Regional Analysis 2020

USA Market Review 2020

Short-term effects arising from COVID-19 are starting to be realized, including a spike in unemployment to 11.1% and supply chain disruptions.

$667.9bn
Total construction spending in first half of 2020
6.5%
Contraction in GDP expected in 2020
7,256,000
Average monthly employment in construction in first half of 2020

USA Market Review

As one of the countries most impacted by COVID, Jeff Peragallo, Director and Vice President of Operations at Linesight, explores the US market performance to date and what lies ahead in the coming months, as we approach the final quarter of 2020.

This year started off with strong optimism in most regions, but what a difference a few quarters has made, with the global pandemic turning certain countries and specific sectors upside down. The commercial, retail and hospitality projects are the hardest hit by the impact of COVID-19, but conversely, data centers and life sciences have maintained their momentum.

As the economy continues to react to the pandemic, short-term effects are starting to be realized, including a spike in unemployment to 11.1% (June 2020 Bureau of Labor Statistics) and supply chain disruptions.

During the first six months of the year, total construction spending (both private and public) amounted to $667.9 billion, an increase of 5% on the $636.0 billion for the same period in 2019. Sectors that are negatively affecting this spend are lodging, office, religious, amusement and recreation, conservation and development, and manufacturing. Sectors that have contributed to the overall growth in spending are healthcare, public safety, communication, power, highway and street, and water supply.

As expected, projections for 2020 have been curtailed significantly, with GDP now expected to contract by 6.5%. Key commodities and materials have already seen a drop in prices, with oil and steel products bearing the brunt of this decline. Production facilities are slowing down, and in some cases, closing completely, which raises concerns over the ability to increase supply once demand returns. With supply potentially constricted and tariff uncertainty lingering between the U.S. and China, it is possible that we will see increases in the cost of construction materials over the next 18 months, thereby reversing the current trend of price reduction.

Northeast

The Northeast has been hard hit by the pandemic. The New York labor market is down 6% year-on-year, with residential completions down 5%. The non-residential segment is projected to be down at least 9%, and commercial and manufacturing is down 8%.

Future or planned commercial projects in the tri-state area have been significantly impacted by the pandemic, and recently published leasing reports from well-known brokerage houses indicate a 50% decline in leasing activity. The associated decline in construction activity will drive down escalation, but there will be upward pressure on construction costs relating to the impacts of COVID-19, which are still being realized.

Residential completions continue to experience a decline. This sector peaked in 2019 and a decline was anticipated in 2020 pre-COVID. This, combined with increased unemployment rates, has led to a decline in total housing starts.

South Central

There is currently over three million square feet of unused commercial real estate in Dallas alone. This is similar to what is being seen in other large cities in the region, which is making the commercial market stagnate, with no clear indication as to when it will improve. However, companies and staff continue to relocate to the region, while some companies have continued to proceed with business-critical projects.

Large infrastructure projects that were due to start are now delayed or being reassessed. Dallas-Fort Worth airport announced that the planned extension is now on hold, with the planned bullet train project and major road/bridge works serving as other examples of projects not starting as originally planned.

The residential sector remains resilient due to the continued movement of people into the hub metro areas, so it is expected to remain steady for 2020.

Southeast/Mid-Atlantic

As COVID cases continue to increase, the outlook for commercial and retail projects is expected to worsen, due in part to market uncertainty.

As the region has a strong existing life sciences and data center presence, the recent upsurge in demand within these two sectors means that new spaces need to be built and existing projects completed to service this demand. The outlook for the remainder of 2020 appears positive, with a steady performance expected.

COVID-related projects are getting started to help meet the manufacturing demand that will be required to produce a global vaccine. Existing pharmaceutical companies are actively examining their manufacturing capacity and looking for solutions (re-tool versus new build) to meet this requirement. The Federal Government is providing large incentives to bio-tech companies of all sizes that can help with this manufacturing effort. North Carolina, in particular, is seeing a lot of activity in this regard.

Most cities and counties in the region did not require construction sites to close during the pandemic, so this is helping to maintain construction progress in 2020 in the short term.

Midwest

The Midwest has seen an overall reduction in new construction starts since the turn of the year, recording a 14% decline in the first six months of 2020. This trend is expected to continue through year end, with a major slowdown in new residential and commercial starts anticipated, as the full impact of COVID and the potential onset of a recession will severely curtail the availability of finance.

