1-30-21 How can we tell if the adjusted starts forecasting method produces reliable results?
This plot of predicted spending from the starts cash flow model compared to actual spending is a check on this analytical modeling method. It shows a comparison of the cash flows predicted from all construction starts vs actual spending. If the forecast plot is accurate, then actual spending should move in the same direction, at the same slope. While we sometimes see lag in the plots movement, over time, the cash flow model of new starts does a good job of predicting where spending is headed.
In this first plot, prepared back in Nov, based on October data, note the divergence of residential in Jun-Jul-Aug 2020. Actual residential spending finished much higher than predicted. In 3 months, the actual spending pushed 15% higher than starts predicted. Tracking actual spending vs predicted, several of these months varied by more than 4 standard deviations, an unusual occurrence that has occurred less than 2% of the time in past 240 months. All of the other instances occurred during the Great Recession. This variance was suspected to indicate initially adjusting starts data to forecast too great an amount delayed or canceled or too slow a return of delayed projects to full workload.
The nonresidential buildings plots (and the residential plot prior to 2020) are remarkably close, providing an indication the method of analysis employed, cash flow of all construction starts to get spending forecast, is reasonably accurate.
Settings in the pandemic forecast model resulted in the residential divergence. First, projects delayed were predicted to take six to eight months to come fully back up to production. But residential project spending was fully back to prior levels by August, within 3 months from the May bottom. About 60% of the return to prior spending was supported by growth in residential renovations. The rapid growth in spending is represented by the steep recovery in the spending curve between May and August. Second, a small portion of jobs delayed were predicted to be canceled permanently. Based on the spending data, this likely did not occur at all, or the impact was very small. Finally, Dodge at that time was forecasting that residential new starts in 2020 would finish the year down slightly. With December starts data now in, residential starts for 2020 finished up 4%. In fact, over the final 5 months of 2020, new residential construction starts posted 4 of the 5 highest monthly totals since 2004-2006. Residential new starts finished 2020 at a 15-year high, with almost 50% of new activity for the year posting in the final 5 months, which will put a lot of that spending into 2021.
The updated chart below incorporates these changes to residential (only residential has been modified): no delayed projects canceled; all delayed spending restarted by August; new construction starts beginning in August, for the final 5 months of 2020, fastest growth in 15 years. This shows the latest starts data as adding to the recovery forecast between May and December and moving the future forecast residential spending line up on the index.
The table below shows the 2020 forecasts published at midyear by numerous analysts, the first opportunity to incorporate impacts from the pandemic recession. This table compares Construction Analytics Midyear July 2020 forecast to eight firms that reported nonresidential forecasts in the AIA Midyear July Outlook. Two of those firms, FMI and ConstructConnect, also published full forecast reports at midyear. The Actual totals for 2020 based on data through December, are shown in the first column. There will be very little change to Actual 2020 data when revisions are issued 7-1-21. Forecasts, all compared to Actual 2020, are marked best, 2nd best, worst. Where there’s limited comparison (Total, Residential and Non-building), only the closest is marked.
Construction Analytics midyear 2020 forecast garnered more bests than any other firm when comparing Midyear estimates to actual totals for the year. No one got residential correct, some reasons cited above, but Construction Analytics was the closest . I think it’s fair to say, Construction Analytics Midyear 2020 forecast was closest to 2020 Total Actual overall. Though, I do remember some other times with red in my column.
This next table shows the current forecast for full year 2021 forecast published as of January 2021. Of the eight nonresidential markets in the AIA Outlook report, the spread between hi and low forecast is 14%-17% for 4 markets, but 24%-25% for 3 markets and a spread of 45% for lodging. Spreads that wide are indicating some forecasts are all over the place. This will get compared next January when we know the Actual amounts for 2021. Watch closely nonresidential buildings.
Also, in July, along comes the Midyear Outlook, when usually forecasts improve a bit. That also will get compared next January.
Also See Construction Inflation Report May 2021 for downloadable report
1-25-21 What impacts should we expect on Construction Inflation in 2021?
In April 2020, and again in June 2020, I recommended adding a minimum 1% to normal long-term construction inflation (nonres longterm inflation = 3.75%), to use 4% to 5% for 2020 nonresidential buildings construction inflation. Some analysts were suggesting we would experience deflation. Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, 2009 and 2010. That was at a time when business volume was down 33% and jobs were down 30%. In 2020, volume dropped 8% from Feb to May and we’ve gained half that back by Dec. Jobs dropped 14%, 1,000,000+ jobs, in two months! Now volume is still down 4% and jobs are down 2% from Feb peak. We’ve gained back 850,000 jobs. But also, we’ve gained back more jobs then volume. That’s inflation.
