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Report: Recovery for North American Construction Industry is an “Alphabet Soup of Possibilities”

Rider Levett Bucknall, Seattle, San Francisco
Courtesy of RLB

By Meghan Hall

The impact of the coronavirus pandemic on the construction industry was immediate; construction sites were forced to close due to shelter in place orders, while supply chains interrupted delivery timelines. The rapidity at which COVID-19 forced the industry to a halt has created an uncertainty that has made it difficult—at best—to predict how and when recovery will occur. According to a recent North American construction report released by global firm Rider Levett Bucknall (RLB), recovery will be challenging due to the variety of scenarios possible.

“As noted in this quarterly cost report, economic indicators are showing deep drops since our last quarter, and in some cases have reached historic lows. While this is hardly surprising, it’s clear that charting the recovery will be a complicated process,” stated Julian Anderson, RLB President of North America. “Indeed, there is an alphabet soup of possibilities when discussing the possible trajectories: Z-shape, V-shape, U-shape, W-shape, L-shape, K-shape, and more.”

After the second quarter, the United States saw its largest quarterly drop of gross domestic product (GDP) on record, with a 32.9 percent annualized decrease. Construction unemployment also remained high, at a rate of 10.1 percent in response to many construction sites being shut down. Construction costs also moderated with the national average increase coming in at 0.16 percent, compared with 1.3 percent at the same time last year.

Currently, the prevailing theory of recovery among economists is “K” shaped—meaning recovery would be uneven and split across different sectors and income groups. For the construction industry, this also holds true.

“The pandemic-induced recession is going to have far-reaching effects,” said Anderson. “Lenders are less likely to support large new developments in sectors that have been hard-hit, like sports and hospitality. As construction costs soften, we are already seeing more interest in the projects that are coming online.”

Over the course of the quarter, however, the number of cranes and construction projects declined nationwide, with the count dropping by 40 cranes. According to RLB’s Crane Index, this was the first decrease since its July 2017 iteration of the index. Of the fourteen cities evaluated, four experienced an increase; four held steady and five saw a significant decrease, some of up to 76 percent. Different industries were also impacted: Cranes installed on civil projects have dropped by 40 percent, while cranes dedicated to transportation projects have increased 80 percent. Healthcare projects also experienced an increase of 38 percent in active cranes. Residential and mixed-use projects accounted for 40 percent and 25 percent of all cranes counted, respectively. The results indicate that the impacts of COVID-19 are far from even.

San Francisco, for example, experienced a decrease in crane count even though it remains the fourth most active construction market in the country, with 24 cranes. The decrease, according to RLB, is indicative of the number of nearly-completed apartment and condominium projects throughout the city, including the Four Seasons Residences in SoMa. Challenges in the hospitality sector have also impacted San Francisco, which is often a prime tourist spot. RLB predicts that hospitality construction will likely be more adversely impacted in San Francisco over the course of the next year.

“As a primary market, SF continues to be a target for developers that focus on healthcare, housing, technology, and biotech R&D—even during this latest economic downturn. A great example of how developers currently see opportunity in SF for delivering in-demand product such as housing, mixed-use commercial, and public/civic infrastructure is the latest round of proposals selected for review by the Port Commission for the redevelopment of Piers 30-32 and Seawall Lot 330 along the city’s Embarcadero,” said Ryan Bosworth, resident manager of San Francisco at RLB.

Bosworth continued, adding, “Although significant investment in hospitality or commercial/retail is unlikely until there is more certainty around COVID-19, San Francisco’s position as a regional, national, and international destination means it will be higher on the list for potential investors within these sectors in 2021 that are looking to capital plan for 2022/23.”

Seattle added even cranes to its skyline since RLB’s last report, and the city ranks number one nationwide in active cranes, with 43 counted. Despite its shelter in place orders, work has restarted on many residential projects, allowing the local construction industry to move forward. However, RLB predicts that Seattle too could see a decrease in its crane count in the future. According to Craig Colligan, resident manager of Seattle’s RLB office, there are several reasons as to why Seattle could see a slowdown in construction, despite seemingly bucking nationwide trends thus far. These reasons all impact different sectors in different ways.

“[For education], The public is playing a key role—at the ballot box—in the slowdown of education projects. People who have lost their jobs due to COVID are unwilling to vote in favor of additional taxes that are used to fund the bonds and levies that pay for school construction,” explained Colligan. “As far as private work is concerned, uncertainty about the presidential election and the development of a coronavirus vaccine has prompted some of our clients to pause their projects.”

Current projections for the construction industry vary widely, making it hard to predict the health of the industry in the future. However, RLB remains certain that when recovery does begin to occur, learning to manage risks and financial concern in the future will be challenging for many.