The ongoing pandemic notwithstanding, construction economists are cautiously optimistic about a slow, but continual, recovery in 2021. That’s the short answer. The long answer is a bit more complicated.
In its 2021 Construction Outlook, Dodge Data & Analytics predicts that total United States construction starts will increase 4% over the next year, to a total of $771 billion. After a volatile year of shutdowns, delays and ongoing project cancellations due mainly to COVID-19 and its repercussions, a growth of 4% is not anything to complain about.
However, even as the nation anticipates a viable vaccine in early 2021, the long-term effects of the pandemic and the resulting recession (the construction industry lost an estimated 14% in 2020 totaling $738 billion) will be felt for much of 2021, according to Richard Branch, chief economist for Dodge Data & Analytics.
“Uncertainty surrounding the next wave of COVID-19 infections in the fall and winter and delayed fiscal stimulus will lead to a slow and jagged recovery in 2021. Business and consumer confidence will improve over the year as further stimulus comes in early 2021 and a vaccine is approved and becomes more widely distributed, but construction markets have been deeply scarred and will take considerable time to fully recover," Branch said in a press release late last year.
"The dollar value of starts for residential buildings will increase 5% in 2021, nonresidential buildings will gain 3%, and nonbuilding construction will improve 7%. Only the residential sector, however, will exceed its 2019 level of starts thanks to historically low mortgage rates that boost single family housing,” Branch continued.
If you missed Dodge’s outlook, here’s a quick refresher of what the organization expects for the industry in the coming year:
- Single-family housing construction—The dollar value of single-family housing starts will increase 7% and the number of units will be up 6%.
- Multifamily construction—The dollar value of multifamily construction will drop 1%, and the number of units will drop 2%.
- Commercial building construction—Commercial building starts will increase 5%, and warehouse construction will lead projects in this sector. Office starts are also expected to increase, which will include data center construction and renovations to existing spaces. Dodge does not expect retail and hotel starts to rebound to pre-2020 levels.
- Institutional building construction—Dodge predicts institutional construction starts will increase 1%.
- Manufacturing plant construction—This building sector will be flat in 2021, mostly due to declining petrochemical construction and weak domestic and global activity in the beginning of 2021, but Dodge forecasts more growth toward the end of the year.
- Public works construction—Starts in the public sector are expected to be slow in early 2021 due to uncertainty surrounding federal and state funding. Dodge predicts public works starts to remain flat for the remainder of 2021.
- Electric utilities and gas construction—Electric utilities and gas plant starts are expected to increase 35%, led by large liquified natural gas export (LNG) facilities and wind farm projects.
It’s a new year full of new possibilities. And if you’re a contractor who makes a regular habit of watching overall economic and industry trends (which we hope you do), most of this is not a surprise. Below, delve a little deeper into the forecast with Dodge’s Branch—including his long-term view of energy and utility projects and a short-term view of labor and economic concerns.
CBO: The outlook forecasts meager growth for the public works, institutional and nonbuilding construction. Does this forecast change with President-elect Biden’s incoming administration?
RB: Not for 2021, no. President-elect Biden’s win could lead to increased public spending on construction projects; however, he will be hemmed in by a reduced Democrat majority in the U.S. House of Representatives and what could be a Republican-led U.S. Senate. Should the Democrats win the Georgia Senate runoffs on January 5, that could boost the prospects of increased spending.
However, those wins would still leave them short of a 60-seat super majority in the Senate, which reduces the potential for any broad sweeping measures. Further, any spending plan passed in the first half of 2021 would have greater impact in 2022, as allocated dollars take time to find their way down to the project level.
CBO: The growth forecasted for energy and utility projects is notable. Do you see this sector continuing to grow for several years to come?
RB: Growth in the energy sector over the next year will largely be fueled by increased spending on LNG export facilities as well as by a rising number of utility-scale wind and solar construction projects.
It is those renewable projects that provide for the most opportunity in the coming years as improving technology brings the energy produced by these projects closer in cost to traditional fossil-fueled power generation.
The main hindrance for these projects is the lengthy permitting process—particularly for transmission lines that carry the renewable power into large markets.
CBO: The outlook specifically mentioned short-term economic and labor market concerns. Can you go into a bit more detail about what these include?
RB: The recovery in the labor market has stalled as the spending programs provided under the Coronavirus Aid, Relief and Economic Security (CARES) Act have expired, just as the next wave of COVID-19 infections arrives.
Rising cases of the coronavirus will lead to reduced consumer and business spending, which could upend the nascent recovery and reduce hiring in the industry. These trends will persist until further federal stimulus is provided and a viable vaccine has been widely adopted.
CBO: Other than navigating safety processes, shutdowns and delays caused by the ongoing pandemic, what do you predict to be the top challenges commercial contractors will face in 2021?
RB: Perhaps the biggest challenge that contractors will face will be the continued acute shortage of skilled and available labor. Additionally, contractors who rely on public projects, such as schools, may see greater uncertainty over spending programs, as state and local budgets have been materially impacted by declining tax revenues. Lower revenues could result in fewer construction projects over the coming year.