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Construction: Remodeling Needed For COVID Created Ambiguity

July 9, 2020

There has been a great deal of change in the economy over the last several months. Of the many sectors that have felt the impact of the lockdown recession, the construction sector has experienced the most varied response. This stems from the wide variety of construction activity in the economy as a whole. What drives residential construction is not what drives commercial activity, and public sector construction projects are another thing altogether.

To make matters more interesting, construction is driven by extremely long-term decisions and timelines which makes it less subject to short-term changes than other sectors.

When the lockdown began, retail and most of the service economy were directly and completely impacted.  But construction projects continued more or less uninterrupted (despite obvious work sites being temporarily closed).  Projects that were underway largely resumed upon removal of lockdown orders.

The real impact from the recession will come later should projects continue to be delayed or get canceled altogether. As the construction industry looks ahead it will need to consider everything from consumer attitude to corporate budget constraints, commodity pricing, labor shortages, public budgets, and shifts in the way people work and live in the post-pandemic world.

Residential Construction

The residential market is undergoing profound changes as the US consumer has been heavily affected by a combination of the viral pandemic and the subsequent collapse of the economy. Prior to March of this year, the expectation had been that multi-family housing and senior living facilities would be growth areas for years to come.

Now the emphasis has started to shift back to single family homes for the millennial generation and what is now an emerging Gen-Z buyer. The limitations of being isolated in an apartment have become apparent and there are fewer people willing to move to senior facilities.

The large number of job losses have reduced the pool of potential homeowners and the volatility of the stock market has limited demand for higher end homes. And yet, a combination of factors has helped fuel the trend toward working at home and has allowed people to consider living further from urban centers – which drives residential construction demand. This may accelerate the growth of more distant exurbs and suburbs.

The Kansas City area still has a shortage of housing in many areas – especially in lower income regions. The expected population growth over the next five to ten years will make this shortage more acute. There is also a chronic shortage of skilled laborers and the recent surge in unemployment will do little to alleviate the problem (few who have been laid off have the requisite skills and most will need specialized training).

Commercial Construction

The commercial side of construction will see significant changes as well. The sectors that will see declines in construction activity will include office development as well as lodging and entertainment venues. This will probably ease as the lockdown restrictions are slowly lifted, but some of this development will not resume as working patterns have likely changed permanently.

The office of the future will be different than today – likely smaller and more conducive to social distancing protocols. There could be fewer large office buildings in the short term and increases in demand for small satellite facilities that will give employees some temporary access to an office environment for collaboration and culture building, even as they do the bulk of their work at home.

In the commercial construction segment, the major growth sector will be in warehousing and logistics as businesses rethink the fragility of their supply chains and the need to closely manage inventory.

The initial pandemic crisis will eventually pass but reactions to the issue will linger. The focus for construction will change in many business environments. There will be an emphasis on safety and hygiene with new protocols that will affect personal space. The culprit for viral spread has been population and worker density in small spaces, and that will be reduced in the future - but at a cost. Spreading people out will require more square footage per employee and more energy use as a result.

The notion of open space offices will be replaced by designs that allow workers to be more easily isolated. Temporary barriers (plexiglas and glass partitions) that have been quickly implemented to deal with social distancing guidelines will become more permanent additions to the office and retail environments and will be built into architectural designs.

Public Sector Construction

The outlook for public sector construction is far murkier. On the one hand there is an immense need in the US for infrastructure improvements as the entire system has been graded as D- by the American Society of Civil Engineers. There is ample opportunity to work on roads, bridges, ports, airports, and a wide variety of public structures.

What is missing is investment.  With Federal, state, and local municipalities seeing a surge in spending generated by the response to the pandemic, it is expected that budgets will be extraordinarily restrained. There has been discussion of linking infrastructure improvement to the next stimulus effort in Congress, but that remains up in the air.

The largest project in the Kansas City area remains on track – thus far the funding for the airport has been left intact but the pandemic has severely strained the air travel industry and that has negatively affected revenue projections.

Ongoing Opportunities

The construction sector continues to face many challenges that it was encountering before the pandemic lockdown. There are not enough people in skilled trades and those that are in these jobs are aging. The average skilled worker is now in their mid-50s, which is the oldest average age seen in over 30 years.

There will still be significant growth opportunities in construction if one knows how to capitalize on the potential.  But it is more important than ever to closely manage all financial aspects of the business and extract maximum productivity and efficiency from all segments of the company’s operations.  Accurate costing and proactively getting ahead of changing design trends are just one part of the ongoing challenge. Knowing when to diversify into new types of construction and creating expertise in those vertical markets through talent and M&A activity may help companies work through what could be a continuously volatile 24 months ahead.   

MarksNelson is positioned to support construction companies with cash flow, job costing, contract accounting, and other financial advantages; technology improvements including workforce mobility; and exit strategies including succession planning, valuation, and financial due diligence. Whether you need ongoing support or a complete business strategy remodel, we can help you move your construction company forward.