Article written by Ken Simonson, Chief Economist, AGC of America on constructormagazine.com
If the outlook for construction were presented as a Sesame Street sketch, it might be “sponsored by the letter K.” That’s because the residential branch of construction looks to be headed on a steady upward course, while most nonresidential segments head downward.
The distinction first became apparent last July, when homebuilders and residential specialty trade contractors added 35,000 employees and nonresidential firms — general and specialty trade contractors plus heavy and civil engineering construction companies — shed 4,000 positions. A similar split appeared in August and September.
Although the employment gap narrowed slightly in October, forward-looking indicators all signal that homebuilding will remain robust in the next several months. In contrast, only a few nonresidential niches appear to have good prospects.
For instance, in AGC’s latest coronavirus survey, conducted in mid-October, three-quarters of the more than 1,000 respondents reported that a project had been postponed or canceled. That share had jumped from 60 percent just two months earlier and 32 percent last June.
ConstructConnect reported that the dollar value of nonresidential building starts plunged 33 percent year-to-date in the first 10 months of 2020 compared to the same period in 2019, while civil starts declined by 18 percent. In October alone, the two types of projects each posted decreases of 40 percent or more, indicating a market that is worsening rather than beginning to heal. Conversely, single-family starts increased by 6 percent year-to-date and 17 percent October-over-October, pointing to a strengthening market going into 2021.
Two indicators that look further ahead are also dispiriting. Dodge Data & Analytics’ Momentum Index fell 1.8 percent from its September level. The index “is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year,” Dodge says. The index “has struggled to make consistent gains since passing its post-pandemic low in June.”
The American Institute of Architects’ Architecture Billings Index similarly is intended to signal the direction of building construction spending nine to 12 months ahead. October was the eighth consecutive month in which more responding architecture firms reported a decline in billings from the month before than an increase. The unfavorable string reached nine months in a row for firms with predominantly institutional and commercial/industrial practices. In contrast, the index was above the breakeven level for firms concentrating on residential (mainly multifamily) construction.
A few nonresidential niches are doing well and should continue to do so in the next several months. It appears demand for home delivery will remain strong, which is prompting a race to build distribution facilities (including repurposing and remodeling stores) that are close to residential customers. The surge in internet usage from homes has added to already strong demand for data centers and improved connectivity, including faster buildout of 5G wireless. A limited number of manufacturers are building or expanding plants to meet demand from health care sectors and to deliver products that satisfy residential customers’ needs. And many types of buildings are undergoing remodeling to accommodate changing economic or public-health circumstances.
