2021 promises to be a challenging year for most nonresidential contractors, with opportunities for a minority but shrinking demand for most. Meanwhile, homebuilders will have more work than they can find workers to perform it.
The construction industry ended 2020 in better shape than many other sectors. After an unprecedented loss of 1.1 million jobs, or 14% of total construction employment, from February to April, the industry added back 80% of the lost positions by December.
But the rebound was very unevenly distributed. Employment at residential construction firms—homebuilders, remodelers, and multifamily builders—was slightly higher in December than in February, the pre-pandemic peak month, on a seasonally adjusted basis. (Seasonal adjustment is a statistical method to remove the influence of regularly recurring monthly variations, such as those due to normal weather or holiday patterns.) In contrast, nonresidential building, specialty trade, and heavy and civil engineering construction firms added back only 61% of the jobs lost from February to April.
The disparity is likely to widen for the next several months at a minimum. Homebuilders will scramble to meet rising demand for new, expanded, and renovated homes, while nonresidential contractors can expect growing postponements and cancellations but few new projects.
Of the more than 1,300 respondents to an annual hiring and business outlook survey conducted in late 2020 by the Associated General Contractors of America (AGC), only one-quarter reported winning new or expanded work as a result of the pandemic. Meanwhile, nearly four out of five reported at least one project had been postponed or canceled.
Respondents were asked if they expect the dollar volume of business available to bid on would increase or decrease in 2021 relative to 2020. The difference between the percentage who expect an increase less those expecting a decrease—the net reading—was negative for 13 out of 16 project types.
Contractors were most optimistic, with a net positive reading of 11 percentage points, regarding healthcare construction other than hospitals, such as clinics, testing and screening facilities, and medical labs. Respondents also expect the market to increase for warehouse construction, although the net reading was only 4% positive. And by a slim 1% margin, they expect the market to grow for water and sewer projects. (AGC members perform every type of construction other than single-family, which was not included among the categories.)
Net expectations were slightly negative (-3%) for hospital construction and a bit more pessimistic (-8% each) for multifamily and power construction. The most dismal readings were for retail construction (-64%), closely followed by private office and higher education (-58%).
Apart from water and sewer, readings were negative for all of the predominantly public categories: federal agency projects (-10%), bridge and highway work (-11%), transportation facilities (-19%), elementary and secondary schools (-27%), public building (-38%), and higher education (-40%). However, prospects for some of these segments could brighten late in the year if Congress passes funding for infrastructure investment or for backfilling some state and local agencies’ revenue losses.
Two other niches may be winners in 2021. The survey did not ask about data centers, but the number and size of recently announced projects suggests this will remain a vibrant market. And selected categories of manufacturing plants are likely to be built or expanded to accommodate shifts in purchasing preferences, although respondents rated manufacturing overall at a net reading of -17%.
Nearly two-thirds of respondents said projects have taken longer than anticipated and more than half reported costs have exceeded expectations. Yet only one-quarter said they were putting longer times into bids or contracts and one-third were putting in higher prices.
Some contractors may have found a way—or expect to do so—to use technology or improved project management to absorb higher costs and shorten completion times. But such changes are hard to come by in an industry where every project has different site conditions, design and materials, and often different crews or subcontractors. Operating under new and frequently challenging rules or guidance regarding health and safety makes it even more difficult to achieve cost and time savings.
More likely, contractors expect competitive pressures will force them to accept narrower profit margins in order win any business. Indeed, while one-third of the respondents in AGC’s survey said business had already matched or exceeded year-earlier levels, an equal share predicted it would take more than six months to return to that level.
Economic recovery will not occur on a broad, sustained basis until enough people receive an effective vaccine and resume going to offices, schools, restaurants, cultural and sporting venues, and travel destinations. Even then, owners—businesses, investors, institutions, and state and local governments—will need time to recover from revenue losses, unbudgeted expenditures, and uncertainty about future demand before they will order new construction.
Thus, most nonresidential contractors may have to hunker down until 2022 or later. That will make it tough for them to invest now in new technology or ways of executing projects. But such adaptations will be one key to driving down costs and completion times.
