The Spring 2021 edition of ConstructConnect’s Construction Starts Forecast Report

Article source: ConstructConnect

Total US construction starts fell 22.3% year-on-year (y/y) in Q4 2020, taking the 2020 full-year decline to 18.3%. Non-residential building experienced the steepest decline, in both y/y terms in Q4 and for 2020 as a whole. The pandemic has weighed heavily on sectors such as hospitality, entertainment, retail and office working, with limited investment in new facilities in related sectors. Engineering construction contracted 30.3% y/y and 19.1% in 2020 overall, with the biggest drops seen in sectors related to new energy projects. Residential construction fell 1% y/y and averaged a 2.1% decline in 2020, with a marked recovery in the singlefamily segment seen towards the end of the year.

• With little economic momentum going into the year and a third wave of Covid infections limiting activity, GDP growth is expected to slow in the first quarter of 2021. However, a mix of fiscal stimulus and a gradual rollout of the vaccination program should lead to a mini economic boom this summer. Overall, we expect GDP to rise 4.2% in 2021 after a 3.5% contraction in 2020.
• US construction activity is forecast to post a “modest” rebound (relative to last year’s decline) in 2021 of 8.8%. However, the pandemic will leave severe scarring on the sector, with new construction not expected to reach its 2019 level until 2023. Civil engineering starts are expected to lead the pack, with only modest growth in non-residential building. Residential construction is expected to post the slowest growth, but against a background of a shallow decline last year, it is expected to rise above its 2019 level in 2021.
• Total construction starts in Canada in Q4 2020 declined 43.4% y/y and 22.3% in 2020 as a whole. All three headline sectors posted double-digit declines in 2020, with only activity in new residential construction showing a strong improvement by the end of the year.
• Canadian construction starts are expected to climb 11.5% this year, not rising above their pre-pandemic high (in 2018) until 2024. Like in the US, non-residential building will be the slowest to return to pre-pandemic levels, which is not expected over our forecast period to 2025. The scarring in the residential and civil engineering sectors will be less severe, with the former reaching its pre-pandemic high by 2024 and the latter by 2022.

Overview

US starts fall to lowest level in five years Total US construction starts continued to drop sharply in Q4 2020, shrinking 22.3% from a year earlier and taking the full year decline to 18.3% in 2020. Non-residential building experienced the largest decline, down 38.7% year-on-year (y/y) and 31.9% in 2020 as a whole. Engineering construction contracted 30.3% y/y in Q4 and 19.1% in 2020. New residential construction experienced the smallest decrease, shrinking 1% y/y and 2.1% for full year 2020. The impact of the coronavirus pandemic weighed heavily on construction throughout the year. Stay-at-home orders included closures of construction sites in some locations during the first wave of the pandemic, most notably in Pennsylvania and Massachusetts, but projects have been allowed to operate since then. The impact on the demand side of the economy may have played a bigger role, with economic uncertainty leading to cuts to capital expenditures and tight state and local budgets weighing on engineering construction. This has had an especially large impact on mega projects valued at over $1 billion. 2019 was an exceptional year for such projects, with construction starting on 35 mega projects worth a total of $79.1 billion. By contrast, there were only a dozen mega projects in 2020, totalling $21 billion. The collapse in mega projects certainly played a role in 2020’s weakness, but soft underlying construction activity took the whole-year value of construction starts in 2020 to its lowest level since 2015.

Throughout 2020, non-residential building starts have seen large declines in almost all segments. The only categories to grow during the year were warehouses, courthouses, police & fire, prisons, and military. Warehouse building, in particular, was boosted by investment in logistics capabilities as customers moved en masse towards online shopping. Military construction was propped up by a $1.75 billion project earlier in the year. By contrast, there were steep declines in industrial building and in several commercial sectors. New factory building contracted 68% from its level in 2019 — partly due to several large projects dropping out of the annual calculation — but like with the wider construction sector, new factory building was at its lowest level since 2015. The steepest declines in the commercial sector were in hotels & motels, sports & convention centers, and transportation terminals, all linked to the travel and entertainment sectors that have been hit so badly by the pandemic. Private office building also declined sharply, down 36.9%, unsurprising given moves towards working from home. However, construction of data centers provided some offset: for example, groundbreaking on two $800 million Facebook data centers began in the fourth quarter.