Volume drops another 5% in 2021, all nonresidential, and then another 3% in 2022. Jobs could drop overall 8%-10% for all of 2021-2022, 500,000 to 700,000 jobs.
Even though material input costs are up for 2020, nonresidential inflation in 2020 remained low, probably influenced by a reduction in margins due to the decline in new construction starts (-24%), which is a decline in new work to bid on.
Volume = spending minus inflation.
Residential business volume dropped 12% from the January 2020 peak to the May bottom, but has since recovered 22% and now stands at a post Great Recession high, 10% above one year ago. Although residential spending remains near this high level for the next year, volume after inflation begins to drop by midyear. For the year 2020, Residential Building Materials Inputs are up 6.2%. See PPI charts. Sharply higher lumber prices have added more than $17,000 to the price of an average new single-family home since mid-April ($24,000 as of 3-30-21). Residential inflation averaged 5.1% for 2020. (UPDATE 3-30-21 – Single Family home prices increased 11% since March 2020. Lumber cost is now 3x what it was in March 2020. These will both impact cost to build SFH).
The U.S. Census Single-Family house Construction Index is up 6% from Nov 2019 to Nov 2020. The index increased 4% in the last 5 months. The index is increasing, now thru February 2021 is up 6.7% for the last 12 months. https://www.census.gov/construction/nrs/pdf/price_uc.pdf
Nonresidential volume has been slowly declining and is now down 10% from one year ago. By 3rd quarter 2021, nonresidential buildings volume is forecast down another 15% lower than December 2020, or 25% below the Feb 2020 peak. This tracks right in line with the 24% decline in new construction starts in 2020. Most of the spending from those lost starts would have taken place in 2021, now showing up as a major decline in spending and work volume. Nonresidential inflation for 2020 dropped to 2.5%, the first time in 7 years below 4%. It’s expected to increase in 2021.
The Producer Price Index tables published by AGC for year-end 2020 https://www.agc.org/sites/default/files/PPI%20Tables%20202012.pdf shows input costs to nonresidential buildings up about 3.5% to 4.5% for 2020, but final costs of contractors and buildings up only 1% to 2%. This could be an indication that, although input costs are up, final costs are depressed due to lower margins, a result of fewer projects to bid on creating a tighter new work available environment which generally leads to a more competitive bidding environment. This could reverse in 2021 as the volume of work to bid on in most markets begins to increase.
As of March 2021, PPI for materials inputs to construction is up 12% to 14% yoy, measured to last March before the bottom dropped out. The PPI Buildings Cost Index for final cost to owner is up only 2%. Construction inflation is very different right now for subcontractors vs general contractor/CM. https://www.agc.org/learn/construction-data
The Turner Construction Cost Index (nonresidential buildings) for Q1-Q2-Q3 is +1%, -1%, -0.5%, effectively reporting the index down -0.5% year-to-date. But the Turner index year-to-date average (avg Q1+Q2+Q3=1179) is still 2.6% higher than the average of Q1+Q2+Q3 2019 and 2% higher than the avg for all of 2019 (1156). So, while the index appears to show no gains in 2020, through the first nine months of 2020 it is up 2.6% above the average of the same months in the 2019 index. http://turnerconstruction.com/cost-index
The Rider Levitt Bucknall nonresidential buildings index average index for 2020 (through October 1, 2020), although up less than 1% in the last 6 months, is up 3.5% from the average 2019 index. https://s28259.pcdn.co/wp-content/uploads/2020/07/Q2-2020-QCR.pdf
R.S.Means quarterly cost index of some materials for the 4th quarter 2020 compared to Q1: Ready-Mix Concrete -1.8%, Brick +10%, Steel Items -1% to -5%, Framing Lumber +32%, Plywood +8%, Roof Membrane +5%, Insulating Glass +12%, Drywall +3%, Metal Studs +23%, Plumbing Pipe and Fixtures +1%, Sheet Metal +20%. https://www.rsmeans.com/landing-pages/2020-rsmeans-cost-index
U.S. manufacturing output posts largest drop since 1946. Think of all the manufactured products that go into construction of a new building: Cement, steel, doors, frames, windows, roofing, siding, wallboard, lighting, heating systems, wire, plumbing fixtures, pipe, valves, cabinets, appliances, etc. We have yet to see if any of these will be in short supply leading to delays in completing new or restarted work.
