By far the greatest impact of the pandemic on construction is the massive reduction in new nonresidential construction starts in 2020 that will reduce construction spending and jobs for at least the next two years.
In the Great Recession, beginning in Q4 2008, nonresidential buildings new construction starts fell 5%, then fell 31% in 2009 and 4% in 2010. Spending began to drop by Dec 2008, then dropped steadily for the next 24 months. Spending dropped 40% over that next two years. During that period, residential starts and spending fell 70%.
In 2020, nonresidential buildings starts fell 24%, but the six months from Apr-Sep, starts fell 33%. Starts are forecast to fall 4% in 2021. Nonres Bldgs spending began to decline in Aug, is now down 10% from Feb high and is forecast to drop steadily the next 20 months, for a total decline of 25%. This time around residential starts and spending are increasing.
The measure of decline due to Pandemic delays and shutdowns is not the difference between Q3 vs Q1 growth or spending. Nor is the impact measured by the current difference in ytd performance vs 2019. The measure of decline due to Pandemic delays and shutdowns is the difference between what was forecast for growth pre-pandemic vs actual growth.
New construction starts projected for 2020:
- Total 2020 Construction Starts now forecast down -11%, pre-pandemic forecast was up 2%
- Nonresidential buildings now down -22%, pre-pandemic forecast was up 1%
- Non-building infrastructure now down -15%, pre-pandemic was up 2%
- Residential new starts now up 1%, pre-pandemic was up 2.5%.
New starts for 2021 were originally forecast up 1.5% to 2% in all sectors. The current 2021 forecast shows residential up 4.5%, nonresidential buildings up 4.6% and non-building infrastructure up 11%. Residential is already at a new high, but nonresidential buildings and non-building infrastructure will still be lower than 2018.
Future impact from delays/cancellations and reduced starts
Total construction starts year-to-date for 10 months through October are now down only -11% from 2019 ytd. Total starts had been down -14% to -15% ytd for the previous four months. Nonresidential buildings starts are down -24% ytd and non-building infrastructure starts are down -14% ytd. Residential starts are now up ytd +2% from 2019.
The most recent four months total residential starts, Jul-Aug-Sep-Oct’20, posted the highest 4mo total since 2005. The next highest 4mo total since 2005 was for the period Nov-Dec’19-Jan-Feb’20. So, the two best 4mo periods of new residential construction starts in the last 15 years have occurred in 2020. In August, residential starts posted an all-time high. Much of the spending from these starts carries into 2021 and supports residential spending growth in 2021.
The following table shows, for each market, the current forecast for new construction starts. With exception of residential, spending in all other markets, due to longer schedules, is most affected by a decline in new starts, not in the year of the start, but in years following. Some effects of reduced starts have not even begun to show up in the data. A 20% decline in new nonresidential starts in 2020 results in a huge decline in spending and jobs in 2021-2022. Residential spending hit bottom in May 2020 and ultimately will post an increase in 2020. Nonresidential Buildings spending will not hit bottom until 2022.
Dodge updated their Outlook to show 2020 construction starts for nonresidential buildings fall on average 20%, less in some markets, but -30% to -40% in a few markets. Only warehouses is up. Non-building starts fall on average 15%. Only Highway/Bridges is up. Residential starts may post an unexpected gain in 2020 and are forecast to climb 4.5% in 2021.
Starts lead to spending, but that spending is spread out over time. An average spending curve for nonresidential buildings is 20:50:30 over three years. Only about 20% of new starts gets spent in the year they started. 50% gets spent in the next year. The effect of new starts does not show up immediately. If new nonresidential buildings starts in 2020 are down 22%, the affect that has on 2020 is reduced spending by -22% x 20% = – 4.4%. The affect it has on 2021 is -22% x 50% = -11%. In 2022-2023 the affect is -22% x 30% = -6.6%.
Many nonresidential buildings have durations that last 24 to 36 months, with peak spending 12 to 18 months from now. With the 22% drop in new starts this year, that peak spending 12 to 18 months from now will be impacted negatively. Some nonbuilding markets have project durations that go out 5 or 6 years, so the impact of a decline in 2020 starts may be felt at least until 2025.
Starting backlog is the estimate to complete (in this analysis taken at Jan 1) for all projects currently under contract. The last time starting backlog decreased was 2011.
Backlog leading into 2020 was at all-time high, up 30% in the last 4 years. Prior to the pandemic, 2020 starting backlog was forecast UP +5.5%. Due to cancelations, that has been retroactively reduced to +2.7%.
Starting backlog pre-pandemic forecast for 2021 was UP +0.3%. Due to fewer new starts in 2020, that has now been reduced to -10.6%. By far, the greatest impact is due to nonresidential buildings for which backlog declined by 17%.
