VIDEO: How contractors can succeed as construction continues to recover

CONEXPO-CON/AGG 365 talks to ABC Chief Economist Anirban Basu about how contractors can succeed as construction continues to recover

With 2021’s first quarter coming to an end and the first anniversary of the Covid-19 pandemic occuring earlier this month, CONEXPO-CON/AGG 365 sat down with Dr. Anirban Basu, chief economist for Associated Builders and Contractors (ABC), to discuss construction’s recovery and what contractors can do to succeed going forward.

The following is an edited excerpt from the video conversation above.

CONEXPO-CON/AGG 365: It’s been quite a year in the construction industry. Everyone’s been affected by the Covid-19 pandemic. And although construction was deemed essential, the pandemic exacerbated some existing challenges in the industry. In general, how far has the construction industry come since the uncertainty in the struggle of spring 2020?

Dr. Anirban Basu, ABC chief economist: Oh, a long way. You know, while it is true that construction was deemed broadly speaking to be an essential industry, the fact of the matter is that if you look at the construction data from March and April [2020], they look terrible. So many project interruptions, of course, some people became a Covid-19-positive on teams, some projects were postponed, others were cancelled outright as financing dried up in the midst of that crisis period. And so it was the case that there were some significant dislocations.

And indeed, over the two months, between February and April of 2020, the industry lost almost 15% of U.S. jobs. Now, since that time, it has really come back a long way for a number of reasons. Contractors are better able to deal with Covid-19 and try to keep team members safe, so there has been a boom in residential activity. The broader economy has begun to recover. And finally, the outlook looks quite good for construction going forward for reasons we can get into.

CONEXPO-CON/AGG 365: Before we get to looking forward, I’m still interested in the past and the present and how we’re doing. How would you characterize how construction stands in comparison to other industries? In North America, for instance, hospitality, entertainment, etc.?

Basu: Well, there’s no comparison. The segment that has been most ravaged by the pandemic is leisure and hospitality, which includes restaurant jobs, hotel jobs. There are some industries where people cannot work remotely, it’s about in-person experience. That’s true in retail. That’s true in the hotel sector. That’s true in the cruise ship industry, which has lost about $40 billion in revenue over the past year alone. So construction compared to that, of course, has fared very well.

CONEXPO-CON/AGG 365: What would your message be to small- to medium-sized contractors who still might be getting through challenges presented by Covid-19 and the current economic market? And what steps can those small to medium contractors take as they continue into 2021?

Basu: It depends on who they are. Are they residential? Are they commercial? Really dependent on new construction? Or do they work very much on the rehabilitation of existing structures? The outlook is very different across those segments. I think commercial construction is in a bit of a crisis. I’m talking about the construction of new office buildings, new hotels, new shopping centers, with all that retail bankruptcy and all that vacant retail space, shopping center development will be minimal for some time to come. Hotels have been devastated by low occupancy rates. And while I think leisure travel will bounce back rapidly this year, business travel will take some time to take off as many businesses find that their balance sheets have been negatively impacted by the pandemic.

CONEXPO-CON/AGG 365: ABC reported that the industry lost 61,000 jobs in nonresidential construction in February. What can those in nonresidential construction look forward to with a little bit of hope as 2021 progresses?

Basu: There are some segments with obvious weaknesses, but there are some other segments that stand to be very strong going forward. How about data centers? We’re going digital economically, and at the backbone of that digital migration, including the migration to the cloud, are data centers. So data center construction will be fast and furious. One of the other implications of 2020 was the rapid market share gains of e-commerce. You’re going to continue to see a lot of large-scale fulfillment centers under construction around the country.

What about healthcare? For many years, the game in American healthcare was to put downward pressure on the cost curve, and that meant investing less in hospitals and more in outpatient centers, outpatient clinics and outpatient surgical centers. And that may still happen, but I think the pandemic has laid bare the fact that we have cut too much capacity out of our hospitals, that we don’t have enough ICU beds, we don’t have enough ventilators, and we don’t have enough space for those items. So what that means is you will see some hospital expansion projects going forward.

And finally, I’ll mention manufacturing because there is this reshoring to North America of production that had gone to Asia. And I think you’re going to see even more reshoring of manufacturing activities back to the U.S. going forward, as many CEOs are tired of repeated supply chain disruptions and, moreover, want to better protect their intellectual property.

CONEXPO-CON/AGG 365: Another part of nonresidential construction is infrastructure. How do you expect the billions of dollars that are being earmarked for infrastructure in upcoming legislation to help those in nonresidential construction?

Basu: The American Rescue Plan Act does not have really an infrastructure category, per se. But what it does offer, among other things, is $350 billion of general fund relief to state and local governments. So they can spend that money in many ways... and they can certainly put more into infrastructure. Remarkably, many state governments actually didn’t perform that badly in 2020.

So as this $350 billion comes in, I would think some of that money is going to be spent on infrastructure... school construction will be a major winner, because the department of education got a major sum of money from this. And some of that will be spent on ventilation systems and other forms of school construction. So those are some of the public segments that stand out to me in terms of being quite strong going forward.

CONEXPO-CON/AGG 365: In December 2020, 13,000 more workers quit their construction jobs than were than were laid off or discharged by their employers. What effect has the pandemic had on the construction industry’s labor shortage?

Basu: You would think that it would be a benign impact. In other words, the principal complaint of contractors coming into 2020 was they couldn’t find workers, couldn’t find electricians, plumbers, pipe fitters, roofers, superintendents, and insurers that cannot find estimators. The past has demonstrated that when construction workers lose their jobs, they have a tendency to leave the industry altogether. These are often really versatile people.

