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Rebound in Construction Activity Will Lag Broader Economy

The Marcum Commercial Construction Index for the fourth quarter of 2020 reports that the industry has reasons for both optimism and pessimism as it recovers from the recession caused by COVID-19.  Total construction employment has rebounded since plummeting last March and April, but it remains 3.3% below pre-pandemic levels, and Marcus predicts that recovery in the sector will lag the broader economy.

“Nonresidential construction employment declined by about 644,000 jobs between February and May of 2020 as the pandemic’s grip took firm hold,” writes Anirban Basu, author of the report and Marcum’s chief construction economist. “As of January 2021, the nonresidential industry had recovered about 60% of those losses, which means that the segment’s employment is still 5.5% lower than it was at pandemic’s onset.”

Basu points out that the residential segment has boomed over the past several months. “The story in residential construction segments has been vastly different,” he writes. “Mass migration toward the suburbs, triggered in part by the pandemic but also by underlying demographics, has helped launch a single-family housing construction boom.”

Construction spending data indicate that nonresidential spending contracted 5.7% on a year-over-year basis in December 2020. “Among the most damaged segments were retail, hotel room, and traditional office space construction,” the report says. “Based on leading indicators, near-term dynamics will not be positive in many nonresidential segments. Among the exceptions are data centers and fulfillment centers.”

To date, construction input prices haven’t been subject to rampant inflation, but that’s subject to change due in part to elevated shipping costs. “With so many construction commodities shipped from various parts of the world, it is remarkable that there hasn’t been ever more construction input price inflation,” writes Basu. “The reconciling factor is likely the diminished demand for inputs to construction in much of the pandemic-hammered world.”

Marcum predicts a rapid economic expansion in the second half of 2021, but nonresidential construction may take longer to rebound. “In recent cycles, the recovery of nonresidential construction spending has tended to lag that of the overall economy by 12 to 18 months,” according to Basu. “If that formula remains in place, solid macroeconomic recovery this year should translate into more exuberant expansion in nonresidential activity in 2022 and/or 2023.”

Marcum’s national construction leader, Joseph Natarelli, said, “Non-residential construction is slow at present. However, in this latest index, we highlight possible pathways up and out. If you’re in the infrastructure subsector, the outlook is especially positive, with most infrastructure subsectors trending up. Will there be a new New Deal from the White House? We don’t know that for certain yet, but if contractors can look into ways that their current operations can innovate in that direction, it is likely to pay dividends in years to come.”

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About Paul Bubny

Paul Bubny serves as Senior Content Director for Connect Commercial Real Estate, a role to which he brings 13-plus years’ experience covering the commercial real estate industry and 30-plus years in business-to-business journalism. In this capacity, he oversees daily operations while also reporting on both local/regional markets and national trends, covering individual transactions across all property types, as well as delving into broader subject matter. He produces 15-20 daily news stories per day and works with the Connect team and clients to develop longer-form content, ranging from Q&As to thought-leadership pieces. Prior to joining Connect, Paul was Managing Editor for both Real Estate Forum and GlobeSt.com at American Lawyer Media, where he oversaw operations at both publications while also producing daily news and feature-length articles. His tenure in B2B publishing stretches back into the print era, and he has served as Editor in Chief on four national trade publications. Since 1999, Paul has volunteered as the newsletter editor of passenger rail advocacy groups (one national, one local).

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