There have been reports that scrap steel shortages may result in a steel cost increase. Scrap steel prices are up 27% in the last quarter and up 40% for the year 2020. Scrap is the #1 ingredient for new structural steel. The U.S. steel industry experienced the most severe downturn since 2008, as steelmakers cut back production to match a sharp collapse in demand and shed workers. Capacity Utilization dropped from 82% in January 2020 to 56% in April. In mid-August, CapU was up to 61%, still very low. As of January 23, 2021 CapU is up to 76%, well above April’s 56% but still below desired levels. Steel manufacturing output is still down compared to pre-covid levels. Until production ramps back up to previous levels there may be shortages or longer lead times for delivery of steel products.
Steel Prices at mill in the U.S. are up 60% to 100% in the last 6 months. All prices are 50% to 75% higher than Feb 2020. http://steelbenchmarker.com/files/history.pdf . This is mill price of steel which is about 25% of the price of steel installed. What affect might a steel cost increase have on a building project? It will affect the cost of structural shapes, steel joists, reinforcing steel, metal deck, stairs and rails, metal panels, metal ceilings, wall studs, door frames, canopies, steel duct, steel pipe and conduit, pumps, cabinets and furniture, and I’m sure more. Assuming a typical structural steel building with some metal panel exterior, steel pan stairs, metal deck floors, steel doors and frames and steel studs in walls, then all steel material installed represents about 14% to 16% of total building cost. Structural Steel only, installed, is about 9% to 10% of total building cost, but applies to only 60% market share being steel buildings. The other 6% of total steel cost applies to all buildings. https://www.thefabricator.com/thefabricator/blog/metalsmaterials/steel-prices-reach-levels-not-seen-since-2008 At these prices, if fully passed down to the owner, this adds about 1.5%-2% to building cost inflation. With demand in decline for nonresidential buildings, I would expect to see all these steel price increases recede. Also, take note, as of January 2021, none of this steel price movement appears captured in the PPI data or RSMeans data.
Contractors have been saying they have difficulty acquiring the skilled labor they need. This has led to increased labor cost to secure needed skills. I expect the decline in nonresidential work volume in 2021 to result in as much as a decline of 250,000 nonresidential jobs in 2021. This results in labor available to fill other positions.
This SMACNA report quantifies that labor productivity has decreased 18% to meet COVID-19 protocols. https://www.constructiondive.com/news/study-finds-covid-19-protocols-led-to-a-7-loss-on-construction-projects/583143/ Labor is about 35% of project cost. Therefore, just this productivity loss would equate to -18% x 35% = 6.3% inflation. Even if, for all trades, the average lost time due to COVID-19 protocols is only half that, the added inflationary cost to projects is 3% above normal. But that may not remain constant over the entire duration of the project, so the net effect on project cost would be less.
Post Great Recession, 2011-2020, average nonresidential buildings inflation is 3.7%. In 2020 it dropped to 2.5%, but for the six years 2014-2019 it averaged 4.4%. Residential cost inflation for 2020 reached 5.1%. It has averaged over 5% for the last 8 years. The 30-year average inflation rate for nonresidential buildings is 3.75% and for residential it’s over 4%.
This survey of members by AGC https://www.agc.org/sites/default/files/2021_Outlook_National_1221_.pdf just published provides some insight into construction firms outlook for 2021.
Almost every construction market has a weaker spending outlook in 2021 than in 2020, because approximately 50% of spending in 2021 is generated from 2020 starts, and 2020 nonresidential starts are down 10% to 25%, several markets down 40%. Nonbuilding starts are down 15%, but will increase 10% in 2021.
Typically, when work volume decreases, the bidding environment gets more competitive. We can always expect some margin decline when there are fewer nonresidential projects to bid on, which typically results in sharper pencils. However, if materials shortages develop or productivity declines, that could cause inflation to increase. We can also expect cost increases due to material prices, labor cost, lost productivity, project time extensions or potential overtime to meet a fixed end-date.
Constant $ = Spending minus inflation = Volume
Many projects under construction had been halted for some period of time and many experienced at least short-term disruption. The delays may add either several weeks to perhaps a month or two to the overall schedule, in which case, not only does labor cost go up but also management cost goes up, or it could add overtime costs to meet a fixed end-date. Some of these project costs have yet to occur as most would be expected to add onto the end of the project.
Some projects that were put on hold (nonresidential buildings starts in 2020 dropped 24%) just prior to bidding in 2020 may now re-enter the bidding environment. The rate at which these projects come back on-line could impact the bidding environment. If several months worth of projects that delayed bidding last year all come onto the market at once, or at least all in a more compressed time span than they would have, the market could be flooded with work and bidding contractors now have more choice, can bid more projects than normal and could potentially raise margins in some bids. This would have an inflationary effect. Also, there can be difficulty in starting many projects at the same time, rather than more staggered starts. It burdens subcontractors and suppliers with too much of the same type of work all going on at the same time. This could exacerbate labor issues and could lead to project time extensions.
