Recent economic disruptions considered in the following forecast include the domestic and foreign impact of COVID-19, high volatility across financial and equity markets, emergency policies set in place by the Federal Reserve, lower oil prices, and mounting political uncertainty in addition to nationwide social unrest headed into the 2020 presidential election.
Based on unprecedented government support, FMI is anticipating the 2020 recession to continue to dissipate. However, anticipated corrections across residential markets are at risk of contributing toward ongoing economic losses and an elongated downtrend in nonresidential construction spending over the next several years.
FMI Managing Director Jay Bowman Discusses the Construction Forecast
Total engineering and construction spending for the U.S. is forecast to end flat, or less than -1 percent in 2020, compared to 2 percent growth in 2019.
Declines will be led by an abrupt contraction in nonresidential building markets. Current anticipated low-performing segments forecast in 2020 include religious (-21 percent), lodging (-14 percent), amusement and recreation (-9 percent), educational (-7 percent) and office (-5 percent).
Multiple segments that were previously in down categories have been upgraded this quarter to reflect upheld market conditions and investment levels. Based on strong second quarter actuals, year-end forecasts for public safety (9 percent), water supply (9 percent), residential improvements (6 percent), communication (4 percent) and sewage and waste disposal (4 percent) have all been revised and improved substantially.
FMI’s third quarter 2020 Nonresidential Construction Index (NRCI) at 45.6 reflects a large improve- ment from the second quarter reading of 36.9, up nearly 24 percent. However, the index remains well below the growth threshold of 50, suggesting fewer future engineering and construction opportunities.
Total Construction Put in Place Estimated for the United States
Throughout the value of construction put in place includes the cost of architectural and engineering work. Source: U.S. Census and FMI Forecast
Total Construction Spending Put in Place 2019 and Forecast Growth (2019-2024 CAGR) by Metropolitan Statistical Area
Source: U.S. Census and FMI Forecast
RESIDENTIAL CONSTRUCTION PUT IN PLACE
NAHB/Wells Fargo Housing market index reports builder confidence at all-time highs despite historic rise in input costs
Slow migration out of crowded metropolitans into low cost of living cities and states
Expect heightened unemployment rates to weigh on inventories, prices and consumer confidence as government programs reach expiration
Geographic diversity results in new economic hubs alongside demand for supporting infrastructure and services
NRCI scores are based on a diffusion index where scores above 50 represent improving or expanding industry conditions, a score of 50 represents conditions remaining the same, and a score below 50 represents worse conditions than last quarter (or contraction).
The data in the NRCI is presented as a sampling of construction industry executives voluntarily serving as panelists for this FMI survey. Responses are based on their experience and opinions, and the analysis is based on FMI’s interpretation of the aggregated results.
NONRESIDENTIAL CONSTRUCTION PUT IN PLACE
COVID-19 cases, layoffs, and bankruptcies have caused major disruptions to travel (both business and leisure) nationwide
Occupancy rates and RevPar begin upward slowly, but are expected to remain depressed well into (and possibly beyond) 2021
New demand expected to follow suburban migration, future losses tied to reduced large scale mixed-use and transportation investments
Drivers: Occupancy rate, RevPAR, average daily rate, room starts
Ongoing bankruptcies, closures and remote working preferences will weigh on demand for future traditional office space requirements
Rapid expansion of data center investment continues alongside 5G deployment, IoT expansion and increased e-commerce and remote working adoption
Office dedensification renovations and increased adoption of shared working spaces are expected to drive activity in both large metropolitans and suburban markets
Drivers: Office vacancy rate, unemployment rate
Ongoing/increasing bankruptcies and store closures into 2022
Demand for warehouse and distribution picks up across all facility types; repurposing existing stores and shopping malls becomes more common place
Future losses tied to reduced/revised mixed-use investments and increasing vacancies
Jay Bowman is a principal with FMI. Jay assists a broad range of stakeholders in the construction industry, from program managers and general contractors to specialty trades and materials producers, with the identification and assessment of the risks influencing the strategic and tactical decisions they face. In this role, Jay’s primary responsibilities include research design and interpretation, based on developing an understanding of the context within which these organizations operate. Jay can be reached at email@example.com.
Brian Strawberry is a senior economist with FMI. Brian’s expertise is in economic and statistical modeling. He leads FMI’s efforts in market sizing, forecasting, and building product/construction material pricing and consumption trends. Brian’s combination of analytical skills and creative problem-solving abilities has proven valuable for many contractors, owners and private equity groups as well as industry associations and internal research initiatives. Brian can be reached at firstname.lastname@example.org.
Emily Beardall is a senior analyst for FMI’s strategy practice. Emily is responsible for creating and developing tools to deliver innovative solutions for our clients. She is committed to utilizing these strategic tools to improve company performance and profitability. Emily can be reached at email@example.com.