It's been a banner year for the construction industry. Even with the sharp rise in material costs and a run-up in housing prices, consumers' appetite for new homes and builders' optimism about the future remain incredibly strong. For agents and insurers who specialize in construction, it's been an extraordinary ride. All signs point to more of the same in 2022 and, at least in the residential sector, robust growth for the rest of the decade. A bright star has been builders' bullish outlook. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index broke 80 for the first time ever in September 2020. A key indicator of builder confidence, the index held fast at 80 or higher for 11 consecutive months. In August, it dipped to 75 due to higher building costs and home prices — still better than any month on record prior to last year. |

Great Recession recovery

To understand this market, you have to go back to the last great boom when new home starts peaked at 2.27 million units in January 2006. After the housing crash, new starts, according to the St. Louis Fed's Federal Reserve Economic Data (FRED), fell to an all-time low of just 478,000 in April 2009. With fewer builders making it through the recession, there was a slow, steady recovery in starts over the next 10 years but nowhere near the level of the mid-2000s. That's partly what's driving the current surge in demand. A report commissioned by the National Association of Realtors (NAR) estimates that from 2010 to 2020, home constructions trailed the household growth rate by 6.8 million units. To shrink that deficit, NAR says builders would need to construct more than 2 million units a year over the next decade. This underbuilding and subsequent supply shortage has led to bidding wars for homes and a spike in home prices. Extremely low interest rates, a COVID-inspired movement from cities to the suburbs and exurbs, Gen X reaching its peak earning years and millennials entering the housing market in large numbers have amplified the demand for housing. The federal government's mortgage forbearance program and baby boomers deciding to hold onto homes longer has also shrunk existing home inventory. It all means there is enormous pressure on builders to break ground on new houses, and new home starts have been inching up again this year to levels not seen since before the Great Recession. |

Commercial construction is up, too.

The commercial side of the business is also seeing strong growth. With new housing development comes retail, food service, gas stations, medical clinics — the infrastructure needed to support communities. For those core business services, construction is booming at almost the same rate as residential construction. Under-utilized commercial space is being turned into apartments and condos. Entrepreneurs are buying vacant restaurants and shops and starting new businesses. And employers are reopening offices shuttered during the pandemic. Renovation and remodeling continue to be hot. Total renovations are outpacing remodels, as commercial buildings are gutted and repurposed. To be clear, some segments remain weak primarily due to the impact of the pandemic. Lodging, amusement and recreation, religious institutions, public safety and educational facilities are all down, although some of them are starting to rebound. In addition, there is a significant surplus of office space in most major cities. |

An expensive time to build

The ramp-up in construction has had its challenges. Supply chain disruptions have led to huge increases in material costs and have slowed project completions. There is also a critical shortage of skilled labor, and shovel-ready land is scarce in many areas. In August, NAHB reported that building supply prices were climbing at a record pace, up 19.4% over the last 12 months. To put that into perspective, material prices increased 13% for the first seven months of 2021 compared to just 1.1% in the same period in 2020. Lumber prices hit an all-time high of $1,670.50 per thousand board feet in May. That's three to four times their pre-pandemic prices. By mid-July, though, prices had come back down to $521. While other building material prices may not have rocketed to these hyperinflated levels, there have been steep increases in a number of components essential to projects. These include steel, copper, brass, laminate sheeting, PCV pipe and paint, not to mention appliances. As a consequence, there was a pause in construction starts this summer. Jeremy Burr, vice president of sales at Insurance Office of America in Longwood, Florida, says, "When construction prices went ballistic, we saw a hiatus in starts. But now that prices have come down, those projects are pushing forward again." Analysts at Wells Fargo say the market is beginning to move back into balance, with home construction picking up again as supply catches up with demand. The breather may lead to some moderation in home prices, they add, but a lean housing inventory "will keep prices on an upward trajectory." |

Regional variances are different this time.

