2021 Construction Outlook Predicts an Uneven Recovery

Dodge Economist Provides Overview of Construction Segment Starts and Recovery

By Jordan Scott

During the 81st Annual Dodge Construction Outlook Conference in December 2019, economists said they didn’t expect a recession to occur within the next 12 months. Then the COVID-19 pandemic changed the global economic landscape. So what’s in store for 2021? At the Dodge Construction Outlook 2021 Virtual Conference, Dodge Data & Analytics chief economist Richard Branch provided a look at where construction segments stand in terms of recovery, which he expects to be a slow process.

Residential Outlook

The single-family market is one of three segments that Branch expects to grow in 2020, due to low mortgage rates. However, the strength of the single-family market translates into weakness in the multifamily side. He attributed that weakness to issues in the labor market.

He also explained that the segment trended toward high-end, high-rise construction and many of those projects that began in 2017 and 2018 have come online as the economy is pulling back. This could create additional financial difficulty for owners and developers next year. However, Branch expects the decline to be confined to large urban areas as people move to suburbs and rural areas, creating growth opportunities in less populated areas.

Commercial Outlook

The retail sector was hit hard by the pandemic, but Branch said it was already in a bad spot prior to the crisis due to a shift toward online sales. He expects the segment to continue to suffer from the effects of the pandemic during the second wave. He anticipates that as people move toward suburban and rural markets, however, there will be an uptick in retail activity in those areas.

What’s been bad for retail has been exceptional for the warehouse segment, said Branch, explaining that it’s now the largest nonresidential building category Dodge tracks in terms of square footage.

Like retail, starts among hotel buildings have also taken a major hit due to the pandemic. Branch expects a 7% decline in 2021, anticipating that people won’t feel comfortable traveling and businesses won’t be ready to let employees travel until a vaccine is adopted. He doesn’t think hotels will be back to their 2018 and 2019 levels for another five years. Office starts will also take a major hit in 2020, according to Branch, but he expects the segment to grow 5% in 2021. Data centers accounted for 10% of total office starts this year.

“I’m not 100% convinced work from home will be as widespread as people think,” Branch explained, adding that as people leave dense urban areas there could be an uptick in office construction in the suburbs and rural areas.

Branch said the manufacturing segment continues to struggle due to the shortage of skilled, highly technical employees.

Institutional Outlook

While Branch expects institutional starts to shrink 18% in 2020, he anticipates 1% growth in 2021 due to market stabilization. However, he said state and local governments have a deep hole to dig out of in the next year, likely having to dip into rainy day funds or cut program costs.

Branch doesn’t expect the education segment to begin recovery until kids are back in school, which he anticipates will happen consistently in September 2021. However, the segment could see help from renovation activity, as the average age of K-12 buildings in the U.S. is around 50 years old. Healthcare took a hit from cutbacks in elective procedures and the high costs of acquiring personal protective equipment earlier in the year. While starts for recreation, public buildings, dormitories and religious buildings are all expected to decline in 2021, Branch anticipates 11% growth in transportation starts, which will be buoyed by the JFK airport project.

Total Construction Starts

Overall, in 2019, total U.S. construction starts grew 4% to $853 billion. Branch expects starts to fall 14% in 2020 to $738 billion before growing 4% in 2021 to $771 billion. Planning times are 1.5 months longer than they were pre-pandemic.

Key takeaways from the construction outlook include the expectation that there will be a slow road back to full recovery, according to Branch. It will be impacted by shifting demographics, regional growth disparities and other market shifts. Ultimately, he doesn’t expect all segments to look the way they did prior to the pandemic.

Jordan Scott is an assistant editor for USGlass magazine. She can be reached at jscott@glass.com.

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