The Chicagoland area has experienced a combination of a slowdown in new construction overall (9%), and an increase in commercial and warehousing/distribution facilities, which has resulted in a much better forecast than what is expected in many other major metropolitan areas across the country.

2019 was the strongest year in commercial real estate since 2007, particularly in Chicago. Pre-COVID, growth in 2020 was expected to slow down, but remain strong. The BMO Tower and Salesforce Tower in Chicago had boosted the commercial market early in 2020 (+24%). Commercial property sales in the region fell to their lowest mark since 2013 (down 41%), but even this drop-off isn’t as steep as the national trend (down 68%).

The infrastructure and education sectors have been impeded by the COVID-19 crisis, but have also been able to accelerate projects due to lower levels of mass transit and road network users. Schools and colleges have also been able to start projects earlier in the year and push them through quicker, as there are no students/teachers on campuses, removing the live environment aspect. All in all, these sectors have remained steady.

Similar to other regions and countries, hospitality has been the hardest hit sector along with retail, as the pandemic has accelerated the adoption of online shopping, in turn fueling the increase in warehousing/distribution centers (which is becoming a very hot market in-region).

Construction projects are being delayed but are being completed, with new starts also being delayed, having a major impact on trade labor. Labor had picked up in June, as the country (and major projects) looked ready to re-start, but then fell off again in July as there was a resurgence of the virus.

As is being seen elsewhere, supply chain concerns are proving to be a major risk on all types of projects.

The Midwest has had a bad year, but the impact has been relatively moderate compared to other regions. There is a cautious level of optimism for the second half of the year, following increased construction starts since the low in April (down 9% year-on-year). Construction starts in the other top 20 major metro areas were down by an average of 22%.

West

Construction projects in California, Washington and the Pacific Northwest have been met with some hard stops, while projects throughout the Southwest and Western regions are continuing to move forward. With restrictions on travel remaining, this has had a significant impact on the migration of labor, which in turn has led to a high rise in unemployment, although it is anticipated that unemployment will level out by the end of 2020. Figures published by the Bureau of Labor Statistics show that construction employment in California for Q2 2020 is down 9% when compared to Q2 2019. Moving into Q3, as projects start to come back online and move forward, some are being hit with claims to adapt to the new normal on building sites. These claims include increased safety protocols and loss of productivity from the general contractors and their subcontractors.

Contractors in California received some good news, with a budget deal being reached that should keep current spending in place for K-12 schools and community colleges. The facility service division (FSD) is anticipating more than 120 new bond program projects being put out to bid between June 2020 and June 2021.

Currently underway in Arizona is a $185 million road widening project, known as Pima Freeway. Construction remains on track, despite the COVID-19 outbreak.

Construction has also continued through the pandemic on the $1.9 billion Allegiant Stadium in Las Vegas. The project team have had two main priorities: to finish the stadium in the Fall, in time for the NFL season kickoff, and to stay ahead of the pandemic. Officials declared substantial completion at the end of July 2020, as had been targeted. In addition to Allegiant Stadium, some other significant projects have also continued construction through the pandemic, such as the West Hall ($980 million), Underground Drilling ($53 million), Resort World Las Vegas ($4.3 billion). While construction continues on these projects, other Las Vegas projects such as the $1.7 billion MSG Sphere, Las Vegas Monorail stop, 1,000ft. pedestrian bridge to The Venetian and The Drew have been halted.

With the Government response to the COVID-19 outbreak in Washington State, many construction projects were shut down under the ’Stay Healthy‘ order, to help flatten the curve and slow the spread of COVID-19. Given the progress in flattening the curve, construction activities around the state have restarted, with the implementation of improved testing and provision of personal protective equipment. As the market is still looking to recover, tender bids are expected to be competitive due to the current state of the market and contractor’s eagerness to win jobs.

Hyperscale data center builds are seen to be ramping up their construction planning, with the increased demand stimulated by the virus outbreak.

Summary

Although it is a tumultuous time for the US region as a whole, there are some positives to be drawn. Construction spending for the first half of the year was up 5% on 2019, and although some sectors, such as commercial and hospitality, have been hit hard by the pandemic-induced economic shock, others, such as life sciences and data centers, are experiencing healthy growth. All in all, it remains to be seen what the more medium to long-term impact will be, but the pace of recovery is dependent on the successful suppression of the virus to avoid additional waves.

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