The hidden inflationary costs of bidding environment, project time extensions, potential overtime and lost productivity haven’t all yet appeared in the data. Some of these could still add to 2020 inflation. Also, the huge loss of new starts in 2020, which meant fewer projects to bid on in 2020, probably reduced margins in 2020. Nonresidential starts are projected to increase 4% in 2021, so that could lead to some recovery of margins, however, even with 4% growth in new starts, that comes after a 24% drop in 2020, so remains still 20% below 2019. Total volume of work is declining and new projects available out to bid is still depressed, so pressure on margins still exists.
update 4-15-21 Although materials cost inflation will be higher, I expect non-residential buildings inflation final cost in 2021 to range between 3.5% to 4.0%, with potential to be held lower. Subcontractor costs, such as for steel or lumber, could range much higher due to huge material cost increases. All the downward pressure on nonresidential inflation is on margins. There is currently 20% less nonres bldgs work to bid on than in Q1 2020.
updated 3-30-21 Expect 2021 residential inflation of 6% to 8% with potential to push slightly higher.
See Construction Inflation Index Tables for indices related to Nonbuilding Infrastructure work and for more links to sources.
The tables below, from 2011 to 2020 and from 2015 thru 2023, updates 2020 data and includes Q1 PPI data thru March and provides 2021-2023 forecast. The three sectors, highlighted, are plotted above.
(4-16-21 The tables and the plot above include updated residential costs and updated nonresidential inputs).
NOTE, these tables are based on 2019=100.
Nonresidential inflation, after hitting 5% in both 2018 and 2019, and after holding above 4% for the six years 2014-2019, ended 2020 at 2.4%. Current forecast is for 3.7% and hold near that level the next few years.
Forecast residential inflation for 2021 is 7% and for 2022-2023 years is level at 3.8%. It was only 3.4% for 2019 but averaged 5.5%/yr since 2013 and came back to 5.4% in 2020. Recent materials costs and record volume of work could impact residential inflation and push it higher.
How to use an index: Indexes are used to adjust costs over time for the affects of inflation. To move cost from some point in time to some other point in time, divide Index for year you want to move to by Index for year you want to move cost from. Example : What is cost inflation for a building with a midpoint in 2022, for a similar nonresidential building whose midpoint of construction was 2016? Divide Index for 2022 by index for 2016 = 110.4/87.0 = 1.27. Cost of building with midpoint in 2016 x 1.27 = cost of same building with midpoint in 2022. Costs should be moved from/to midpoint of construction. Indices posted here are at middle of year and can be interpolated between to get any other point in time.
All forward forecast values, whenever not available, are estimated by Construction Analytics.
edited 3-5-21 to include 2020 revised jobs and 2021 revised outlook.
Construction closes 2020 down 157,000 jobs comparing Dec 2020 to Dec 2019. Average jobs lost over the year is down 220,000, down 2.9%. Also, average hours worked in 2020 is down. The equivalent jobs lost over the year (jobs x hours worked) is down 3.8% or a loss of 281,000 jobs equivalent.
While construction spending in 2021 is forecast up 1.3%, after inflation construction volume is expected to decline 2.5%. Residential construction spending is forecast up 13%, volume up almost 9%, but 2021 nonresidential buildings spending is forecast down -11% leading to a decline in volume after inflation of -14%. Nonbuilding Infrastructure spending in 2021 declines -2.5%, volume drops -6%.
Nonresidential buildings volume declines of 14% project to a loss of over 400,000 jobs next year and non-building infrastructure is projected to drop 60,000 jobs, but Residential could experience growth next year of 250,000 jobs. That could net annual average jobs losses to -200,000. Job losses continue into 2022 with net volume declines of 4%.
It is notable though, even with residential spending and volume increasing, due to large losses in nonresidential buildings, total construction volume declines every month for the next 9 months. Nonresidential buildings volume declines for the next 18 consecutive months.
There is an unusual occurrence in the data for 2021. Annual average jobs in 2021 may decline in total by only 100,000, but from Dec. 2020 to Dec. 2021, jobs decline may be nearer to 400,000. The annual average change is much less due to the massive decline in jobs in April 2020, which by itself caused the 2020 average to drop by almost 100,000. Most months in 2021 will show jobs about 3% to 4% or more below the same month in 2020, except for April, which will show 2021 jobs 10% higher than 2020.
