Nonresidential construction should hold up
Thursday, September 10, 2020 from Floor Covering Weekly
While GDP is likely to fall more during this recession than it did during the Great Recession — most projections are that the economy will contract 5 percent or more this year — building construction is expected to hold up better than expected. A recent consensus construction forecast compiled by the American Institute of Architects is calling for an 8.1 percent decline in spending this year, and another 4.8 percent next year, or less than half the fall experienced during the last recession. So, while the building sector will not do as well as some sectors of the economy, it likely will avoid the fate that most were fearing when the pandemic hit. The reasons are:
• A strengthening housing market While homebuilding had a few rocky months early in the pandemic, recent numbers have been surprisingly strong, fueled at least in part by record-low mortgage rates. Housing is not only a leading indicator for the economy, but generally foreshadows movement in the broader construction sector because new homebuilding spurs need for other facilities — stores, offices, schools, health care facilities and so forth.
• Investment capital availability The Federal Reserve Board lowered short-term interest rates to near 0 percent and has dramatically increased its balance sheet to ensure more liquidity in the economy. As a result, the stock market is near record valuations. As investors seek better returns than they can get from traditional investments in stocks and bonds, real estate is often viewed as an attractive option, which in turn generates more demand for these facilities.
• Facility retrofits Probably the single most important factor boosting construction activity in the near-term is the need to retrofit existing facilities to accommodate emerging health concerns. There will be a dramatic need for post-pandemic design in most existing buildings. The overwhelming majority of commercial, industrial and institutional facilities will need at least minor and often major retrofits before workers and customers feel comfortable returning.
So, while the overall nonresidential market is expected to see more manageable declines this year and next, some sectors will be hit much harder than others. Commercial buildings (office, retail, hotels, etc.) are expected to be the hardest hit, with spending projected to decline almost 12 percent this year and another 8 percent in 2021. The hotel market, in particular, is projected to see declines of more than 20 percent this year and almost 17 percent next. Industrial buildings (manufacturing production and related distribution facilities) are slated to see declines of 5 percent this year and 3 percent next. Institutional buildings (healthcare, education, religious, public safety and amusement and recreation) should fare the best, with spending on these facilities projected to drop almost 5 percent this year, and another 2 percent next. In particular, healthcare facilities are expected to see modest gains both years.
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]