This time last year, economists at the 81st Annual Dodge Construction Outlook Conference didn’t expect a recession to occur within the next 12 months. Then the COVID-19 pandemic changed the global economic landscape. At the Dodge Construction Outlook 2021 Virtual Conference, Dodge Data & Analytics chief economist Richard Branch provided a look at where each of the construction segments stands in terms of recovery, which he expects to be a slow process.
Branch said key assumptions to the forecast include that the current wave of COVID-19 cases doesn’t lead to nationwide shutdowns, that a vaccine is adopted by the midpoint of 2021, and that a $1.5 trillion stimulus package from Congress will arrive in the first quarter of 2021.
When looking at quarterly contributions to growth for the 2020 U.S. gross domestic product (GDP), the first quarter saw a small dip of 5% before the second quarter brought a major decline of 31.4%. Some of those losses were recovered by 33.1% growth in the third quarter. Branch expects another 1.5% growth in the fourth quarter. In 2019, the U.S. saw 2.3% GDP growth. However, Branch expects a decline of 4.4% in 2020, followed by 2.8% growth in 2021.
The single-family market is one of three segments that Branch expects to grow in 2020. He explained that the third quarter was the best on mark for single family going back to 2006. This can be attributed to low mortgage rates, he explained, which have had a stronger impact than other financial measures. Branch expects the segment to grow by 5% this year and 6% next. First time home buyers have grown substantially this year, especially in the millennial age group.
“We know the demand side is robust but we need to think about the constraints on the supply side,” said Branch, explaining that the labor shortage, land costs, zoning issues and lumber costs could put a cap on the segment’s growth potential next year.
Branch added that there is a supply side crisis in the single-family market with only a three-month supply available. This could eat into housing affordability and make the margins for entry-level homes tighter.
“The strength of the single family market translates into weakness in the multifamily side,” said Branch.
He attributed the weakness in multifamily to issues in the labor market. Younger people have been hit harder by unemployment and they are traditionally those renting. Branch said this is leading to vacancy growth and creates greater financial risk for owners and developers.
“The vacancy rate has ticked down from Q2 to Q3 but it’s still higher year-over-year,” he said.
He also explained that the segment trended toward high-end, high-rise construction and many of those projects that began in 2017 and 2018 have come online as the economy is pulling back.
“This will create an overhang of supply in dense urban areas,” he said. “There could be additional financial difficulty for owners and developers in 2021 … I will say though, I think much of the decline will be in larger urban areas. Opportunities for growth do exist in smaller urban areas.”
Branch expects the multifamily segment to shrink by 12% in 2020 with an additional 2% decline in 2021.
He also looked at the data to determine whether people have moved out of dense urban areas and into the suburbs and rural areas as anticipated. The data shows that this trend is a reality. Large central metropolitan areas have seen a decline of 4% while large fringe areas have seen 4% growth, medium-sized metro areas have seen 8% growth and small metro areas have seen 10% growth. Additionally, rural areas have experienced growth of 9% year to date.
Branch expects a 23% decline in total commercial construction starts in 2020, followed by a 5% increase in 2021, which would bring the sector back to where it was in 2016.
The retail sector was hit hard by the pandemic, but Branch said it was already in a bad spot prior to the crisis due to a shift toward online sales. He expects the segment to continue to suffer from the effects of the pandemic as the second wave begins, pulling down foot traffic. Bankruptcies could also rise into early 2021, pushing up vacancy levels. Branch expects a 25% decrease overall in 2020, followed by 7% growth next year. He anticipates that as people move toward suburban and rural markets, there will be an uptick in retail activity in those areas.
“What’s been bad for retail has been exceptional for the warehouse segment,” said Branch. “The warehouse segment is now the largest nonresidential building category we track in terms of square footage.”
Amazon is leading segment growth. The company broke ground on $3.8 billion in warehouse projects in the first nine months of 2020 and $19.4 billion over the past four years.
Branch expects segment starts to grow 2% this year following record growth in 2019. The warehouse segment also is expected to grow 8% in 2021 to $33.2 billion. Some of that can be attributed to renovations of vacant department stores and other similar facilities into distribution space, but, historically, renovations account for less than 10% of warehouse starts.
Click here to read part two of this article about the rest of the commercial sector, institutional starts and total construction starts.