Report: Now’s the time to get into infrastructure

Anirban Basu, construction economist

The construction industry has reasons for optimism and pessism as it recovers from the recession caused by the Covid-19 pandemic, according to the Marcum Commercial Construction Index for the fourth quarter of 2020. While nonresidential construction lags, the residential sector is booming.

The index, which was produced by Marcum LLP’s national Construction Services group, reports total construction employment has rebounded since plummeting in March and April of last year, but remains 3.3% below pre-pandemic levels. 

“Nonresidential construction employment declined by about 644,000 jobs between February and May of 2020 as the pandemic’s grip took firm hold,” wrote Anirban Basu, author of the report and Marcum’s chief construction economist. “As of January 2021, the nonresidential industry had recovered about 60% of those losses, which means that the segment’s employment is still 5.5% lower than it was at pandemic’s onset.”

Basu pointed out the residential segment has boomed over the past several months. “The story in residential construction segments has been vastly different. Mass migration toward the suburbs, triggered in part by the pandemic but also by underlying demographics, has helped launch a single-family housing construction boom.”

Nonresidential construction struggles

Construction spending data indicate that nonresidential spending contracted 5.7% on a year-over-year basis in December 2020. “Among the most damaged segments were retail, hotel room, and traditional office space construction,” the report said. “Based on leading indicators, near-term dynamics will not be positive in many nonresidential segments. Among the exceptions are data centers and fulfillment centers.”

National nonresidential construction spending increased 0.9% on a monthly basis in January 2021, according to an Associated Builders and Contractors (ABC) analysis of data from the U.S. Census Burea. On a seasonally adjusted annualized basis, nonresidential spending totaled $799.1 billion for the month.

Spending was up on a monthly basis in nine of the 16 nonresidential subcategories. Private nonresidential spending increased 0.4% in January, while public nonresidential construction spending increased 1.6%. Only four nonresidential construction categories have experienced growth in spending on a year-over-year basis, all of which are primarily publicly financed segments.

“It is remarkable that overall nonresidential construction spending has stabilized recently despite the lingering impacts of

the Covid-19 pandemic,” said Basu. “January 2021’s construction spending data line up with the Construction Backlog Indicator produced by ABC, which indicates that backlog is stabilizing and that many nonresidential contractors expect both sales and staffing levels to expand over the next six months.

“There are some key caveats, however,” he added. “Private nonresidential construction remains soft in the context of compromised commercial real estate fundamentals. Construction spending in the lodging segment is down nearly 23% over the past year, and office construction spending is down on both a monthly and yearly basis. The trajectory of remote work, business travel and brick-and-mortar retail is still uncertain, so construction spending in a large number of private categories is poised to remain soft for the foreseeable future.”

Basu continued, “The rise in construction spending in January could largely reflect rising materials prices and efforts by contractors to pass at least some of those increases to purchasers of construction services. It comes as little surprise that many of the contractors who expect rising sales and staffing levels during the first half of 2021 also anticipate shrinking margins.”

Hopes pinned to infrastructure

Construction input prices have not been subject to rampant inflation thus far, although Basu warned that could change due in part to elevated shipping costs. “With so many construction commodities shipped from various parts of the world, it is

Joseph Natarelli, Marcum’s national construction leader

remarkable that there hasn’t been even more construction input price inflation. The reconciling factor is likely the diminished demand for inputs to construction in much of the pandemic-hammered world.”

Marcum predicts the economy will expand rapidly in the second half of 2021, but that nonresidential construction may take longer to bounce back. “In recent cycles, the recovery of nonresidential construction spending has tended to lag that of the overall economy by 12 to 18 months. If that formula remains in place, solid macroeconomic recovery this year should translate into more exuberant expansion in nonresidential activity in 2022 and/or 2023.”

“Non-residential construction is slow at present, however, in this latest index, we highlight possible pathways up and out,” said Marcum’s national construction leader, Joseph Natarelli. “If you’re in the infrastructure subsector, the outlook is especially positive, with most infrastructure subsectors trending up.

“Will there be a new New Deal from the White House? We don’t know that for certain yet, but if contractors can look into ways that their current operations can innovate in that direction, it is likely to pay dividends in years to come,” Natarelli said.