Here's What's Blocking The Path To Modernizing Construction

You could close your eyes and run your index finger up and down the 27 paragraphs of New York Times economics columnist Ezra Klein's analysis – "The Story Construction Tells About America’s Economy Is Disturbing" – and pick one randomly.

Almost every one of the 27 separate passages could each ignite a day's worth of debate among any dozen experts on construction, real estate, policy, and capital investment in a room.

This one – a snippet of paragraph 23, for instance – stands out as an example of how construction productivity and orthogonal matters like local community activists, policy makers, and submarket specific rules can conspire against one another.

There are a million veto points,” [Chad Syverson, an economist at the University of Chicago’s Booth School of Business] said. “There are a lot of mouths at the trough that need to be fed to get anything started or done. So many people can gum up the works."

A million veto points go far to describing, as Syverson and his co-author economist Austan Goolsbee entitle a new analysis on why we're not building our way out of the nation's housing affordability crisis, "The Strange and Awful Path of Productivity in the U.S. Construction Sector."

From a high level, Klein's "America's getting worse – not better – at building" assertion adds value – explicit or inferred – across four key areas.

(1) Construction, paired with real estate, are both nearly impossible to disentangle and, yet, each contains separate, often conflicting, economic forces.
(2) In building buildings and projects, it's impressive the number of isolated "fixes" in the building lifecycle one can achieve without improving – and oftentimes worsening – the holistic build-cycle is mind-boggling
(3) Productivity by itself won't solve for housing affordability; but without it, housing affordability remains unsolvable.
(4) The juncture of construction capability and real estate capability – including policy support and capital investment – is human relationships-driven.

This last point is meaningful, because it's the only way to truly hold together – in a single operational, capital investment, and policy model – what is genuinely susceptible to elevated productivity and respective households' attainable access to the homes being produced.

The single solution – vertical productivity and horizontal attainability – can come only if and when productivity's measures include zoning and development in the series of handoffs [and potential veto points]. Navigating that pre-development and planning stage of the lifecycle can be and often is a boon or a showstopper. Not for nothing, the New York Times' Klein zeroes in on a black hole for construction productivity when he looks through the lens of local policy, code, inspections, and approvals. He writes:

After looking at the states with the highest construction productivity, they note that the more productive states don’t seem to gain market share in the construction industry. That doesn’t make much sense if you assume that the difficulties of construction are primarily the organization of manpower and materials. It makes more sense if you assume that the frictions are in navigating local regulations, community considerations, neighbors’ qualms and politicians’ interests.

In the cities where I’ve covered politics closely, developers are fixtures in the local political scene. They have to be.

'My feeling is the guys that know the system have a much easier time getting through the system,' Zarenski said. 'They know ahead of time what they have to come into the party with and how to speak to those people and how to satisfy them, and so it goes a lot smoother for them.'”

In this context, actual apples to apples measures of productivity in the U.S. Construction sector writ large may only be meaningful when private sector players commit and invest serious 5% to 6% of revenues in R&D, as do firms in other manufacturing, technology, and consumer goods and services fields. Further, that R&D – rather than focusing entirely on evolving American construction into an era of modern manufacturing and industrialization, needs as well to address how that enhanced productivity can actually bend cost barriers in favor of more working households.

On the topic of the same Goolsbee and Syverson research Klein spotlights, Construction Physics host and analyst Brian Potter writes:

I agree with Goolsbee and Syverson’s conclusion, that “the productivity struggle is not just a figment of the data. It is real.” But in general, I find these highly abstract measures of productivity difficult to extract much signal from, and this paper hasn’t shifted my opinion much on that - so many of these numbers are simply hard to make sense of. I will continue to prefer more direct measurements of construction costs, for reasons I mentioned previously."

What's encouraging – despite where Klein leaves off on the story – is that local, regional, and national homebuilders and their partners have made it their business to live with and work alongside the very folks referred to above.

The agility homebuilders have been showing in the threshold from late 2022 to the start of 2023 brings this home. As they trim out variable costs, double-down focus on returns on fixed costs, and re-set their business to mitigate the cons and safeguard the pros they're all flexing their relationships for maneuverability and options.

Okay, here's Klein's paragraph 27. Don't expect to be cheered by his conclusion:

How do we get construction productivity rising again? I have no idea. Construction should become safer, more respectful of community concerns, and more environmentally sustainable as countries become richer and less desperate for growth. But it’s also true that many of the problems America faces — from decarbonization to affordable housing — would be a lot easier to solve if we were getting better at building, rather than worse."

Getting better at building. That's right. But not as it applies exclusively to the vertical construction of new structures. Getting better at building is also about getting better at building the relationships, at the ground level, with community and locality gatekeepers and stakeholders. They're going to have as much to say about what's affordable or not as modern methods of manufacturing and assembly of buildings.