, says Justin Sullivan. He wants to see much better treatment of unskilled and skilled labour. The necessary improvements range from working conditions to the food served in canteens, and Justin believes it is beholden on industry leaders to action this. He also points out that when tradespeople leave the construction industry, they often don’t return because of the poor working environment. ‘There is a perception that trades work is somehow lesser than a desk job and that is completely untrue’ says Shoshanna Fraizinger. She also believes that skill shortages can place an unfair work burden on existing professionals, something that companies should take care to avoid. A remnant of the Global Financial Crisis, when individuals were reluctant to enter the construction industry due to lack of work, could potentially explain skills gaps observed among certain age demographics, suggests Edna Benavides.

AI and sustainability

AI can be of assistance, but human involvement is still necessary, remarks Edna Benavides. She questions the likelihood of AI possessing the most up-to-date and precise information compared to the nuanced insights a professional might possess about a specific location, for example. The time taken to carry out due diligence to verify data and information from AI-generated answers presently limits its usefulness, believes Laeeq Hassan. 

On sustainability, the adage ‘if you can’t measure it, you can’t manage it’ remains true, says Justin Sullivan. The International Cost Management Standard Coalition, which developed ICMS 3, a carbon reporting standard, is now looking at creating a standard for measuring carbon, which is currently calculated differently across the globe. Once there is a global standard we can start benchmarking properly, he says.

What are the big issues facing construction as it continues to play a critical role in supporting economic growth through the current economic uncertainty? How is the sector responding to the pressure to improve its performance on sustainability?  And are we at last seeing signs that the productivity deficit in construction is being addressed?

In this selection of webinar highlights, our panel of experts discuss these and other issues, including the extent to which skills and labour shortages as well as material costs are still impacting on delivery and performance.

The webinar also features highlights from the RICS Global Construction Monitor Q2 2023 survey and is moderated by Simon Rubinsohn, RICS Chief Economist.