New engineering construction declined in all sub-sectors, but the biggest drop was in power and miscellaneous civil projects. Both of these sectors contain projects related to energy, a sector hit by weak demand and falling (even negative) oil prices during the year. Both sectors also saw mega projects in 2019 fall out of the annual calculation. Road construction, the largest engineering sector, was more stable, falling 2.8%, and construction on two large highway projects (in Texas and in Florida) was started in the final quarter of the year. Water & sewage treatment plants and dams, canals, & marine projects also proved more stable in 2020, posting only single-digit declines.

Residential construction was the most robust in 2020, driven by a 10.6% increase in single-family homebuilding. Although single-family construction fell sharply early on during the initial part of the pandemic, by Q4, it was 28.5% higher than a year earlier. Demand for additional space has grown as more workers work from home, driving growth in single-family homebuilding. By contrast, new multi-family construction fell 27.6% in 2020 and construction was down 50% year-on-year in Q4 as the pandemic has weakened demand for urban living. Other construction indicators have been slightly better than the starts data. Put-inplace construction from the Census Bureau, for example, was 3.8% higher than a year earlier in November. However, this is a measure of continued construction activity, including the mega projects started in 2019, so it could be some time before the recent weakness in starts is fully realized in the put-in-place data. Like with starts, residential put-in-place construction has been much stronger that non-residential construction, with the former up 16.2% y/y but the latter down 4.7% y/y. Construction employment added 51,000 jobs in December at a time when the overall economy shed 140,000 jobs. Total construction employment in December was 3% below its peak in February, compared to 6.5% for overall employment.

Table 1: Summary forecasts (Annual percentage changes unless specified otherwise)

Economic activity picking up after slow start to 2021

At the outset of 2021, the US economic outlook is one of contrasts — there is little economic momentum going into the new year amid a third wave of Covid infections that is limiting mobility, curbing employment, and constraining demand. Yet while worsening health conditions will weigh on growth in the near-term, a mix of fiscal stimulus and a gradual rollout of the vaccination program should lead to a mini boom this summer. After a 3.5% contraction in 2020, we expect GDP to grow 4.2% in 2021, with considerable upside risk depending on the size of the various stimulus proposals that are ultimately passed.

The pace of the economic recovery slowed markedly towards the end of 2020, with GDP rising at a 4% annualized rate in the final quarter of the year. What’s more, the labor market ended the year on a sour note with the economy shedding 140,000 jobs, the first employment decline since the beginning of the post-pandemic recovery. The weakness was almost entirely due to a drop in leisure and hospitality employment, hit by surging infection rates and cold weather. These headwinds are likely to persist into the first quarter of 2021, and as a result, we expect Q1 growth to slow to about 1.5% annualized.

Congress passed a long-awaited $900 billion fiscal stimulus package in December, which should support growth during the initial vaccine distribution phase. The Democrats’ wins in the Georgia run-off Senate election means that additional fiscal stimulus is likely to be passed, but we expect this will fall short of the $1.9 trillion package currently on the table. We foresee a $1.2 trillion stimulus package being passed in Q1, providing additional support to households, state governments, and public health measures. But further stimulus related to the yet-to-be detailed “Build Back Better” program is likely to provide additional support.

Fed Chair Powell reaffirmed the Fed’s extremely dovish forward guidance in the January FOMC statement. The Fed would rather err on the side of removing accommodative policy too slowly than removing it too rapidly, due to heightened uncertainty surrounding the pandemic and the shape of the recovery thereafter. We expect that a gradual tapering of QE asset purchases will begin in 2022 with the Fed commencing a gradual rise in the policy rate a year later.

