Staring down a recession

The eXchange | July 29, 2020

Industry outlook includes downturns, opportunities and uncertainties

Between managing the sudden migration to telework, implementing COVID safety requirements on jobsites, reinventing work schedules, deciphering aid programs, juggling supply chain shifts and responding to clients’ new requirements, construction industry executives could be forgiven if they haven’t found time to digest economic forecasts and realign their strategic plans to meet the new shape of the construction market.

Economists have proposed multiple models for a U.S. economic recovery. The graph above shows what percentage of economic output the U.S. would experience compared to the 2019 GDP for three common recovery models — the V-shaped, U-shaped and W-shaped models. Source: The Conference Board

Yet 2020’s economy continues to shift beneath our feet and companies will need to be ready to weather the downturns, seize the opportunities and adjust to what is still a volatile economic outlook.

“We’re still optimistic about the growth of the economy, but I don’t think we should put any blinders on,” said Spencer Levy, Chairman of Americas Research and Senior Economic Advisor at CBRE. “The pathway of reopening the economy has been much choppier in the short term than many of us feared.”

That turbulence has prompted Levy, who previously expected a sharp V-shaped recovery for the economy, to caution that the pathway to a vast, full recovery “has gotten murkier … It is going to be very challenging even though we will be continuing to grow as the disease is brought under control.”

At Gray and Son, President and COO Rick Scheetz is already seeing a reduction in contract competitions.

“For commercial and residential, we know a slowdown will come because bidding activity has slowed,” Scheetz said. “The Architectural Billings Index (ABI) has been down for the past couple of months and it is a leading indicator of construction activity six to nine months out. So we are preparing for 2021 to be a softer year than 2020.”

The ABI — which tracks monthly billings for design work by architectural firms and measures changing value of design contracts and inquiries into new work — predicted the last two recessions nine to 11 months before those recessions began. In April, the ABI recorded the largest monthly decline in its history — a drop that more than doubled the decline experienced before the 2008 Great Recession. Analysts of the ABI report warned that the country could experience “a very pronounced W-shaped recovery” and that the country was “sitting on the edge” of the second drop in economic activity.

National economic trends, however, don’t necessarily predict what exactly will happen with Maryland’s construction economy over the next 18 months.

“Maryland’s economy held up better than most despite the fact that we have some of the most aggressive social distancing directives in the country,” said Anirban Basu, Chairman and CEO of Sage Policy Group.

Buoyed by a highly-educated workforce, extensive professional services and government sectors, and a widespread ability to shift to telework, Maryland’s economy could still experience a fast, if erratic, V-shaped recovery in 2020 “and 2021 will be a period of very robust economic expansion,” Basu said.

Many economists and political analysts predict the U.S. Congress will pass a massive infrastructure package in late 2020 or early 2021. That stimulus, which could top a trillion dollars, would create business for the construction sector and fuel growth across the economy.

He anticipates the economy will be strengthened by two further federal stimulus measures — aid to state and local governments and a massive infrastructure package.

In the midst of the economic turmoil, several construction sectors are poised to experience growth.

“Major medical systems — such as University of Maryland, Johns Hopkins and MedStar — recognize that there needs to be more investment in their inpatient capacity… Healthcare in the longer term stands to be a significant source of construction activity,” Basu said.

The shift to e-commerce is increasing the already strong demand for fulfillment centers in Maryland. Online shopping along with widespread adoption of telework and the need for expanded public health data systems is also expected to increase the demand for data centers.

“There is obviously going to be more onshoring and reshoring of manufacturing as companies work to bring supply chains closer to their customers,” said Daraius Irani, PhD, Chief Economist at the Regional Economic Studies Institute at Towson University.

Maryland could see some of the increased need for industrial space. Given the relatively high cost of land in Maryland, however, those facilities would likely be for high-value manufacturing operations, such as vaccines,therapeutics and medical equipment, Irani said.

The prospects for commercial construction are less promising. The flight to telework and ongoing pandemic will produce “a very weak commercial real estate sector with lots of office vacancy and retail vacancy,” Basu said.

The current aversion to public transit and crowded urban centers could prompt employers to open suburban offices. However, construction loans will be very difficult to obtain in the near future, Levy warned.

Despite uncertainties surrounding the economy and the pandemic, many contractors still have considerable time to prepare for a market downturn.

“We’re going like gangbusters right now” with projects for several public school systems, the University of Maryland and the Maryland Stadium Authority, said Tom Gnau, President of J. Vinton Schafer & Sons. “But I expect future [public sector] budgets will be slashed… I have already talked with some engineers and designers who have indicated that they are laying offpeople. So I can’t see how this won’t have an effect on our future workflow.”

To prepare for that downturn, J. Vinton Schafer is already researching opportunities to diversify into other market segments.

Principals at GWWO are bracing for a similar, delayed downturn about 18 months from now in their typical workload of educational and cultural facilities. To prepare, the firm is reinforcing its ongoing standards — do really good work, become a client’s architect of choice and always take the opportunity to talk to clients about possible, future projects, said Paul Hume.

“We saw in 2008 as belts tightened that owners and clients gave more work to architects they enjoyed working with, who provided good service and who they didn’t want to see go out of business.”