The residential segment is positioned for growth in 2020 and 2021 despite a pullback in multifamily starts. However, a shakier recovery is expected for the commercial and institutional segments, according to Dodge Data & Analytics chief economist Richard Branch, who provided a look at where each of the construction segments stands in terms of recovery during the Dodge Construction Outlook 2021 Virtual Conference last week.
Commercial Starts (continued)
Like retail, starts among hotel buildings have also taken a major hit due to the pandemic. The segment saw a 5% decline in 2019 and Branch expects another 46% decline this year to a total of $9.7 billion. He expects a 7% decline in 2021, anticipating that people won’t feel comfortable traveling and businesses won’t be ready to let employees travel until a vaccine is adopted.
“I don’t think hotels will be back to their 2018 and 2019 levels for another five years,” he said, adding that he doesn’t think business travel will remain dead post-pandemic.
Office starts will be down 22% in 2020 following 12% growth last year, according to Branch, who expects the segment to grow 5% in 2021. Data centers are another major driver of growth in the office segment, accounting for 10% of total starts this year.
“I’m not 100% convinced work from home will be as widespread as people think,” Branch explained, adding that as people leave dense urban areas there could be an uptick in office construction in the suburbs and rural areas.
Branch said the manufacturing segment continues to struggle. The segment grew only 1% last year and is expected to decline by 49% this year to $16.7 billion in starts. Branch expects segment starts to remain unchanged in 2021. One issue weighing down the segment is the shortage of skilled, highly technical employees.
Institutional Outlook
Branch expects institutional starts to shrink 18% in 2020 to $116 billion after a 1% decline last year. He anticipates 1% growth in 2021 due to market stabilization caused by the stimulus package. However, he said state and local governments have a deep hole to dig out of in the next year.
“They’ll either have to dip into rainy day funds or cut program costs,” he said.
The education segment is expected to drop 10% to $56.7 billion in 2020, followed by a 3% drop in 2021. The top three states for education—New York, Texas and California—are down a combined 22% this year. Branch doesn’t expect the segment to begin recovery until kids are back in school, which he anticipates will happen consistently in September 2021.
However, the segment could see help from renovation activity, as the average age of K-12 buildings in the U.S. is around 50 years old. That number is even higher among states in the Great Lakes region.
Healthcare took a hit from cutbacks in elective procedures and the high costs of acquiring personal protective equipment earlier in the year. Branch expects the segment to shrink 9% in 2020 to $25.8 billion, before growing 8% in 2021.
While starts for recreation, public buildings, dormitories and religious buildings are all expected to decline in 2021, Branch anticipates 11% growth in transportation starts, which will be buoyed by the JFK airport project. If that project is delayed or canceled, the forecast for overall institutional starts in 2021 changes from 1% growth to a 1-2% decline, he said.
Total Construction Starts
Overall, in 2019, total U.S. construction starts grew 4% to $853 billion. Branch expects starts to fall 14% in 2020 to $738 billion before growing 4% in 2021 to $771 billion. Planning times are 1.5 months longer than they were pre-pandemic.
Key takeaways from the construction outlook include the expectation that there will be a slow road back to full recovery, according to Branch. It will be impacted by shifting demographics, regional growth disparities and other market shifts. Ultimately, he doesn’t expect all segments to look the way they did prior to the pandemic.
Click here to read part one of this article, which focuses on residential and commercial starts.