New construction activity to recover in 2021

After the sharp decline in construction activity of 2020, we expect a “modest” (in relative terms) rebound of construction starts of 8.8% in 2021. Civil engineering starts are forecast to lead the construction sector with growth of 13%. Non-residential building starts, which fell most precipitously last year, are forecast to grow by 8.6%. The residential sector is forecast to have the slowest growth at 6.7%, but this should be seen in the context of a particularly shallow decline in 2020. Non-residential building starts are forecast to grow by 8.6% this year, a tepid rebound given the depth of the decline in 2020. The retail sector has been particularly affected as lockdowns have resulted in consumers shifting to online shopping as opposed to bricks & mortar retail. The slow path to recovery means that any serious upturn in retail construction is unlikely to take place this year, with the result that many stores will go out of business permanently. We forecast an expansion of just 4.2% this year, with construction not returning to its pre-pandemic level until 2023.

Office buildings is another sector that has witnessed a sharp drop in starts. However, with office construction, there is likely to be considerable scarring over the mediumterm as a consequence of the pandemic. The move towards working from home, widely adopted during the pandemic, will to an extent remain a permanent feature of many people’s working lives. This will lessen the demand for office space as firms are able to operate with less physical office space. Indeed, we expect office starts to decline again in 2021 adding to the sharp drop witnessed in 2020, and new construction is not expected to reach its pre-pandemic level over our forecast period (to 2025).

Looking at manufacturing starts, the outlook is more positive. After significant declines in new building work in 2020, manufacturing is set to see robust growth over the next 3 years, although after an especially strong 2019, it will not regain its pre-pandemic level. The re-shoring of US factories continues, supported by favorable government policy, a large domestic energy sector, deep supply chains, and a strong domestic market, all of which will ensure stable demand for manufacturing construction. Residential starts finished 2020 in a relatively strong position. After posting growth in 2020, single-family starts are expected to remain strong, growing by 8.2% this year. The fundamentals supporting single-family construction remain positive. Home-buying among millennials is increasingly focusing on the single-family sector, but affordability remains an issue for many first-time buyers.

This is creating demand for new homebuilding that better suits the budgets of these new buyers. The pandemic has had the impact of further strengthening the trend in single-family housing as a rise in working from home lowers the need to live closer to built-up areas where offices are usually located. In contrast, these trends do not bode so well for the multi-family segment, which typically accounts for more urban residential construction. Construction in that segment is forecast at only a 2.4% rebound this year, despite falling by 27.6% in 2020.

Civil engineering starts are forecast to rebound by 13% this year after nearly a 20% drop in 2020. Bridge construction is forecast to grow by 6.7%, while new road construction is to see growth of 10.3%. Both of these sectors are areas in need of significant investment after years of underfunding.

Growth is also set to come from the All Other Civil category, which includes the oil and gas sector, tunnels, and railway projects, among other things. However, this can largely be seen as a rebound after the sector witnessed free-fall declines in new projects last year amid plummeting energy prices, reduced transportation, and an economy in lockdown. The long-run outlook for the oil and gas sector is less certain as climate change policies become increasingly restrictive on new investments in fossil-based energy — already, the Biden administration has cancelled the planned construction of the Keystone XL pipeline which had already started north of the border.

The Biden administration is set to outline its infrastructure plan in early February with a target $2 trillion package being talked about. Initial reports suggest that the plan will focus on new green construction initiatives such as building 50,000 new EV charging stations, investment in solar and wind power and improving the energy efficiency of new and existing buildings. Nonetheless, significant hurdles remain in place in terms of forming a sufficient political consensus to ensure passage of any new infrastructure bill through Congress.

Growth in Canadian construction to resume after steep 2020 drop

Total construction starts in Canada declined 43.4% y/y in 2020 Q4, taking the full-year decline in 2020 to 22.3%. Almost all construction sub-sectors posted a decline in 2020, and unlike in the US, the magnitude of y/y decline worsened at the end of the year. Although there were restrictions on construction activity in Q2 2020 in Quebec and Ontario, large projects early in the year limited the extent of the annual decline in that quarter.

From a sectoral perspective, residential building construction experienced the sharpest drop in 2020, down 28%. The single-family segment was heavily affected by construction disruptions earlier in the year, but by the end of 2020, at least, had rebounded strongly, up 28% y/y in Q4. By contrast, the multi-family segment in Q4 was 67.3% below its level a year earlier as demand has shifted away from city living. New non-residential building fell 23.1% in 2020, with annual declines in all categoriesexcept transportation terminals and warehouses. The former was driven by a large project in Ottawa in Q2, while the latter has benefited from investments in logistics facilities to accommodate moves to online shopping.

