COVID-19 Leads to “Steep But Short” Recession; Drop in Construction Starts
The economy is currently in a steep but short recession according to Richard Branch, chief economist for Dodge Data & Analytics. In the webinar, titled “The Potential Impact of Coronavirus (COVID-19) on Construction Starts,” Branch said Dodge expects an economic rebound by the second half of 2021.
He pointed out that Dodge’s economic forecast was made using assumptions based on data from health professionals in mid-April. Those assumptions include 3-8 million confirmed U.S. infections, around 60,000-80,000 deaths and that infections would peak in May and abate by July.
“Our usual data points haven’t captured the extent of the stoppage fully. The shear drop-off makes the drop in 2008 look somewhat gradual … We’re in a recession, full stop,” said Branch. “We’re trying to figure out the depth of the recession and what a potential recovery looks like.”
Heading into this year, Dodge expected that commercial starts would decline 8% in 2020. The COVID-19 pandemic has led to a more negative adjustment, but not to the same level as during the Great Recession since there wasn’t as much overbuilding as the pre-recession period of 2006-2007, according to Branch.
“The fundamentals for vacancy and occupancy rates have been very healthy. The federal government has been aggressive in the front side of this crisis in its attempts to insulate the markets which is overall good news for the commercial sector,” said Branch. “… Second quarter starts will be rough. For some markets, Q2 activity could decline as much as what we saw peak to trough in 2008-2009. The difference is the bounce back. By the time we get to the fourth quarter the level of starts activity should begin to return to normal.”
Retail, which Branch said is one of the markets that gets hit hardest during recessions, has been declining in recent quarters due to online sales.
“This crisis accelerates the speed of permanent closings,” said Branch, adding that what’s bad for retail is generally good for warehouse construction.
While Dodge expects a hard hit on physical retail starts, it expects warehouse starts to remain strong.
The office sector has three segments: speculative offices, dedicated corporate headquarters and data centers. Overall, Branch said the office segment is less exposed than retail or hotels but more than warehouses.
“The speculative side is the weakest and most exposed, especially in large metro areas such as New York City. Big headquarter projects such as Amazon HQ2 in Arlington, Va., are well planned and unlikely to be pulled back,” he said, adding that there should be significant growth in data centers.
Branch said that hotel starts have been highly affected by the pandemic. He believes people will be hesitant to travel until a vaccine or treatment is available, impacting the segment’s recovery.
“Beyond 2021, the market is primed to get back into the large territory it was in during the 2014-2017 period,” said Branch.
Manufacturing starts reached 85 million square feet in 2018 and declined 21% in 2019 to 67 million square feet. However, Branch said there aren’t a lot of large projects in the pipeline to suggest that it will get back to the 2019 level.
“Will we see manufacturing come back to the United States? I’ll say a hesitant yes. We could see high-value manufacturing come back but there are many issues to deal with, such as a shortage of skilled, high-tech manufacturing employees. These are similar workforce issues as faced in the construction industry,” said Branch. “Supply chains take a long time to recalibrate and normalize … the industry will likely hit an equilibrium in the mid to high 60 million square feet level past 2021.”
Multifamily construction had been strong but Branch expected a 13% decline in that segment in 2020. However, he said that as the economy starts to recover it will take time for renters to repair their balance sheets.
“The multifamily market will contend with strong growth on the single family side going into 2021 and we’re expecting strong growth in the single family side to erode multifamily starts in 2021,” he said.
The institutional market usually lags behind the overall business cycle. Education makes up over half of the total institutional market. Branch explained that Gen Z and the younger generation are smaller than the millennial age group, and so Dodge doesn’t expect to see the same growth rate as prior to the recession.
“Many states and local areas will suffer revenue shortfall at the same time that costs in terms of social programs increase which could undermine the market,” said Branch.
Branch explained that in the healthcare sector there had been a greater shift from traditional hospitals to outpatient facilities and urgent care clinics, which have proved inadequate in the COVID-19 situation.
“The construction has not kept up with population growth,” said Branch, who expects to see investment in the healthcare industry grow.
Branch added to be prepared for a painful second quarter, that 2021 will be better than 2020 and that 2022 will be better than 2021.
Turner Seeks Millions in Damages from TWA Hotel Owner
Turner Construction Company is suing Flight Center Hotel, owner of the former TWA terminal turned upscale hotel at JFK airport, for $22.5 million in damages. The hotel includes 78,000 square feet of unitized curtainwall manufactured by Fabbrica with triple-laminated insulating glass to reduce sound transmission.
The complaint states that the owner entered into a construction management agreement (CMA) with Turner in October 2015 in which Turner agreed to manage the TWA project. The parties agreed Turner would be paid on a cost-plus-a-fee basis rather than guaranteed maximum price, meaning that Turner did not warrant orguarantee its work product, estimates or schedules according to the CMA.
Turner alleges that the cost of the work increased due to “piecemeal design issuance” which led to constructability issues, delays and additional design changes. Turner also alleges that its work was impacted because many of the drawings issued by the owner’s design team were incomplete and lacked construction details.
In the lawsuit, Turner claims that in July 2018 it notified the owner that the opening date would be August 28, 2019 instead of the originally scheduled date of April 4, 2019 due to several design-caused delays. In February 2019, Turner alleges, the owner verbally directed it to complete the work so the hotel could open in May 2019.
Turner states that it and its subcontractors worked premium time, which expanded the extent of the punch list work that had to be performed. The hotel opened May 15, 2019 and Turner alleges that the efforts resulted in significant additional costs to the company.
Turner also alleges that the owner failed to make subcontractor payments in excess of $13.4 million. The company states that it sent the owner a notice of breach for non-payment on February 3, 2020. However, Turner alleges that the owner neither responded nor cured its breaches of contract.
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