Some who read this post will question how I forecast such a drop in nonresidential work, when some other analysts predict far less declines and even some who predict nonresidential work increases in 2021. It will be very difficult for anyone to support a forecast for increased spending in 2021 given a 22% drop in new construction starts in 2020 for nonresidential buildings work, most of which would have occurred in 2021.
Public Starts and Backlog
Leading into 2020, the Public markets with the highest growth in new starts the previous two years were Transportation and Public Works. Transportation terminals and rail starts were up 15% over two years, 25% in the last three years. Backlog nearly doubled in three years because a large portion of those starts is very long duration projects. Public works starts were up 13%, 20% in three years, and backlog is up 40%. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years.
Public work backlog leading into 2020 was up an average 8%/year for the last three years. Some of this is very long-term work that started construction in 2017 and it will still contribute spending for the next several years. 40% of all public spending in 2020 comes from projects that started prior to Jan 2019.
2020 losses in new construction starts impact the forecast for the next few years. Total new starts in 2020 for Public work dropped 9%. Transportation starts fell 20%, Educational starts fell 11% and Public works fell 6%. Amusement/Recreation starts fell 40%. Highway/Bridge starts increased 4%.
2021 Starting Backlog for all Public work is down 5%. Backlog for Transportation projects drops only 4%, and that leaves 2021 still 2nd only to the all-time high in 2020. Both Educational and Public Works backlogs drop 7%. Amusement/Recreation backlog falls 40%. Highway backlog increases 3%. Of all public work in backlog at the start of 2021, 43% comes from projects that started prior to Jan 2020.
The two largest markets contributing to public spending are Highway/Bridge (30% of total public spending) and Educational (25%), together accounting for 55% of all public construction spending. At #3, Transportation is only 12% of public spending. Environmental Public Works combined makes up 15% of public spending, but that consists of three markets, Sewage/Wastewater, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation account for about 3% to 4% each.
Highway is 100% public and Public Works 98%. Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20%.
Total public spending for 2020 is projected to finished up 5% at $350 billion. Spending for every major public market is projected to finish up in 2020. By far, the largest Public spending increases measured in dollars for 2020 are Educational, Transportation and Public Safety.
Total public spending in 2021 is projected to finished up 5% at $370 billion. Transportation provides most of the gains in 2021 and Public Works adds some, but this forecast may come down without support from Highway or Educational.
Public Infrastructure and Public Institutional
A bit less than 60% of all Non-building Infrastructure spending, $198 billion in 2020, is publicly funded. That public subset of work has averaged growth of $5 billion/year from 2013 through 2019, with maximum growth of $16 billion in 2019. 2020 increased only $4 billion. In 2020, Non-Building Infrastructure spending makes up about 60% of Public spending.
About 30% of all Nonresidential Buildings spending, $141 billion in 2020, is publicly funded. It’s mostly Educational. That public subset of work has averaged growth of $6 billion/year from 2013 through 2019, with maximum growth of $10 billion in 2017. 2020 increased $14 billion. In 2020, Nonresidential Buildings spending makes up about 40% of Public spending.
- Infrastructure = $349 billion, ~25% of all construction spending.
- Infrastructure is about 57% public, 43% private. In 2005 it was 70% public.
- Public Infrastructure = $198 billion. Private Infrastructure = $150 billion.
- Power and Communications are mostly privately funded infrastructure.
- Nonresidential Buildings is 30% public (mostly institutional), 70% private.
- Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
- Public Commercial construction and Amusement/Rec. are not included.
- Public Institutional = $110 billion, mostly Education ($86b).
Public Infrastructure + Public Institutional = $308 billion, 22% of total spending.
Public Infrastructure + Institutional average growth is $12 billion/year. This subset has never exceeded $30 billion in growth in a single year. In 2019 spending increased $20 billion. With 10 months data posted, 2020 is forecast to increase $17 billion.
Although total all public spending may increase for 2021, the select group of Infrastructure + Institutional likely to be funded by an Infrastructure stimulus bill shows 2021 growth is uncertain and may remain flat.
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.
The greatest impact to construction spending from fewer new starts in 2020 comes in 2021 or early 2022, when many of those projects would have been reaching peak spending, near the midpoint of the construction schedule. Nonresidential starts in 2020 are down 15%-25%. Residential starts are up 2%.
Construction Spending for October https://census.gov/construction/c30/pdf/release.pdf…
Up 1.3% from Sept. Sept rvsd up 0.4%. Aug rvsd up 1%
Year to date (ytd) spending is up 4.3% over Jan-Oct 2019. Oct SAAR is now only 2% below Feb highpoint.