Civil engineering construction fell 17% in 2020, with declines in all sub-sectors except for bridge construction, boosted by a project in Surrey, British Columbia in Q1. Like in the US, road construction was somewhat more stable, declining by just 1.9% on the year, in sharp contrast to all other sectors, which posted double-digit contractions.

The economic recovery in Canada has slowed as the course of the coronavirus pandemic has worsened. Increased restrictions and a slower-than-expected vaccine rollout will result in a 0.7% contraction of GDP in 2021 Q1. With hospitalizations and deaths at record highs, restrictions are set to remain in place for the time being. Ontario is again under a state of emergency with stay-at-home orders in place until at least February 11th while Quebec has issued a nightly curfew until at least February 8th. Employment fell by 62,600 jobs in December, the first decline since April of last year, leaving employment 636,000 jobs (3.3%) below its pre-pandemic level. We expect further job losses in early-2021. Price pressures are being kept in check by the depressed economic situation. We expect inflation will temporarily rise above 2% in mid-2021. However, our expectation remains that the Bank of Canada will keep the policy rate at the effective lower bound of 0.25% until early-2024.

Construction starts in Canada are forecast to grow by 11.5% in this year, rising to 16.4% in 2022. Civil engineering is set to see the strongest growth, rebounding by 16.1% as the oil and gas sector drives new activity. Non-residential construction is forecast to grow by 11% this year before rising to 23.6% in 2022. Residential growth is forecast to grow most slowly, expanding by only 5.5% this year and 11.8% in 2022. Fortunately for the construction sector, it is seen as an essential service and therefore is largely exempt from many of the lockdowns that were imposed earlier in the pandemic.

The non-residential sector faces similar issues to those in the US, namely ongoing business uncertainty and a lack of investment into new projects. This is particularly present within new office construction where lack of clarity about the eventual return to work will see office starts fall for a second year running. The hotels and motels sector will see growth of 12% this year, but this is in the context of a 50% decline in 2020. Demand for new hotel construction remains limited as the travel and tourism sector will continue on its downbeat path for at least the early part of 2021. Other areas of nonresidential are more positive. The warehouse sector witnessed growth of 19.6% last year and is forecast to grow by 14.9% in 2021. The sector has been buoyed by the increasing demands by the logistics sector as people increasingly switch to online shopping and delivery. Canadian manufacturing is also set to see strong growth this year with starts nearly doubling on their 2020 level. Much of this is due to new LNG projects, which are counted under manufacturing.

The civil engineering sector, the largest part of Canadian construction, is forecast to rebound by 16.1% in 2021. Much of this rebound is due to work within the oil & gas space. We also forecast significant work within Canadian power infrastructure over the next two years. Both new road & bridge construction will also see new investment. A 2019 report into the state of Canadian infrastructure revealed significant shortcomings in Canadian road and bridge networks.

The residential sector is forecast to grow by 5.5% this year. Growth is being primarily driven by the single-family sector, caused by many of the same reasons as in the US. Single-family construction bucked the general trend in 2020 and continued growing despite lockdown restrictions. Robust population growth, averaging roughly 1% per year, will see demand for new housing continue past 2025. The millennial age grouping is amongst the most active new homebuyers with many young adults gravitating toward the single-family segment.

EXPLANATION: Table 3 conforms to the type-of-structure ordering adopted by many firms and organizations in the industry. Specifically, it breaks non-residential building into ICI work (i.e., industrial, commercial and institutional), since each has its own set of economic and demographic drivers.

Table 4 presents an alternative, perhaps more user-friendly and intuitive, type-of-structure ordering that matches how the data appears in ConstructConnect’s on-line product ‘Insight’.

Source of actuals: ConstructConnect “Insight” / Forecasts: Oxford Economics and ConstructConnect / Table: ConstructConnect

Category: ConstructConnect

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