BRIEFING NOTE
MAY 2020
The Impact of COVID-19 on US Construction A 2020/2021 Market Outlook
The coronavirus outbreak is foremost a human tragedy. At the time of writing, there have been more than 1,900,000 confirmed cases of COVID-19 in 185 countries and governments have launched unprecedented public-health responses, implementing rigorous measures to contain the virus.
At the same time, the pandemic has triggered the fastest and most severe economic shock in our recent history. The pandemic has disrupted manufacturing supply chains and upended services sectors like travel, tourism, leisure, hospitality, and transport. Governments are scrambling to contain the implications of the economic fall-out while trying to stabilize economies through public-policy responses.
The situation is still dynamic, evolving by the day and the longer-term implications for damages to livelihoods, businesses and companies are unclear. What the next normal will look like is subject to speculation at best.
As such, some of the views in this article may fall out of date.
ECONOMIC IMPACT AND
A SCENARIO FORWARD
Two months ago, the world economy seemed poised for further steady growth. The US economy enjoyed another year of record-low unemployment and appeared well prepared for the expected cyclical slowdown in growth. Financial markets were confident, trade and political tensions the main issues for most economic commentators. So let's undertand it in a detailed manner.
CONSTRUCTION IMPACT
Like every other sector of the economy, the coronavirus pandemic is having a significant impact on the construction industry. Sites are being shut down and projects across the US are being delayed, put on hold or cancelled, affecting workers, businesses and capital programs.
These impacts vary by location, asset type, stage of the project and the parties involved. Generally, sectors such as commercial, leisure and hospitality, education, as well as transportation related projects are especially hit by the current crisis, as demand has been impacted. This will affect investors and their view on project risk in the near to medium term.
Whether or not projects can continue depends partly on state or local authorities’ shelter-in-place orders and the sectors’ designation as an essential industry, which allows a continuation of work rather than a shut down.
At the time of writing, most projects in New York, Pennsylvania, and Washington have come to a halt on state order. At the local level, work stoppage directives vary. In March, Boston shut down all construction and other areas in Massachusetts, e.g. Cambridge followed suit.
Other states consider construction “essential,” with some exceptions. For example, in California, construction is generally deemed essential, especially residential projects, but some large commercial projects have been put on hold. Figure 1 shows current construction related restrictions by state.
This article reflects our perspective as of April, 14, 2020.
We will continue to monitor the situation as it evolves.
Boston
Status of construction
Construction considered non-essential. Boston was one of the first cities where all work was ordered to stop by Mayor Marty Walsh. A ban on building has now been extended “until further notice”. Exceptions include emergency projects such as roadwork. There are other exceptions in the city. For example, work continues on the Seaport District where projects are built on land controlled by the Massachusetts Port Authority. In contrast to Walsh, Massachusetts Gov. Charlie Baker classified construction work as “essential”, meaning construction work can continue with COVID-19 related health and safety restrictions.
Outlook for workload + prices
Construction activity in Boston peaked at the end of 2019 and the development pipeline of new work had started to moderate, reflecting a decrease in the value of construction starts in 2019, a trend that was widely expected to continue this year. The downward trend in the flow of work has now sharped and contractor revenues are expected to decrease more significantly than previously thought. The pace of bid submission price escalation is now expected to slow more significantly, with prices falling moderately in the second half of this year, as contractors cut margins and capacity constraints previously seen in the market ease. We expect bid submission prices to be flat overall this year and next, unless the rebound in work occurs sooner and sharper than we currently anticipate.
New York
Status of construction
Initially construction was considered “essential” and contractors were exempt from the state-wide shutdown. On March 27, the governor issued an updated order, suspending most residential and commercial construction. Emergency repairs and work on infrastructure, hospitals, and affordable housing is permitted to continue.
Outlook for workload + prices
The local construction project pipeline has started to slow with the completion of major projects in 2018 and 2019. Similarly, bid submission price escalation peaked in 2018 and begun to trail off modestly in 2019. Both downward trends were expected to continue this year and the pandemic is set to accelerate the decrease in workload and price escalation, as demand and labor capacity ease, despite the official continuation of work. Overall, we expect bid submission price escalation of 2% in 2020 and 2021, down from 4% and 3.5%, respectively in our previous central forecast scenario. A stronger than currently anticipated reduction in workload would see prices flatten this year.
Philadelphia
Status of construction
Deemed non-essential on March 21 by the state governor of Pennsylvania, with construction ordered to halt. Restrictions have been relaxed slightly for emergency repairs and construction of healthcare facilities. On March 22, the City of Philadelphia issued a “stay-at-home” order, which remains in effect until further notice. As of March 29, the “stay-at-home” order has been expanded to 22 total counties. The order does not apply to essential businesses or to essential personal activities previously set forth by the Governor and the Mayor of Philadelphia. Critical projects have since been given a green light by the Pennsylvania government to get restarted, including several large transportation related projects. All projects being restarted have to comply with COVID-19 jobsite safety plans.
Outlook for workload + prices
We anticipated bid submission prices to slow to 2.5% in 2020, as the number of large projects out for tender was expected to decrease and construction work peaked in 2019. We maintain this view, but lower moderately our forecast for bid submission price inflation to 1% in our central forecast scenario. In the absence of a longer than currently expected downturn, we do not anticipate prices to decrease this year and next. Large masterplan projects will continue to sustain local workflow, but these are phased over long time periods and roll-out will be subject to market demand. We suspect that changing market conditions will push the delivery time of some of these schemes backward.
Washington D.C
Status of construction
On March 24, 2020, Mayor Muriel Bowser issued an order directing the closure of all non-essential businesses through to April 24, 2020. Construction is not categorically exempted, but commercial and residential construction, as well as infrastructure work are deemed essential and can continue to operate for now.
Outlook for workload + prices
We anticipated a moderation in bid submission price inflation to 2.5% in 2020, as the number of large projects on site decreases from its 2019 peak. We did not anticipate prices to decrease over the next three years. The construction market in the D.C. area has not been and is not overly busy by regional standards, though large masterplan projects sustain a steady level of work. As the roll-out of these projects are subject to market demand, we expect a slowdown in the flow of work, rather than a cancellation of projects. In light of recent market developments, we downgrade our forecast for bid price escalation moderately to 1% this year and next.
