The Market Took a Hit from COVID-19, But Positive Signs Are Starting to Emerge.
The first five months of the year were as strange as any in recent memory. The year started off strong, then took a perilous dive due to the economic impact of COVID-19 on the economy. Then signals of a rebound began to pop up.
The National Stone, Sand & Gravel Association, as part of its virtual Executive Committee & Leadership Summit, hosted economist Anirban Basu, who took participants through recent economic ups and downs via charts, graphs, explanations and somehow The Lord of the Rings. Basu concluded that despite the ongoing negative signals, “the recovery is afoot.” But it won’t be fast. He also noted that low interest rates and the amount of money flowing through the economy coupled with a housing market characterized by low inventory equals positive signals for the construction market.
Construction Starts
Total construction starts rose 3% from April to May to a seasonally adjusted annual rate of $595.1 billion, following a 25% decline the previous month. Several large nonresidential building projects broke ground in May resulting in the gain. Removing those large projects from the statistics would have resulted in no change in starts over the month. In May, nonresidential buildings increased 8%, while residential building starts rose 4%. Nonbuilding starts, however, declined 4% during the month.
The highway and bridge category was up 5% through May.
Through the first five months of 2020, total construction starts were 12% lower than in the same period in 2019. Nonresidential starts were down 19%, nonbuilding starts were 16% lower, and residential starts were off 3%.
For the 12 months ending May 2020, total construction starts were down 1% from the same period a year earlier. Residential buildings were 1% higher and nonbuilding starts were up 5%. Nonresidential starts, however, were 7% lower for the 12 months ending May 2020. The Dodge Index posted a slight gain, increasing to 126 (2000=100) in May from the 121 posted in April.
“While May’s increase in construction starts is certainly good news, the influence of several large projects undermines the notion that the construction sector has fully entered recovery,” stated Richard Branch, chief economist for Dodge Data & Analytics. “Even as state and local areas re-open and bans on construction activity in Boston, New York City and other areas are lifted, the sector will have to contend with digging itself out from a deep economic recession. While the overall economy most likely hit bottom in May, the recovery will be slow since nearly 20 million jobs have been lost since February. The second half of 2020 will be a slog and gains will be modest over the short term.”
Nonbuilding construction fell 4% over the month in May to a seasonally adjusted annual rate of $149.1 billion. The utility/gas plant category dropped 37%, while the highway and bridge category lost 4%. On the plus side, the miscellaneous nonbuilding category increased 31% over the month and environmental public works were flat.
The largest nonbuilding project to break ground in May was the $1.3 billion widening of Interstate 635 in Dallas. Also starting in May were the $789 million Lynnwood Link Extension (Northgate to NE 200th) in Lynnwood, Wash., and the $705 million widening of I-405 in Seattle.
Year-to-date through May, nonbuilding construction starts were down 16% compared to the first five months of 2019. Starts in the highway and bridge category were up 5% through May, although other nonbuilding categories were down significantly.
Environmental public works were down 24%, while the miscellaneous nonbuilding category was 31% lower. The utility and gas plant category was 35% lower through the first five months of this year.
On a 12-month rolling basis, total nonbuilding starts were 5% higher than the 12 months ending May 2019. Starts in the utility/gas plant category were up 34%, while miscellaneous nonbuilding starts were 1% higher. Street and bridge starts were down 3% for the 12 months ending in May while environmental public works were 2% lower.
Nonresidential building starts rose 8% in May to a seasonally adjusted annual rate of $188.8 billion following the very steep April decline related to COVID-19. However, the rebound was due to several large projects that broke ground in the manufacturing, hotel, and education categories. Removing those projects would have led to a mild decline in nonresidential building starts in May. Commercial starts gained 6% in May and manufacturing starts rose 167%, but institutional building starts were flat.
The largest nonresidential building project to get underway in May was the $950 million SDI Steel Complex in Sinton, Texas. Also starting during the month was the $355 million Fig + Pico hotel towers in Los Angeles and the $360 million Wolf Point South Tower B building in Chicago.
Through this year’s first five months, nonresidential building starts were 19% lower than in the first five months of 2019. Commercial starts were 24% lower, while institutional starts were down 11%, and manufacturing was off 39% through five months.
Over the past 12 months, nonresidential building starts were down 7% from the prior 12 months. Commercial starts were 6% lower, while institutional starts were down 5% and manufacturing starts dropped 16%.
Residential building starts rose 4% in May to a seasonally adjusted annual rate of $257.2 billion. Single-family starts rose 2%, while multifamily starts gained 10% over the month.
The largest multifamily structure to break ground in May was the $180 545 Vanderbilt Ave mixed-use development in Brooklyn, N.Y. Also starting was the $150 million 354 N Union apartment tower in Chicago and the $150 million Ripley II – Solaire 8200 Dixon Luxury Apartments in Silver Spring, Md.
