16 Oct Building During a Pandemic
The construction estimator’s role is to quantify the project work and assess the cost. Often this task includes a projection of the future anticipated cost. To accurately project future costs, I have relied on leading indicators that help guide the estimate projections plus future construction lending and activity. Clients have been inquiring and seeking insight as to what we see as an outlook for 2021. After reviewing the data, the future of construction remains cloudy, however, some key directions are very clear.
Since March 2020, normal construction activities have been in transition. The commercial construction market has been completing their projects with very little work entering the pipeline. The residential construction market has continued to be robust and, in most markets, the pipeline remains full and proceeding non-stop. Interestingly, we find most residential and commercial contractors are not competitive in each other’s market resulting in the segmentation of that marketplace.
Architectural contract survey data indicates that 84% of design firms anticipate their workloads will be reduced by 33% in the next three months. Translation – lack of new work to fill the commercial design pipeline.
The hospitality market is also exhibiting segmentation. Hotel and air travel bookings continue to suffer while the “vacation home” rentals remain very strong and well ahead of last year’s business. The real estate business is experiencing a similar market split. Commercial real estate firms are struggling while residential practices are racing to keep up with demand.
Another interesting statistic – the American consumer has traditionally been a negative saver – translation ever-increasing credit card debt. Over the last 7 months, this same consumer has become a net saver, paying off debt and adding to their savings and investment accounts despite the overall reduction of workers in the workforce.
Future development is often in response to the availability of debt. Banks remain cautious for commercial construction related to the business and travel-related sectors. Banks remain very comfortable with the residential markets. For example, one bank that used to be very active in the hospitality market says their current direction is not to consider hotel loans for 1-2 years.
Our research indicates commercial contractors are completing their pipeline of work. History tells us when this situation exists, future projects tend to become more competitive resulting in a reduction in pricing. The commercial general contractors and subcontractors are seeking new project opportunities. Material pricing for key materials that are more specific to commercial construction should be dropping in price in the first and second quarter of 2021. However, some materials transcend both segments – for example, lumber, which has increased in cost by 110% since mid-April.
The residential market will continue to be robust and Americans continue to consider moving from urban areas to suburbs and beyond. The traditional criteria for selecting a home location – be near work and social activities has taken on lesser importance to having room to work from home, safety, and children’s education.
Our conversations with the lending community have given us the understanding that they continue assessing their 2021 target markets. Traditionally conservative, we believe that commercial construction will remain on the “high concern” list through at least the first quarter and into the second. Interestingly, select components that are currently doing a robust business will receive favorable consideration. We see casinos, residential, and industrial development being the leading markets for new construction.
Additionally, leading indicators that we reference, also support the prediction that commercial construction will rebound in the third or fourth quarter of 2021 with a high degree of competition. The market segments that will do the best is still not clear – stay tuned as the fog clears on which targets to pursue.