The Construction Industry Is Trending Upwards With An Economic Forecast That Looks Optimistic.
By Mark S. Kuhar
The construction sector faces unique challenges as recession turns to recovery, according to Dodge Data and Analytics’ Mid-Year Report.
- Economic growth is surging thanks to the growing number of vaccinated Americans and substantial federal stimulus.
- This surge will continue into 2022 as consumers and businesses spend and invest anew.
- Higher material prices and labor shortages, however, will impede a quick recovery for the construction sector.
The recovery is getting a helping hand from the additional fiscal stimulus approved in March. Consumers and businesses are flush with cash and releasing a tidal wave of economic growth, which will extend into 2022. This year and next are expected to be the best two consecutive years for economic growth dating back to 1950-1951.
Not every sector, however, will recover at the same pace. Construction is one sector expected to underperform. The rapid acceleration in economic activity is causing significant supply chain problems. Logistics operations have not caught up with the unprecedented uptick in demand, thereby placing significant upward pressure on prices. And the construction industry is feeling the full force of these constraints.
In April 2021, the Producer Price Index for construction materials was 24% higher than a year earlier, with prices for most materials significantly higher. Higher prices are likely to persist through the remainder of 2021 and are the most significant downside risk to the construction outlook as projects get delayed and cancelled.
In sum, total commercial construction starts are expected to rise 5% in 2021, however, the recovery is not evenly shared across all sectors. Retail construction starts will post tepid growth during the year fed, in part, by the increase in residential construction in the suburbs.
The real strength for the commercial sector lies in warehouses. Warehouse starts continue to smash records as builders like Amazon, Seefried, and Northpoint build massive distribution centers across the country. There are also many large warehouse projects in the planning stages that should keep starts elevated for the foreseeable future.
Office construction is mixed. Demand for new space remains very weak due to the uncertainty over when, and if, workers will return to their offices. Data center construction (included in office construction) is healthy as demand for cloud space and quicker data transfers increases.
Publicly funded building generally lags the overall construction cycle, and 2021 will be no different as institutional starts remain sluggish. Education building starts have declined since 2019 and will step further back in 2021 as state and local budgets have been battered by the pandemic and recession. Not all areas of the United States, however, are expected to contract as bond measures in states such as Texas and California could lead to increased K-12 construction.
Healthcare starts are one institutional sector expected to see healthy growth in 2021 fueled by aging demographics and a new awareness about the need for surge capacity for hospitals. Hospital starts, in fact, are expected to outperform clinic and nursing home construction.
Nonbuilding construction includes infrastructure investments such as streets/highways, bridges, sewers, hazardous waste removal, drinking water systems and electric power generation. Over the longer term, the outlook for infrastructure construction is very positive as hopes rise for an infrastructure agreement in Congress.
In the meantime, core infrastructure starts will see tepid growth in 2021. Highway and bridge starts are expected to be flat as new authorizing legislation was delayed and federal appropriations were largely kept at levels seen in the previous fiscal year. Environmental public works will see a 4% gain fueled by bipartisan Congressional support for large water and sewer projects. Electric power, meanwhile, will benefit from the rising tide of utility-scale renewable energy projects.
The single-family residential market has been on fire over the last year as the pandemic pushed Americans out of dense urban areas and into the suburbs and beyond. This exodus was, in part, fueled by the increase in work from home. The single-family sector, however, is very exposed to today’s higher lumber prices and shortage of skilled labor.
Additionally, an insufficient supply of homes for sale has pushed prices higher, hurting affordability. When combined, the growth in single family starts will ease back to 7% this year following the torrid pace set in 2020.
Multifamily starts, meanwhile, continue to drop in large metro areas such as New York, Houston and Los Angeles. Multifamily activity outside of these areas, however, is performing well. Supply overhangs in these metro areas is driving up vacancy rates and will offset growth seen in smaller population centers.