Through the first five months of 2020 residential construction starts were down 3% versus the same time period in 2019. Single-family starts were flat, while multifamily starts were down 12% through five months. For the 12 months ending in May, total residential starts were 1% higher than in the 12 months ending May 2019. Single-family starts were up 3%, while multifamily building starts were down 2%.
Construction Spending
The U.S. Census Bureau announced that construction spending during April 2020 was estimated at a seasonally adjusted annual rate of $1,346.2 billion, 2.9% (±0.8%) below the revised March estimate of $1,386.6 billion.
The April figure is 3.0% (±1.5%) above the April 2019 estimate of $1,307.1 billion. During the first four months of this year, construction spending amounted to $412.5 billion, 7.1% (±1.2%) above the $385.2 billion for the same period in 2019.
In April, the estimated seasonally adjusted annual rate of public construction spending was $342.1 billion, 2.5% (±1.5%) below the revised March estimate of $351.0 billion. Educational construction was at a seasonally adjusted annual rate of $78.6 billion, (±1.5%) below the revised March estimate of $80.4 billion.
Highway construction was at a seasonally adjusted annual rate of $106.1 billion, (±4.6%) below the revised March estimate of $111.9 billion.
Spending on private construction was at a seasonally adjusted annual rate of $1,004.1 billion, 3.0% (±0.7%) below the revised March estimate of $1,035.6 billion.
Residential construction was at a seasonally adjusted annual rate of $536.8 billion in April, 4.5% (±1.3%) below the revised March estimate of $561.9 billion.
Nonresidential construction was at a seasonally adjusted annual rate of $467.3 billion in April, 1.3% (±0.7%) below the revised March estimate of $473.6 billion.
“Bad though these numbers are, construction spending appears sure to shrink further,” said Ken Simonson, the Associated General Contractors of America’s chief economist. “In our latest survey, 40% of contractors report that an upcoming project has been canceled. But this is a great time to undertake needed infrastructure projects, with more availability of labor, lower materials costs and record-low borrowing costs for many public agencies.”
The economist noted that 10 out of 12 public and 10 out of 11 private nonresidential construction categories in the Census Bureau’s monthly construction spending release declined from March to April.
“Although there have been scattered reports of acceleration in highway spending, many state and local transportation departments have been postponing or canceling projects as fuel-tax and toll revenues plummet,” Simonson said. “The highway construction downturn is likely to intensify in future months because, in many states, April is normally the first month of significant highway spending following winter shutdowns. In addition, public educational construction dropped by 2.3% from March to April, while public spending on transportation infrastructure slipped by 1.4%. All public categories are at risk of further declines unless the federal government fills some of the holes that have opened in state and local government budgets.”
Association officials said that state and local funding is likely to continue to decline over the coming months as government officials address budget shortfalls caused by the coronavirus-related economic lockdowns. They urged federal officials to act quickly to address those funding shortfalls by passing new funding measures for transportation and other types of infrastructure. They noted that now is a great time to invest in infrastructure with use relatively light and a large pool of available labor to hire.
“Federal officials can help prevent the economic harm that will occur if state and local officials have to cut back on their infrastructure programs,” said Stephen E. Sandherr, the association’s chief executive officer. “Investing in infrastructure now will help put people back to work in high-paying construction careers while making the economy more efficient and vibrant for years to come.”
“Nonresidential construction has fared far better than most economic segments during the COVID-19 crisis, but the industry’s headline spending numbers fail to fully capture the damage inflicted on many key segments by the pandemic,” said Associated Builders and Contractors Chief Economist Anirban Basu. “For instance, spending in the lodging category was down more than 12% in April relative to a year ago and down 11% in the amusement and recreation category. Spending is also down meaningfully in a number of categories that are public-sector intensive, including education and highway/street.
“In much of the nation, construction was deemed an essential industry, which helped to mitigate spending decreases,” said Basu. “But in many places, including in New York, New Jersey, Boston, Pennsylvania and California, construction was deemed nonessential. That has rendered ongoing work and backlog – which stood at 7.8 months in April, according to ABC’s Construction Backlog Indicator – less of an effective shield against the early stages of the broader economic downturn than it is normally. The nonresidential construction spending data would have been far worse but for a massive increase in spending in the public safety category, which is up 35% year over year due to investments made to shore up capacity to deal with COVID-19.
“As the nation slowly reopens, nonresidential contractors will face many challenges,” said Basu. “State and local government finances have been compromised, jeopardizing infrastructure spending going forward. Many office suites and storefronts have been vacated, which will suppress demand for new construction going forward. Capital will also be scarcer, resulting in greater difficulty securing financing for projects. Moreover, if the past is prologue, many dislocated construction workers will find jobs in other industries, given construction’s tendency to be among the last economic segments to fully recover.”
Housing Starts
In a sign that the housing market continues to show forward momentum, single-family permits posted an 11.9% gain in May, while total housing starts increased 4.3% to a seasonally adjusted annual rate of 974,000 units, according to a report from the U.S. Housing and Urban Development and Commerce Department.