While nearly every area of the U.S. is seeing double-digit construction growth, some areas are growing much faster than others. Regional differences aren't breaking down as they have in the past such as the West or Southeast outpacing the Northeast or Midwest. Instead, demand for new construction is being driven by outward migration, affordability and a highly mobile workforce. This is creating pockets of high growth in every region of the country, even ones that historically haven't performed well. Places where the cost of living is lower and jobs are plentiful have become the new hot places to live. A few examples: Billings, Montana; Columbus, Ohio; and Boise, Idaho, have become top places to relocate. We're also seeing migration out of California, Washington and Oregon to other parts of the West. Florida continues to see net gains in new residents, as does Texas, Georgia, the Carolinas, Arizona and Idaho. Those areas that have cheaper available land but are still close to existing suburban areas seem to be ripe for rapid development. In Daytona Beach, Fla., Ron Bell, commercial lines marketing leader for Brown & Brown's largest retail office, says COVID "never fazed construction in Florida. Residential remodels, in particular, went through the roof. Now we have so many people moving down here from the North, and buying and building homes. Florida is just booming." In Oregon, it's been a different story. Andy Oldenburg, CRIS, CRM, a sales executive with PayneWest Insurance (part of Marsh & McLennan Agencies) in Beaverton, Oregon, says, "For a long time, condos and apartments were going great guns in downtown Portland. Everyone wanted to live in the city. Then came the COVID shutdown, work from home and the riots of last summer. People started moving out to the suburbs." |

Insurance growing pains

In the builders risk insurance market, which covers materials, fixtures and equipment installed during the course of construction or renovation, US Assure has seen double-digit increases in residential premiums through August in nearly every state, with some in excess of 50% compared to last year. As Bell notes: "Contractors' schedules have increased significantly. A builder that may have worked on 10–15 homes a year in the past is now building 30, 50 or even 100 homes." That also means more premium dollars for other coverages contractors need, such as general liability, property and commercial auto. "We're seeing growth in current accounts and new construction companies being started as well," Bell says. "Someone who's been a supervisor for six or seven years might decide to become a general contractor or start a trade company. There's definitely more insurance being sold than a year ago." But significant rate increases and a continued hardening of the property-casualty market have tempered that new business. Dirk Seltzer, vice president of marketing at DiBuduo & DeFendis Insurance Brokers LLC in Fresno, California, says frame rates on builders risk have doubled in just the last year, with large properties now much harder to place. And it's not just builders risk. General liability has shot up, too. "We recently wrote a three-year wrap-up with a $5 million limit on a 100-home track in Fresno County," he says. "The premium cost was $5,000 per house. I've been at this a long time, and I'd never seen that before." Wildfires, hurricanes, tornados, ice storms, flooding and other catastrophic events have contributed to the climb in rates. In 2020 alone, there were 30 named storms in the U.S., and currently there are nearly 50 wildfires. Huge losses have squeezed insurers and resulted in many carriers pulling back. |

'Sticker shock for insureds'

"It used to be that you could look at a map of insurance catastrophes, and Washington and Oregon were the only states that didn't have any exposure," relates Oldenburg. "Three summers ago, we started having wildfires, and it changed things pretty quickly. Rates have gone up 30%–40% in just the last few years. There's definitely a concern about frame building on the West Coast." Bell says significant rate increases in some lines have resulted in "sticker shock for insureds. Contractors may be used to budgeting a certain amount for insurance; now we're telling them it will be 1.5 or 2 times that based off of their increase in exposures and rate. For a small construction company, that could close their doors if they haven't been appropriately prepped by their agent for the increase in premium." He says liability and property insurance are mostly driving rate increases in his area. "Builders risk has been going up, too," he says, "but not nearly as much as casualty for residential construction. For the most part, builders risk policies are a front-end cost for contractors, and they are usually line-itemed out as a percentage of their construction costs. It's mostly the renewals on existing package policies where you see the big increases, especially if any previous losses are involved." The hardening market began well before COVID as insurers adjusted their rates in response to growing catastrophic exposures and increased liability claims. Mounting losses, rising real estate prices and supply-chain interruptions have forced many carriers to continue their tightening. "While softening and hardening of premiums and rates is typically cyclical, we may be in for a prolonged period of hardening," says Burr. "We're 40%–50% higher than three years ago, so maybe it doesn't continue at that pace, but I don't think there is any likelihood of a downturn in rates anytime soon." |

Take advantage of this market

Despite shortages, high prices and a hardening insurance market, building permits and construction spending soared to new heights this year. Construction continues to be red hot and doesn't show signs of slowing down. It all bodes well for agents and carriers that can seize the moment and capitalize on the largest building boom in 15 years. That's not to say the ride will be entirely smooth or the path perfectly straight. But all indications are that the road will be wide, with plenty of room for contractors who want to grow and agents who want to expand their market. Alan Ferguson ([email protected]) 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. See also: |

• Construction rebound opens new opportunities for agents
• Insuring new infrastructure projects against severe weather losses
• A look at 2020's construction risk, insurance market