However, residential spending ytd is up 9.6%, nonresidential building spending is down -1.2%. Both are expected to keep heading in the direction currently established.
Nonresidential Buildings construction will take several years to return to pre-pandemic levels. Although nonresidential buildings spending is down ytd only -1.2% (as of October data), 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 revenues between April and September 2020, would have had midpoints April to September 2021. Nonbuilding project midpoint 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%.
After adjusting for inflation, Residential volume is up about 4% to 5%, Nonresidential buildings volume is down about -14% and Non-building volume will finish down -8%. Jobs should follow suit.
If jobs increase faster than volume, productivity is declining. Also that means inflation is increasing.
Spending is approximately 50% residential, 30% nonresidential buildings and 20% nonbuilding infrastructure.
RESIDENTIAL Construction Spending for October Up 2.9% from Sept
Sept spending rvsd up 1.5%, Aug rvsd up 3.5%
August highest new starts monthly total ever.
Year to date Oct. spending now up 9.6% over Jan-Oct 2019
Oct monthly SAAR now 2% higher than Feb highpoint.
Residential construction starts for Jul-Aug-Sep-Oct’20 posted the highest 4mo total ever. 2nd highest was Nov-Dec’19-Jan-Feb’20. In the last 12 months residential construction starts have posted 7 of the top 10 best months ever. Also, spending in Aug, Sep and Oct is the highest since the previous residential boom in 2005-2006. Spending is now already +2% higher than previous high in Feb and 2020 finishes up +10%. Spending climbs +10% higher in 2021.
Here’s a few short notes
- 2020 spending will close the year UP.
- 2021 will get dragged down by declines in nonresidential buildings.
- Reduced new construction starts in 2020 impact 2021 far more than they impact 2020.
- Residential spending has returned to now only 2% less than the pre-pandemic peak in February.
- There will be hidden inflation not showing up in wages or material costs – lost productivity, acceleration.
There are other analysts reports that 2020 total construction spending will finish the year down -2%. Here’s why that will not happen.
Through August, year-to-date spending is up +4.2%. To finish the year down -2% (with only 4 months to go) would require each month of the final 4 months spending to come in at -14% year-over-year (yoy =compared to the same month last year). Not a single month this year has posted spending yoy lower than last year. Also, -14% yoy for 3 months would idle more than 1 million jobs for 4 months. That would make the final 4 months of 2020 the absolute worst period ever recorded.
September data is in (not included in the presentation) and makes it even more unlikely. Year-to-date September spending is up 4.1%, so Oct, Nov, and Dec would have to each post yoy spending of -20% for the year to end down 2%.
Similarly, the data show by an even wider margin, nonresidential buildings spending will not end 2020 down -10%.
This table updates the slide included in this presentation. It includes September spending year-to-date and Dodge Outlook 2021 for new forecast on construction starts in both 2020 and 2021.
UPDATES to Construction Outlook 10-16-20 based on
- Forecast includes US Census Aug 2020 year-to-date spending 10-1-20
- Forecast includes Dodge September construction starts 10-15-20
- Actual Jobs data includes BLS Jobs to Sept (12th) issued 10-2-20
This update accompanies pandemic-13-midyear-construction-outlook
Total construction starts year-to-date for 9 months through September are down 14%. Total starts have registered down -14% to -15% YTD for the last four months.
Residential new starts are down year-to-date only 1% from 2019. However, the last three months total residential starts posted the 2nd highest 3mo total in 15 years. The highest 3mo total since 2005 was for the period Dec’19-Jan-Feb’20. So two of the best 3mo periods of new residential construction starts in the last 15 years have occurred in 2020.
Nonresidential buildings starts are down 26% and non-building infrastructure starts are down 18%.
This chart shows a comparison of the cash flows predicted from new all construction starts vs the actual spending. Over time, the cash flows do a very good job of predicting where spending is headed. Note the divergence of residential in Jun-Jul-Aug 2020. Actual spending finished on avg 3%/mo higher than predicted. In 3 months the actual spending pushed 10% higher than predicted. This may be a reflection of forecasting too high an amount for delays and cancelations.
Construction Spending drives the headlines. Construction Volume drives jobs demand. Volume is spending minus inflation. Inflation $ do not support jobs. Current outlook shows (recent) peak volume was 2017-2018. Volume is forecast to decline every year out to 2023.
Construction jobs gained slightly in Sept, but are still down 5% (400,000) from Feb peak. Construction may experience only slight jobs improvement in 2020 (residential spending is increasing), but nonresidential buildings declines through 2021 will drive construction jobs lower over next 18 months.