The May reading of 974,000 starts is the number of housing units builders would begin if they kept this pace for the next 12 months. Within this overall number, single-family starts increased 0.1% to a 675,000 seasonally adjusted annual rate, after an upward revision for the April estimate. The multifamily sector, which includes apartment buildings and condos, increased 15.0% to a 299,000 pace.
It takes 400 tons of aggregates to construct the average modern home, according to the National Stone, Sand & Gravel Association.
“We are seeing many positive economic indicators that point to a recovery, including low interest rates, rising demand and an increase in mortgage applications,” said National Association of Home Builders (NAHB) Chairman Dean Mon. “Single-family and multifamily housing production are on an upward path while overall permits, which are a harbinger of future building activity, posted a double-digit gain.”
“The May housing report is consistent with the positive results of the NAHB/Wells Fargo builder sentiment index, and we expect this momentum to continue as economic activity recovers,” said NAHB Chief Economist Robert Dietz. “In another promising sign, single-family permits are up almost 2% on a year-to-date basis and builders are bringing back thousands of workers laid off in March and April to meet renewed demand.”
On a regional and year-to-date basis (January through May of 2020 compared to that same timeframe a year ago), combined single-family and multifamily starts are 1.7% higher in the Midwest, 4.7% higher in the West, 6.7% lower in the Northeast and 0.2% lower in the South.
Overall permits increased 14.4% to a 1.22-million-unit annualized rate in May. Single-family permits increased 11.9% to a 745,000-unit rate. Multifamily permits increased 18.8% to a 475,000 pace.
Looking at regional permit data on a year-to-date basis, permits are 14.8% lower in the Northeast, 6.2% lower in the Midwest, 2.7% lower in the West and 0.8% higher in the South.
Construction Employment
A new survey by the Associated General Contractors of America and data construction technology firm Procore shows that construction activity is returning to pre-coronavirus levels in many parts of the country and some firms are adding workers. The new economic data, however, also shows some future projects are being canceled and many others are being delayed by supply chain issues and labor shortages, underscoring the need for additional federal recovery measures, association officials noted.
“Many of the immediate economic impacts of the coronavirus have passed and, as a result, activity and hiring are up, a bit,” said Ken Simonson, the association’s chief economist. “But while the immediate crisis appears to have passed, we are just now beginning to appreciate some of the longer-term impacts of the pandemic on the industry.”
Construction activity has returned to pre-coronavirus levels in 34 states, based on data on workers’ hours analyzed by Procore. And construction has returned to pre-coronavirus levels in Dallas and Miami, according to Procore’s data on eight large metro areas. Meanwhile, the association’s survey found that only 8% of construction firms were forced to furlough or lay off workers in June while 21% report adding employees, compared to one-in-four firms letting workers go between March and May.
“But it is important to remember that construction activity typically increases quite a bit between March 1 and the end of May as the weather improves and more work gets underway,” Simonson commented. “Getting to March 1 levels is a sign of progress, but it doesn’t mean things are back to normal.”
Simonson added that the AGC survey and Procore’s data show the severe toll the pandemic took on the construction industry. For example, 61% of firms report having had at least one project halted or canceled because of the pandemic. One in four firms report that construction materials shortages, caused by lockdowns and trade disruptions, are causing delays on current projects. Meanwhile, the Procore data found that smaller firms experienced more severe declines in construction activity during the pandemic than larger firms.
“We are living in a time when change seems to be the new norm, but something that will never change is the resilience of the construction industry,” said Kristopher Lengieza, Procore’s senior director of business development. “To date, a majority of states are experiencing levels of construction activity equal to, or in some cases, much higher than they reported prior to COVID-19.”
Simonson added that, moving forward, only 12% of firms report they plan to furlough or lay off staff over the next four weeks while 17% anticipate adding to their headcount during that time span. Yet even as more construction firms predict they will expand during the next several weeks, 42% do not expect demand will recover to normal levels for at least four months, and most of those firms expect recovery will take longer than six months.
Simonson noted that construction firms are counting on additional federal help to improve demand for construction and make it easier to return people to their payrolls. Fifty-five percent of firms report they are counting on Congress and the Trump administration to enact liability reform that protects firms that are complying with coronavirus safety protocols from litigation. And 33% are counting on Congress to boost infrastructure spending to offset declining private-sector demand.
Many firms are also hoping that Congress will not extend the unemployment supplement that is currently set to expire at the end of July. Notably, 34% of firms that called back employees who had been furloughed report having some personnel refuse to return to work because of those unemployment supplements. “Extending the supplement will only make it harder for more employers to bring people back onto payrolls,” Simonson cautioned.
“Without additional help from D.C., the few gains this industry has made during the past few weeks will likely be fleeting,” Simonson added. “That is why we will continue to push Congress and the Trump administration to enact the kind of long-term economic recovery measures this industry needs to truly rebound from the coronavirus.”