If construction starts in 2020 do not outperform 2020 construction spending, then 2021 starting backlog will be lower than 2020. My current forecast (2020 starts down -10.7%) indicates 2021 starting backlog will be down by -10%. Spending declines into 2021 and remains depressed through 2023.
80% of all nonresidential spending in any given year is from backlog and could be supported by jobs that started last year or 3 to 4 years ago. Residential spending is far more dependent on new starts than backlog. Only about 30% of residential spending comes from backlog and 70% from new starts.
Some of the projects delayed or canceled started before Jan. 2020. When one of those projects is delayed, the portion of the project delayed gets shifted and remains in future backlog longer. When one of those projects is canceled, the portion of the project not yet put-in-place gets removed from 2020 and future backlog. Not only does that reduce future backlog but also that retroactively reduces the backlog that was on record at the start of 2020. Therefore, 2020 backlog is reduced by cancelations and future backlog is increased by delays, but reduced by cancellations and a loss of new construction starts.
Future impact on Backlog from delays/cancellations and reduced starts
Projects in starting backlog could have started last month or last year or several years ago. Many projects in backlog extend out several years in the schedule to support future spending. Current backlog at the start of 2020 would still contribute some spending for the next 6 years until all the projects in backlog are completed.
Total starting backlog will fall -11% for 2021 and -4% for 2022. Due to new starts declining by 22% in 2020, Nonresidential buildings backlog drops -17% for 2021 and drops -7% for 2022. For non-building infrastructure, a drop of 15% in 2020 starts results in a drop of 8.7% in 2021 starting backlog.
The biggest changes to 2021 starting backlog are Lodging (-42%), Amusement/Recreation (-40%). Manufacturing (-26%) and Power (-20%). 2021 backlog declines in every nonresidential market, except Highway.
Reductions in starts and starting backlog lead to lower spending. Residential construction is going counter to the trend and will post positive results for new starts, backlog and spending for the next two years. Nonresidential buildings will experience the greatest reductions in new starts, backlog and spending through 2022.
The next table shows spending year-to-date (ytd) through October (released 12-1-20) along with spending forecast for the year. 2nd quarter construction spending activity low-point was down only 5.5% from the Feb peak. Construction spending through October ytd is up 4.3% with Residential ytd up almost 10%.
Almost every market has a weaker spending outlook in 2021 than in 2020, because of lower starts in 2020. Although starts are forecast down -15% to -20% in 2020 and then up +5% to +15% in 2021, the drop in starts in 2020 has the greatest impact on reducing spending in 2021. Most of the reduced spending impact from the lost starts is felt in the future, when those lost projects would have been reaching peak activity at the midpoint of construction. Nonresidential buildings starts in 2020, now down 28% the last seven months. Lowpoint of spending from lost 2020 starts is late 2021- early 2022.
Residential spending looks stable heading into 2021, Nonresidential Buildings spending drops -2% to -3% each quarter in 2021. By Q4 2021, nonresidential buildings spending is down 15% from Feb 2020. When looking at Total Construction Spending for 2021, residential growth obscures the huge declines in nonresidential.
YTD spending for Nonresidential Buildings is currently -1.2% and my 2020 forecast shows Nonres Bldgs ending the year down -2.1%. Some forecasters are predicting spending for nonresidential buildings will end the year down much worse compared to 2019. It would now be difficult to move the end-of-year forecast %change by much, with already 10 months recorded at an average of -1.2%. Also, some forecasts for 2021 predict spending for nonresidential buildings will increase. Remember, most of the reduced spending impact from the lost starts is felt when those lost projects would have been reaching peak spending.
Nonresidential Buildings construction will take several years to return to pre-pandemic levels. Although nonresidential buildings spending is forecast down only -2%, the gapping hole left by the 15%-25% drop in 2020 construction starts will mostly be noticed in 2021 spending. Project starts that were canceled, dropping out of new backlog between April and September 2020, would have had midpoints, or peak spending, April to September 2021. Nonbuilding project midpoints could be even later. The impact of reduced new starts in 2020 is reduced spending and jobs in 2021 and 2022.
Construction Jobs are projected to fall in 2021. While 2021 Residential spending will climb about 10%, Nonresidential building spending is forecast to drop -10% and Non-building spending drops -4%.
A recent AGC survey of construction firms asked, how long do you think it will be before you recover back to pre-COVID-19? The survey offered “longer than 6 months” as an answer choice. Less than 6 months was the right answer for residential, but my current forecast for full recovery of nonresidential buildings work is longer than 6 years.