The Construction Advantage, So What Is Next?

So What Is Next?

By Asha Echeverria 

What a Year! That is the usual greeting on my holiday card and in the past it has been a celebratory statement, but this year I feel the punctuation should change to: What a Year?

Regardless of what was, it is time to turn the page. So, my focus as we move into 2021 is: What’s next?

Please note that this article was written before the enactment of the $2.3 trillion extension of the CARES Act in late December 2020. We will be following up with you early next year with the effects of the Act on the construction industry.

According to Richard Branch, chief economist for Dodge Data & Analytics, “the economy has noticeably slowed in the past couple of months.” He expects slow growth to continue into the first quarter of 2021, but then, relying on additional federal stimulus and a widely available vaccine by mid-2021, Mr. Branch predicts that things will ramp up in the second half of 2021. Still Branch warns, “This will not be a copy/paste recovery compared to the aftermath of the Great Recession.” “The pandemic and economic fallout means that opportunities for growth in the construction sector are going to be harder to find.”

Dodge reports a 14% decline in the dollar value of overall construction starts in 2020, bringing starts to $738 billion. With a projected rebound of 4% in 2021, overall construction starts are expected to reach nearly $771 billion. As to residential construction, after a 2% drop in total starts in 2020, Dodge estimates that total residential starts will increase 5% in 2021. Single-family homes actually saw an increase in 2020, at a rate of 4%, and Dodge expects this trend to accelerate in 2021 with single-family home starts rising to 7% in 2021 to $254 billion, the highest since 2007. This trend seems to be supported by lower mortgage rates and employees moving away from cities as remote work becomes more widespread.

As to commercial construction, Dodge estimates that overall starts decreased 23% in 2020 to $107.4 billion. Dodge expects commercial construction to have a slower recovery, only a small 5% increase to $113 billion in 2021. Hotel and retail losses in 2020 were warehousing constructions gain as e-commerce exploded under the restrictions of the pandemic. Warehouse construction was the one growing commercial sector in 2020. Warehouse starts grew 2% in 2020, to $30.7 billion, and this is projected to accelerate in 2021 to an 8% increase.

In ME, commercial construction slowed, and some developments stopped all together. The vacancy rate for Class A office space in Portland in 2020 was 0.4% according to Nate Stevens, a commercial real estate partner at The Boulos Company in Portland. Now, it is closer to 7%; new office construction typically occurs when market vacancy rates drop below 4%. According to Stevens, it may take years to fill the available space again, especially given current remote working trends.

Jay Bowman, principal of FMI Corp., agrees that the economy will strengthen in 2021, but notes that construction spending tends to lag by one and-a-half to two years. “Most of the spending in 2020 represents existing backlog or ongoing projects,” he says. The full effect of the reduced number of starts in 2020 may not be felt until 2021 and the early part of 2022 when those projects would have reached peak spending during the mid-point of their construction schedules.

According to Ken Simonson, chief economist for the Associated General Contractors of America, “ME has done better than most states so far, but we are heading into a rough period for non-residential construction.” The federal Bureau of Labor Statistics determined that ME’s construction industry employed about 29,300 people this August, down just 300 from the same time in 2019, most likely due to construction continuing through the pandemic as an essential industry. Some areas of construction, like road and bridge projects, actually were more efficient in 2020, achieving substantial completion ahead of schedule due to low traffic volumes, but it is a double-edged sword as reduced traffic means fewer fuel tax dollars to fund the state’s future highway work. ME Department of Transportation projects a $40 million shortfall in the current budget and another $30 million starting next year.

Still new development continues and residential construction, especially single-family homes, remains strong in ME. A focus on re-development and renovation of commercial properties into residential or “livable” mixed-use projects, highlighted by the ME Mall Transit Oriented Development Concept Plan presented by the Greater Portland Council of Governments (GPCOG) and proposals to convert New York City office buildings into residences, may be what’s next with construction in ME and nationally.

Sources:

• Alisa Zevin, 2021 Construction Forecast: A Slow Road to Recovery, Engineering News-Record, Nov. 18, 2020.
• Peter McGuire, ME construction industry remains strong amid economic downturn, Portland Press Herald, Oct. 5, 2020.

The Decision Tree Infographic & Resource Guide

By George F. Burns & Zachary Brandwein

The coronavirus pandemic has created unprecedented uncertainty in the construction industry. It has forced builders and owners alike to make challenging decisions as they contend with altered circumstances. Navigating in this changed environment requires both a grasp of the big picture and a singular understanding of the repercussions of each possible choice.

To help you make the right decision for your project, we’ve distilled our construction expertise and years of making tough decisions into this decision tree. We hope this tool will provide you a better grasp of you project’s big picture and a better understanding of what each choice means for your business. Every project is different and contract terms can drastically affect outcomes. The specifics of a project and contract must be considered and studied before a decision to act.

Webinar | Managing Risks in Construction Contracting and Accounting in 2021: Get the tools you need to succeed

Join Bernstein Shur Construction Attorney Kelly Gagliuso for a virtual seminar in partnership with BerryDunn Construction Practice Principal, Linda Roberts, on navigating hidden risks in construction contracting and accounting challenges during these unprecedented times. They’ll also cover planning and optimizing opportunities in 2021.

Date: January 14th, 2020
Time: 12:00 – 1:30 PM