We lost a lot of construction jobs during the Great Recession of 2008-09. The U.S. Census Bureau conducted a study of what happened to those dislocated construction workers and found that by the year 2013, 60% had left the industry altogether, some found jobs in other industries, such as oil, natural gas, retail trade, logistics, and others simply retired. The fact of the matter is that we still have the structural issue in America of not having enough young people entering the skilled trades, that hasn’t changed. And we have a lot of older construction workers who continue to march toward retirement, that hasn’t changed. So you put all those things together and you’re going to see a major struggle to find enough construction workers. When this economy reopens in earnest, watch out as those skilled construction shortfalls could be sharper than ever.

CONEXPO-CON/AGG 365: What does the future of construction look like if this labor shortage continues?

Basu: It’ll become more automated. Necessity is the mother of invention. And so if I can’t find the workers, I’ll want to move toward robotics or other forms of automation to replace those human beings. Some of that’s going to happen anyway, of course, because of the profit maximization motive, but some of that has been artificially induced by the fact that we’re not training enough young people.

For the skilled trades, it’s really not society’s fault. In many cases, it’s the young people themselves who don’t want to access these opportunities. They’re just not interested in opportunities in construction, manufacturing, or logistics, even though in many cases, these are middle income jobs. A good welder in this country can make low six figures, but there are not nearly enough welders in this country.

There’s this big complaint in America about the disappearing middle class. Well, the middle class may have gotten smaller over time, that’s true, but there’s still lots of middle-class job opportunities out there that go begging each and every day.

CONEXPO-CON/AGG 365: Are there any signs that are pointing to an improved situation with materials shortages?

Basu: It’s not clear to me that we have shortages as much; supply chains have found a way to be reconnected obviously. We had all of those issues with meat early in the crisis and lumber prices took off last year, but what we have seen is that supply chains are basically functioning around the world.

Here’s the issue though: What’s about to happen is that demand is going to surge as vaccinations continue to permeate the global population, and as various national economies reopen in earnest, we’ll have so much monetary and fiscal stimulus behind us that this economy is going to get a shove forward into that post-pandemic world and then the demand for commodities is going to rise by leaps and bounds. While I’m suggesting that much of the supply chain has repaired itself, that’s not true in all cases. Is the supply chain ready to deal with the surge in demand? I doubt it because the demand is just going to be so potent.

In fact, we received data suggesting that prices really climbed pretty rapidly in February 2021 or nearly 8% on a year-over-year basis for softwood lumber, steel, iron, petroleum, natural gas and copper. You might see more of that over the next few quarters

CONEXPO-CON/AGG 365: As backlog builds up and the economy as a whole rebounds, how should contractors navigate possible negative effects such as inflation?

Basu: This is very important because it is the case that many contractors right now probably feel that their backlog is not what they want it to be and many have suffered project postponements and cancellations. It depends upon the part of the country they’re in and the segment they operate in, but they’d like to build back that backlog, they want to get back to where they had been pre-pandemic. Here’s the problem: If materials prices surge going forward, if labor costs have to be high, because there is a shortage of skilled craftspeople, and if contractors take on all the risk of those cost increases going forward, they might come to regret that.

What they really need to think about is how they can protect themselves while continuing to get busier. And that might mean consulting an attorney, and I know no one likes to pay legal fees, but this is an important time for contractors.

CONEXPO-CON/AGG 365: ABC reported in February that the construction backlog has been built back up to 8.2 months. Is there a good target number the industry should aim for or be on the lookout for in terms of construction backlog? And how long before we should expect the backlog to rise to pre pandemic levels?

Basu: The 8.2 months figure is not a bad reading at all. What we had coming into the crisis was some near-record numbers in terms of backlog. So, you know, there’s a limit to how much backlog can grow, right? In any case, [8.2 months] is a perfectly adequate number. Based on all the stimulus that’s out there – and some of these segments, we’ve talked about public construction, data centers, healthcare and fulfillment centers – backlog could grow at some point, perhaps significantly later this year, to get us back to those pre-pandemic levels.

CONEXPO-CON/AGG 365: Is the construction industry anywhere close to being out of the woods?

Basu: We’re in the midst of this global pandemic, so there are still going to be interruptions on the job site. Some developers are going to be nervous about what life is going to look like post-pandemic, how many people are coming back to offices, how will business travel recover? But with all of this stimulus in place, I think that over the next few months, a lot of contractors are going to find more bidding opportunities and are going to have more opportunities to build back that backlog.

I think 2022 and 2023 are looking quite fabulous. All that stimulus continues to roll into the economy, even as late as those dates. Here’s the thing, though, we are so aggressive in stimulating this economy fiscally and monetarily, that we’re risking inflation and much higher interest rates. At some point, once the stimulus is behind us, we might be in a world in which borrowing costs, the cost of capital, are much higher. And that would be really bad for construction. So what I would say to contractors is, look, right now is a difficult time, the economy’s not really ready to take off, but later this year, it’s going to take off and that will set the stage for a better 2022 and 2023 for construction.

But beyond that, the outlook is really quite murky because we just don’t know what financial systems and financial markets will do. Given the possibility of significant inflationary pressure, it’s something we haven’t had to deal with for about 40 years now. And it could be coming back to a certain extent.

CONEXPO-CON/AGG 365: When would you consider a realistic point for a return to normalcy?

Basu: Remember, one of the things that’s happened is that 4.3 million Americans have left the workforce, they’re not working and not looking for work. So it’s going to take some time for some of those folks to get reintegrated into the labor market. And that takes time, so I wouldn’t say later this year, necessarily, is when we get back to where we had been pre-pandemic.

But by 2022, and certainly 2023, we could be saying, once again, this economy is really strong. And we can be talking about an overheating economy by that point. So it’s going to take some time, but we’re going to be able to go to football stadiums this fall. It’s going to feel pretty good even later this year. But I think it’s going to take a little bit longer to get back to where we had been.