Jobs are supported by growth in construction volume. We will not see construction volume return to Feb 2020 level in the next three years. This time next year, volume will be 5% lower than today, 14% below the Feb 2020 level.
This is why the construction industry will have a hard time justifying growth in jobs. After 12 years of fairly even growth in jobs vs volume, that relation broke in 2018. Volume is currently at a 5-year low, well below jobs. Declining work volume is indicating by this time next year we may be down 600,000 jobs below the Feb 2020 high.
The following table shows which markets have the largest (and smallest) changes in new construction starts. With the exception of residential, due to longer durations, spending in all other markets is most affected by a decline in new starts, not in this year, but in years following. Residential spending hit bottom in May, will post an increase in 2020. Nonres Bldgs spending won’t hit bottom until 2022.
A recent AGC survey of construction firms asked the question, How long do you think it will be before you recover back to pre-Covid? The survey offered “longer than 6 months” as an answer choice. My current forecast is longer than 6 years.
Some effects have not even begun to show up in the data. A 20% decline in new nonres bldgs starts in 2020 means a huge decline in spending and jobs in 2021-2022. How long before construction returns to the level it was at in Feb? 6 to 8 years.
Many nonresidential buildings have durations that last 24 to 36 months, with peak spending 12 to 18 months from now. With the drop in new starts this year, that peak spending 12 to 18 months from now will be impacted. 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.
If construction starts in 2020 do not outperform 2020 construction spending, then starting backlog Jan. 1, 2021 will be lower. My current forecast (starts down 11%) is indicating 2021 starting backlog will be down by almost 10%. Spending declines into 2021 and remains depressed through 2023.
The last time starting backlog decreased was 2011. Starting backlog will fall 10% in 2021 and 2% in 2022. Except for residential, about 80% of annual spending comes from starting backlog.
The next table shows spending year-to-date through August (released 10-1-20) and the spending forecast for the year. 2nd quarter construction spending activity low-point is down only 5.5% from the Feb peak. Construction spending in August YTD is up 4.2%.
Residential ytd is up 7.2%. Single Family is +3.0%, multifamily is +2.7% and renovations is Reno +15.6%. Nonresidential buildings ytd is down -0.3% and Nonbuilding Infrastructure ytd is +5.8%.
Take note here, the YTD spending for Nonresidential Buildings is currently -0.3% and my 2020 forecast shows Nonres Bldgs ending the year down -2.6%. Some forecasters are predicting spending for nonresidential buildings will end the year down much worse than -2.6% compared to 2019.
With only 4 months remaining, in order for Nonres Bldgs spending to finish down even -5%, the monthly rate of spending compared to 2019 would need to drop to -14%/mo for each of the remaining 4 months of 2020. (8mo x avg -0.3% + 4 mo x avg -14%) / 12mo = -5% total for the year. To end the year down -8%, nonres bldgs spending for the next 4 months would need to come in 25% lower than 2019. That’s “Great Recession” territory.
How unlikely is this to occur? The greatest monthly declines in 2020 so far are July and August in which the monthly rate of spending dropped -3% to -4% compared to same month 2019. Essentially, for nonresidential buildings spending to end the year down -5%, the bottom would need to drop out of the nonresidential markets, beginning back on Sept 1 and continuing for the final 4 months of the year.
Not sayin’ it can’t happen. This is 2020!
8-27-20 What impact will the pandemic have on Construction Inflation in 2020? Here’s Several inputs.
In April, and again in June, I recommended adding a minimum 1% to normal long-term construction inflation, to use 4% to 5% for 2020 nonresidential buildings construction inflation. Some of my peers were suggesting we would experience deflation. Only twice in 50 years have we experienced construction cost deflation, 2009 and 2010. That was at a time when business volume was down 33% and jobs were down 30%. Currently business volume and jobs are down 10% and by mid-2021 are forecast down 15%.
