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2020 Construction Forecast Briefs

Monday, January 6, 2020  
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Ed Zarenski | edzarenski.com

January 4, 2020 (Updated)

 

Starts CF 2015-2022 1-4-20

New Construction starts data captures a share of the total market or a portion of all construction spending, on average about 60% of all construction. In this analysis every market is adjusted by its own individual market share factor, similar to a weighted average.

Starts, as reported by Dodge Data and Analytics, increased 7%/year in 2016 and 2017, but only 3% in 2018. Starts are forecast to decline slightly in 2019 and 2020.

Applying the market share factors, starts increased 7.3% in 2016, 5.6% in 2017 and 2% in 2018. Starts are forecast up slightly in both 2019 and 2020.

Backlog reaches a post-recession high in 2020, up 20% from 2017, up 100% from 2013. Starts and backlog growth are forecast to remain below 3%/year gain or decline over the next few years. Total spending has only slight gains in 2021 and 2022.

Backlog at the beginning of the year or new starts within the year does not give an indication of spending within the year. Backlog increases if new starts during the year is greater than spending during the year. An increase in backlog could represent a level rate of market activity, but for a longer duration.

The best indicator of future construction activity is the sum of the projected cash flow generated by all the construction starts that have been recorded.

plots updated 1-4-20

Spending cash flow predicted from Dodge Starts and actual spending to date.

For a scenario in which new construction starts drop by 10%:

On average about 20% of new nonresidential construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in future years. If new starts drop by 10% this year, that has only a -2% impact on total nonresidential buildings spending for this year. It would be -5% next year, -3% after.

Only about 30% of residential spending within the year comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total residential spending by 7% in that year.

updated 1-4-20 – The construction spending forecast for 2019 is revised up to $1,304 billion, still a decrease of 0.2% vs 2018. Almost all of the revision up is residential spending that was added in Oct and Sept Census spending revisions released 1-3-20.

The forecast for 2020 construction spending is $1,360 billion, up 4.5% over 2019.

Total Spending increased 9%/yr. from 2012 to 2016, then in 2017 and 2018 slowed to 4%/yr. Spending declined <1% in 2019 and is forecast up 3% to 4% for both 2020 and 2021. 

Nonresidential Buildings starts (excluding Terminals) have reached a new high every year since 2009, but the last three years starts are up only 2% to 3%/year. Every market posted increases in 2017 and 2018. Only Commercial/Retail and Amusement/Recreation declined in 2019. Backlog for Office Buildings, which includes data centers, is up 100%+ since 2015. Spending is still up 4% in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

Nonresidential buildings markets advancing in 2020-2021 are Educational, Healthcare, Office and Manufacturing. Markets declining are Amusement/Recreation, Commercial/Retail and Lodging.

Non-building Infrastructure starts (including Terminals), up 4% in 2019, are at an all-time high. The two markets with the largest share of new starts are Highway/Bridge and Transportation. Transportation terminals and rail starts are up 30% in the last three years, but backlog has nearly doubled because a large portion of those starts is very long duration projects. Starts are forecast up only 1% in 2020 but backlog peaks in 2021. Spending increases are in the 6% to 8% range at least for the next two years.

Spending in recent years has been boosted by Transportation terminals, Highway and Public Works projects. Power is flat or down slightly.

Residential starts averaged 19%/year growth from 2012 to 2016 but slowed to 5%/year for 2017 and 2018. Starts declined in 2019 and are forecast to decline again in 2020.

The outlook for residential construction spending has improved slightly. Previous forecast had residential spending in 2019 down 6% and 2020 up only 2%. That’s been revised to now forecast 2019 down 4.5% and 2020 up 5%. Spending holds steady in 2021.

If spending is increasing 3%/year at a time when inflation is 5%/year, then real volume is declining. In the last two years, spending increased only 2.5%, but construction inflation totaled 9%, therefore, real volume declined by more than 6%, yet jobs increased by 7.5%. Since early 2018, jobs have been increasing while construction volume is declining. Volume of work does not support jobs growth.

Volume, spending adjusted for inflation in Constant 2017$

Spend Sector 2015-2021 1-4-20.JPG

Nonresidential Buildings will post declines in volume in 2020 & 2021. Residential volume gains 1% in 2020 but slips again in 2021. Non-building Infrastructure will increase volume about 3%/year. Overall, total construction volume declined in 4 of the last 6 quarters and is forecast to drop slightly in 2 or 3 quarters in 2020.

One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce margins in bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on inflation.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that will add to labor cost inflation.

Jobs vs Volume growth set to base year 2011

Jobs vs Volume 2015-2021 12-6-19

Average long-term nonresidential buildings inflation excluding recession years is 4.2%.

Average long-term (30 years) nonresidential construction cost inflation is 3.5% even with any/all recession years included.

Nonresidential buildings cost inflation for 2018 and 2019 averaged 5%. It’s predicted closer to 4.5% for 2020 and 4% for 2021.

Residential buildings cost inflation for 2018 and 2019 averaged 4%. It’s predicted at 3.75% for 2020 and 2021.

BCI 2005-2022 12-9-19


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