Economist Admir Kolaj’s Take on Potential Growth in the Industry

Like everything else, the pandemic has upended the construction industry, reshaping the labor market, job bidding, and even how contractors fund their operations and capital equipment purchases. Interestingly though, not everything has been negative. For all its impact on the economy at large, a pandemic, it seems, can give rise to certain bright spots that savvy contractors can use to increase business now and into the foreseeable future.

BCA Insurance, which focuses on the construction industry, Avrio Solutions, an industry-focused accounting firm, and TD Bank recently hosted a webinar in which Economist Admir Kolaj (from TD Bank) reviewed where the industry was in 2020 and what construction companies can expect in 2021, during the throes of vaccine distribution in the first two quarters of the year and even—hopefully—post-pandemic. He also looked at how President Joe Biden may impact the industry (although, at print time, the makeup of Biden’s government was still in flux).

He noted that United States activity in terms of gross domestic product (GDP)—a key indicator of economic vitality—was actually better through the third quarter of 2020 than anyone had reason to expect, although it will take time before that metric returns to a pre-pandemic level. Indeed, he pointed out that the 10% drop in GDP in the first half of 2020 portends a giant hole the economy will need to dig out of in late 2021. The COVID-19 vaccines from Moderna and Pfizer will accelerate economic recovery this year. So, while the short-term outlook remains grim, GDP could grow by 4% or 5%, he said, depending on any additional economic relief packages are passed by Congress in the coming months.

Home Sales Hold Strong

One sector bouncing back better than expected as the economy reopens is existing home sales, which are up about 20% over the pre-pandemic level. This marks the fastest pace since 2005, and, according to Kolaj, is attributable to three main factors:

• Pent-up demand accumulated during the shutdown
• The pandemic’s uneven impact on the workforce, with
• low-wage workers, who are more likely to be renters, being hit harder than higher-income employees who in many cases can work from home and are more likely to own homes
• Interest rates hitting rock-bottom, about a full percentage point lower than 1 year ago, making home ownership
• more affordable

What’s more, low inventory has helped prop up prices for existing homes, which is good for sellers, but not so much for buyers. Fast-rising prices and low inventory are generally good signs for home builders, and those focused on the single-family market are feeling very confident. According to the National Association of Home Builders (NAHB) and Haver Analytics, sales of single-family homes are up about 18% since mid-2020, after hitting a nadir of 60% below normal. Sales should hold steady for the first half of 2021, and the number of prospective buyers will continue to outpace the number of homes available during that time period.

Since the pandemic, single-family starts are up around 13% from the pre-pandemic peak, while multifamily starts are down about 40% from their pre-pandemic peak. Influenced by a virus that jumps between people in close contact, home buyers are gravitating toward less dense, more specious living, which is also why building in the suburbs is expected to outpace residential projects in cities. However, Kolaj said this trend was well underway even before the coronavirus pandemic, dating back to at least 2016.

As the economy continues to reopen, and with low inventory and high demand, he expects single-family starts to trend even higher upward in 2021, even as multifamily construction continues to stagnate.

Not as Rosy in Commercial

While expectations and confidence in residential building is high, Kolaj pointed out that the short-term outlook for commercial isn’t quite as hopeful, as various sectors continue to struggle under the weight of the pandemic. Enforced closures and consumers shopping much more online have contributed to increased vacancies in retail.

Office vacancies have risen too as more people work from home during COVID-19, a trend that will likely continue even after the pandemic ends. Apartment vacancies are far higher in cities than in the suburbs, going back to the beginning of 2020, again illustrating the ongoing shift away from higher-density living and accelerated by the virus.

The Impact of an Election

With a U.S. Congress controlled by the Democratic party, President Biden will likely take action on trade, immigration and environmental regulations. His administration promises to be much friendlier to immigration than the Trump administration was, for example, and a higher immigration rate has a positive long-term effect on GDP. This translates to more economic growth and a net positive on housing and construction.

A Democratic-controlled Senate will also allow President Biden to better implement his agenda, which includes a tax increase for the wealthy and resulting increased revenue that can be put back into the economy. That likely means more public projects would get off the ground, including $2 trillion dollars earmarked over the next 10 years for clean energy and infrastructure projects. Finally, the new administration plans a first-time homebuyer tax credit of $15,000. This will make home buying more affordable, as it can significantly help with down payments, and that will be a further boon to the housing market.

The continued impact of Low Interest

The historically low rates we have seen can help builders both directly and indirectly:

• Direct help— For companies that carry debt or leverage debt to finance their operations, lower rates cut down on their costs and boosts profit margin

• Indirect help— Lower rates help out other areas of economy, particularly consumers. Home buyers and homeowners, in particular, benefit from low interest, and that positively impacts the home construction industry

As more people work from home, they’re seeking bigger homes with potential office space, or are renovating to add space; in either case, the home construction sector will benefit.

Move Forward, But Cautiously

Contractors had a good year and should continue to thrive as we emerge from the economic slowdown. But there are cautions. While it’s nice to use that increased profit to purchase new equipment, and thereby diminish your tax bite, construction companies need to tread carefully. Even if you’re taking advantage of low interest rates, borrowing to finance equipment that’s not going to be used much might not make sense and will certainly outweigh potential tax benefits.

Business owners also need to think about liquidity, which is very important for bonding, as well as cash flow on your projects. Are your customers going to take longer to pay you because of the soft economy? Will you have to price your projects more competitively based on the fact that in many sectors there is less work out there?

Finally, there’s been significant tightening of the insurance market, and that’s raising costs in certain areas like auto liability coverage and excess liability. With insurance usually being your second biggest expense behind labor, it’s important to be mindful of potential cost increases coming in the middle of a job. This is partially due to the pandemic, but mostly it’s just a result of the cycle of the insurance marketplace.

It’s a balancing act, and you should consult your trusted professional advisor to figure out what’s right for your business in terms of tax liability versus surety.

This past year has been difficult for just about every industry, but construction has largely forged ahead. As vaccines get administered and the economy begins shifting back into high gear, 2021 and beyond is looking bright. Contractors who are nimble and carefully weigh their options and all implications before making big decisions will continue to thrive.