*Editor’s Note – At DuckerFrontier, our Building & Construction industry experts are constantly in communication with industry participants who report a positive outlook for the construction industry coming out of the COVID-19 pandemic. Managing Principal Chris Fisher shares his latest insights on construction demand following the current recessionary period. Click below to access our latest Building and Construction articles:
- US Infrastructure – State Level Analysis of the Impact of COVID-19
- US Infrastructure Expected to Fare Well in the Post-Pandemic Environment
- Strong Order Backlog and Essential Business Label to Help Building & Construction Industry Navigate COVID-19
The COVID-19 pandemic interrupted an above-average cyclical transition in the construction industry and changed the demand drivers for recovery. Construction was performing well late into the cycle, experiencing a surge in activity across many sectors in the first quarter of 2020, particularly in the new residential segment. As the pandemic spread to North America, many active projects have been deemed “essential” by government authorities, but new business permits were withheld.
DuckerFrontier’s Building & Construction experts have broken down our expectations for residential new construction, residential remodeling, and nonresidential new construction through 2021 and provided insights into the post-pandemic landscape for the industry.
Residential New Construction: We have seen mixed activity in new home construction due to policy differences across states and confusion around “essential” classifications. Builders and contractors are struggling to obtain permits for both new and in-process projects, with few communities offering virtual inspections. Both companies and workers want to remain in operation, though new policy regulations have created uncertainty and often confusion around guidelines.
As states reopened, the mortgage industry still recovering from a five-year low, saw application to purchase homes rise 5% for the week and were a remarkable 33% higher than a year ago, according to the Mortgage Bankers Association’s. This could be a sign of a housing led recovery and illustrates the significant gap in housing the industry still needs to address.
New data from pending home sales (both existing and new) is good news for the housing industry, but likely a short-term affect. Our analysis indicates these buyers represent migration impact out of urban high rise living into suburban, detached living, plus sellers being more receptive and acting on offers quickly due to the crisis. As the economic impacts of unemployment, consumer cash reverse catches up we see challenges in credit and loan qualifications in the future. The long-standing trend still supports the need for variety of housing options, typically outside urban mega centers, particularly for entry level homes.
Residential Remodeling: Functional and performance repairs and remodels are continuing, while less critical luxury updates are slowing, and new planning has ceased altogether. Homeowners in high COVID-19 case regions are limiting contractor access or entrance into homes and are prioritizing DIY projects as families are staying home.
Nonresidential New Construction: All segments of nonresidential building typically decline in recessionary conditions. Design build projects are moving out phases of construction to deal with local regulations and labor. Architectural firms report new project delays or projects are put on hold, yet 30% are continuing, many with purpose redesign inquiries. Design and development firms are planning for innovation in healthcare facility design post-pandemic.
The Post-Pandemic Construction Environment
The construction landscape post-pandemic is still a mystery, though the industry will face a new set of challenges and practices leading to an uneven recovery. Unemployment and consumer confidence are likely to have a significant impact on consumers’ intent and ability to purchase a new home, though historically, custom home building has recovered the quickest after a recessionary period. Pent-up demand leading into the crisis will weaken or shift into rental solutions and potentially last into the middle of the next cycle.
The latest new housing starts data for May released this June 17th by the Census Bureau shows a 4.3% increase over April to an annual rate of 974,000, the first increase since January. The housing start increase was driven by the West (21.5%) and the Northeast (+12.8%), the hardest hit regions in the first months of COVID-19, while new construction fell in the South (-16%) and the Midwest (-1.5%).
The increase was less than expected but forward-looking indicators are positive and suggest that new housing will see a strong Summer and be an important part of the economic recovery. Additionally, there was a jump in builder permit applications in May of 14.4% over April, this following the news from the Mortgage Bankers Association yesterday that loan applications for home purchases increased by 4% last week and for the 9th week in a row.
We are seeing the short term impact of pent up demand from the Spring, along with record low mortgage rates – the average 30 year fixed mortgage rate just fell to 3.30%. However the sustainability of this rebound longer term will be determined by the overall health of the economy and disposable incomes, and continued high levels of unemployment will be a constraint on demand.
Multifamily fundamentals were healthy coming into the crisis, however single-family homes are beginning to dominate most of the demand. Low rise, less dense unit structures in suburban areas will be preferred after the virus, though multifamily construction is likely to see a healthy recovery.
Small and lower cost DIY projects are also likely to continue, with spending primarily driven by repair or critical improvements to homes. Therefore, kitchen and bath remodels as well as luxury interior offerings are likely to suffer.
Leading Segments for Growth
Low-rise multifamily construction – suburban and rural areas
- Low interest rates and project funding will provide developers access to low cost debt
- Increases in home loan standards will limit consumer mortgages and ability to purchase; rentals become more feasible
- High tax city centers, implications from COVID-19 affects in high populous urban areas will drive consumers outside of urban, close proximity living and working environments
- Consumers preference for more space, less density, access to open areas and yards favors low rise multifamily developments in suburban and rural areas
Warehouse and distribution facilities – digitalization and healthcare/public safety related
- Continued expansion of warehousing and cold storage facilities due to growth in digitalization and e-commerce of critical food, medical and the Amazon effect
- Lessons learned from delivery and online process for materials, food, supplies indicate more robust network needed – regionally
- Federal, state and local stockpiling rebuild – expansion will require more, secured warehousing space of permanent nature (repurpose and build new)
- Data centers for handling secure, expanded digitalization economy
Repurposed facilities for healthcare
- Remodel conversion of existing healthcare facilities to better adapt to future crisis
- Convert/repurpose local, less utilized facilities for overflow or staged healthcare crisis management
- Temporary facility readiness planning for healthcare or public clients for fast response – migration away from open plan office or high occupant facilities
- Building new, expanded or specialized healthcare facilities
Stay tuned in the coming days as our experts take a deep dive into COVID-19’s impact on building and construction infrastructure and what the post pandemic landscape looks like.
DuckerFrontier’s Building & Construction team is at the forefront of key trends impacting the industry amid COVID-19 disruptions. Visit our COVID-19 Resource Hub for the latest insights and implications for global business, or contact us to connect with a team member.