The death of commercial construction is greatly exaggerated

The death of commercial construction is greatly exaggerated

Friday, May 29, 2020 from Floor Covering Weekly Prime

After contacted by a newspaper reporter inquiring whether he was gravely ill or possibly already dead, Mark Twain remarked that, “the report of my death was an exaggeration.” We’ve seen similar reports of the death of commercial construction markets. While the pandemic is certainly going to change how much commercial space we need, and how we use this space, there is still a lot of life left for the commercial markets. 
Construction for each of the major commercial sectors — office, retail, and lodging — has been struggling since well before the COVID-19 outbreak. A consensus construction forecast conducted by The American Institute of Architects in December of 2019 projected that the overall commercial construction market would see almost no growth in 2020, with declines expected for retail and lodging space. An update of this consensus outlook conducted in early April marked down 2020 expectations for the overall commercial construction market to an almost 15 percent decline for the year as demand in most of the sectors has significantly diminished.

In the face of significant weakness, there are also are some potential strengths that likely will cushion a portion of the projected downturn in the construction of commercial space. Demand for office space was one of the first casualties of the pandemic with the stay-at-home orders implemented by most states. With employees of many businesses now successfully telecommuting, there are likely to be fewer employees returning to offices in the future. Also, with the movement toward open office spaces and co-working in recent years, many employees may be justifiably concerned about returning to a crowded work environment. Offsetting this is that to adequately social distance in an office in the future, there will need to be significantly more space per employee. So, the net demand for office space will depend on how these two forces balance out.

The future demand for retail space also is not a straight-forward calculation. Online purchasing was steadily growing before the pandemic, and the recent surge will likely be maintained to some extent even when stores reopen. Offsetting this is the way bricks and mortar shopping occurs in a post-pandemic world. Big box and crowded discount stores are likely to decline in popularity. Shopping will decline as a pastime and become more of an essential activity. As such, big regional malls can be expected to give way to smaller less crowded local boutiques, where shopping may occur by appointment only. Additionally, the growth in online shopping means fewer stores, but also implies a significant increase in distribution facilities to get the products to consumers quickly and efficiently. Again, there likely will be less spending on retail facilities moving forward, but probably not as much of a falloff as expected.

Demand for lodging facilities has suffered from the dramatic decline in airline travel. With enhanced technological options for effective meetings, business travel is likely to remain weaker in coming years. Personal airline travel likewise is expected to remain at lower levels in the future. However, that suggests that more travel will happen in automobiles. Trips, for vacations for example, may remain closer to home. Still, many of these trips will occur over multiple days, in which case lodging facilities will be needed for those days on the road. Airbnb has also cut into the lodging business in recent years. However, will future travelers be concerned about potential health risks associated with the often nonprofessional management of Airbnb facilities, encouraging those travelers to stay in more traditional lodging facilities?

Demand for facilities in the post-pandemic world is still evolving. It’s likely that there will be fewer commercial facilities built in future years than there have been in recent years. Still, how different will these new facilities be? And maybe more significantly for those serving the commercial building market, how much work needs to be done to retrofit existing buildings to accommodate these still-evolving preferences?

Kermit Baker is the senior research fellow for the Joint Center of Housing Studies at Harvard University. He may be reached via e-mail at [email protected]

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