The Turner Construction Cost index for the Q2 is down 1% from Q1, effectively reporting 0% increase in the index year-to-date. But the Turner index year-to-date (avg Q1+Q2=1183) is still 3.6% higher than the average of Q1+Q2 2019 and 2.3% higher than the avg for all of 2019 (1156). So, while the index appears to show no gains in 2020, through the first six months it is already up 2.3% above the average 2019 index. http://turnerconstruction.com/cost-index
The Rider Levitt Bucknall Q2 2020 index is up 1.6% ytd, up 4.6% from the Q1+Q2 2019 average and up 3.1% above the 2019 average. https://s28259.pcdn.co/wp-content/uploads/2020/07/Q2-2020-QCR.pdf
The U.S. Census Single-Family house Construction Index is up 3.6% year-to-date through July. July 2020 is up 4.2% over July 2019. https://www.census.gov/construction/nrs/pdf/price_uc.pdf
Producer Price Index items for July construction reported by AGC on 8-11-20. Inputs to Nonres construction are down ytd -1.0% through July. Final Demand Nonres Bldgs is up 1.8% ytd through July. See https://www.agc.org/learn/construction-data/construction-data-producer-prices-and-employment-costs and https://edzarenski.com/2020/07/14/producer-price-index-year-to-date-june-july-2020/
UPDATE 10-14-20 NAHB reports thru September (Residential) Building Materials Up 4.4% in 2020. See PPI charts. Increases for lumber and ready-mix concrete are noted. LUMBER “Over the last five months, the PPI for softwood lumber has nearly doubled (+90.9%). Sharply higher lumber prices have added more than $17,000 to the price of an average new single-family home since mid-April.” CONCRETE “Prices paid for ready-mix concrete (RMC) rose 1.5% in September (seasonally adjusted), a monthly increase the magnitude of which is atypical of the commodity. The national PPI for RMC has increased by more than 1% just five of the 135 months since the end of the Great Recession. The average annual change in prices paid for RMC was 2.6% over the last decade.” https://www.eyeonhousing.org
R.S.Means quarterly cost index of some materials for the 2nd quarter 2020 compared to Q1: Ready-Mix Concrete 0%, Brick and Block +3%, Steel Items -2%, Wood products +3%, Roof Membrane +7%, Insulating Glass +6%, Interior Finishes -2%, Plumbing Pipe and Fixtures +7%, Sheet Metal +7%. https://www.rsmeans.com/landing-pages/2020-rsmeans-cost-index
U.S. manufacturing output posts largest drop since 1946. Think of all the manufactured products that go into construction of a new building: Concrete, steel, doors, windows, roofing, siding, wallboard, lighting, heating systems, wire, plumbing fixtures, pipe, valves, cabinets, appliances, etc. We have yet to see if any of these will be in short supply leading to delays in completing new or restarted work?
There have been reports that scrap steel shortages may result in a steel cost increase. The U.S. steel industry is in the most severe downturn since 2008, as steelmakers cut back production to match a sharp collapse in demand and shed workers. Capacity Utilization dropped from 82% to 56% in April. Now in mid-August, CapU is up to 61%, still very low. Steel manufacturing output fell by a third and is still down more than 25%. Until production ramps back up to normal levels there may be shortages or delays in delivery of steel products.
Since Q1, the cost of lumber has increase 120%, so expect residential inflation to increase faster than nonresidential. https://eyeonhousing.org/2020/08/average-new-home-price-now-14000-higher-due-to-lumber/ and revised http://nahbnow.com/2020/08/average-new-home-price-now-16000-higher-due-to-lumber/
Contractors have been saying they have difficulty acquiring the skilled labor they need. This has led to increased labor cost to secure needed skills.
But most important, this SMACNA report quantifies that labor productivity has decreased 18% to meet COVID-19 protocols. https://www.constructiondive.com/news/study-finds-covid-19-protocols-led-to-a-7-loss-on-construction-projects/583143/
Labor is about 35% of project cost. Therefore, just this productivity loss equates to 18% x 35% = 6.3% inflation. Even if, for all trades, the average lost time due to COVID-19 protocols is only half that, the added inflationary cost to projects is 3% above normal. I expect the Turner Nonres Bldgs index will reflect some added labor cost in the next two quarterly releases.
Post Great Recession, average nonresidential buildings inflation is 3.9%. For the last five years it’s 4.5%. Residential cost inflation averaged 4.1% and 4.5% for those periods. The 30-year average inflation rate for nonresidential buildings is +3.75%.
Almost every construction market has a weaker spending outlook in 2021 than in 2020, because approximately 50% of spending in 2021 is generated from 2020 starts and 2020 starts are down.
Typically, when work volume decreases, the bidding environment gets more competitive and prices go down. However, if materials shortages develop or productivity declines, that could cause prices to increase.
Add to these issues the fact that many projects under construction have been halted for some period of time and many more have experienced at least short-term disruption. The delays may add either several weeks to perhaps a month or two to the overall schedule, in which case management cost goes up, or it could add overtime costs to meet a fixed end-date.
We can expect some cost decline due to fewer projects to bid on, which typically results in sharper pencils. But we can also expect cost increases due to materials, labor cost, lost productivity, project time extensions, and/or potential overtime to meet fixed end-date.
I expect non-residential buildings inflation to range between 4% and 5% for 2020 and 2021, perhaps 5% to 6% for residential work.