Q1 2021 Construction Activity
The 2020 construction market saw a sharp split in spending between residential and nonresidential construction. According to the U.S. Census Bureau, the entire industry has seen 5.8% growth in spending between January 2020 and January 2021. The growth in spending was largely carried by residential construction of single-family homes. Nonresidential construction turned south in nearly every sector with a (5.0%) decrease; while residential construction expanded by 21.1% for the entire sector during the same time period. Spending on new single-family homes increased 24.2%. New multi-family homes spending grew by 16.9%. Within nonresidential construction, spending on public safety grew by 25.2%; Highway was second with 6.2% and water supply third with 3.7%. All other sectors showed severe contraction. Office had the largest contraction with (22.5%); Conservation and development was second at (22.3%) and manufacturing third with (14.7%). Even though spending in residential construction had huge growth in 2020, nonresidential spending drives the overall construction market through higher spending volume.
2021’s construction economy shows mild signs of early recovery, but expectations are the recovery will be a slow growth throughout the year. Through January 2021, construction spending is mildly increasing many categories. According to the U.S. Census Bureau’s January 2021 construction spending estimate (seasonally adjusted), total spending is approximately $1.521 billion, which is slightly up from December 2020’s number of $1.496 billion, a 1.7% growth. For the same time period, nonresidential spending is approximately $799 million, a 0.9% increase from December. Conservation and Development had the largest spending increase of 6.3%; Highway and street was second with 5.8% and manufacturing third with 4.7%. However, conservation and development does not have the highest numerical value in terms of dollars spent. The highest dollar amount spent in January 2021 is on power ($114 million); highway and street projects are second ($108 million) and educational third ($106 million). Power and educational spending are flat since December.
New residential construction still shows the most promise for 2021. Spending in January 2021 for residential construction was estimated at $722 million for the month, which is a 2.5% rise over December 2020. Single-family homes still carry the sector in spending with a 3.0% increase and spending on multi-family dwellings is up 0.7%. Costs of materials have been rising, and it should be noted that the increase in spending in both residential and nonresidential construction could also indicate the increased costs in addition to a market in recovery.
The U.S. Census Bureau and the U.S. Department of Housing and Urban Development released the February 2021 numbers of new residential construction for building permits and housing starts. A building permit initiates the administrative process of building a residential home, and a housing start indicates that construction is actually beginning i.e., the workers are on site taking action. About 2% of building permits will not be turned into a housing start for a variety of reasons. While both building permits and housing starts were down in February compared with January, the overall numbers still demonstrate a strong residential market. Building permits for privately owned housing decreased by (10.8%) since January, but in year-over-year comparisons, there has been a 17.8% rise. Housing starts in February are down compared with January’s numbers and in year-over-over comparisons. They are down (10.5%) compared with January and down (9.3%) compared with February 2020. Despite the dipping numbers of housing starts in February, this sector is likely to have gains throughout 2021 supported by the historically low interest rates. However, the growth may not be as robust as it was in 2020.
Both the Associated Builders and Contractors (ABC) and the Associated General Contractors of America (AGC) recently posted the results of their survey for the 2021 outlook on construction. The results were mixed in a few categories across both surveys, but the most notable commonality between both surveys is a lack of confidence in growing profit margins for 2021. A few interesting points from the AGC survey that is not covered by ABC are in regard to current staffing situations and how current jobs are affected by the pandemic. 54% of contractors are reporting that they are challenged in filling their hourly and craft positions, which demonstrates a strange anomaly between unemployed construction workers and the need for skilled workers. 64% of respondents reported that jobs are taking longer than expected, and 54% reported that costs are higher than anticipated, especially because of challenges in the supply-chain line. Some materials are considerably delayed, unavailable, or have huge price increases in short periods of time. AGC sites tariffs on key materials as one of the reasons causing the challenges in the supply lines. As of February, construction employment is still down in nearly all the states. Even though early indicators are that the construction market is off to a slow start, about 40% of respondents in both surveys are expecting to slightly increase staffing throughout the year.
ABC reports on the current backlog of nonresidential construction. Backlog indicates the projects currently contracted, and thus, the higher the backlog, the more work contractors have already secured. Lower backlogs indicates that contractors will be searching to secure future contracts. When backlog lowers on a national level, it may indicate increased competition in securing contracts in the future. The ABC respondents report that the backlog is slowly increasing but is still less than a year ago February. This indicates that spending may be slow going in the first part of the year. Because of the large gains in e-commerce in 2020, warehouses are one of the few areas in nonresidential construction that will see growth throughout the year.
Dodge and Data Analytics reports that since 2020, nonresidential starts contracted by 25% and nonbuilding starts by 15% as of February 2021. Manufacturing construction is limping with starts down 59%. Both retail and lodging construction were severely crippled twofold by the shutdown and the change in consumer behavior. These three sectors show little promise of recovery in 2021. Nonresidential construction will likely take a few years to recover because these projects generally having a longer scope than residential projects, and thus spending is spread out over the time of the project.
The Biden administration has spoken of another large spending bill that will likely include further infrastructure money. Spokespeople for the administration said that the infrastructure bill would be their first priority, but so far, the action is in the incipient phase. If a bill such as this were to pass, the money would likely be spent starting in 2022 going forward.