Ken Simonson, chief economist of Associated General Contractors of America, and Dr. Eric Thompson, associate professor of economics at Karl H. Nelson and director of the Bureau of Business Research at the University of Nebraska-Lincoln, presented national and Nebraska economic forecasts focusing on the construction industry during the January DBIA Nebraska Chapter webinar.
Nationally, construction spending increased by 1.3% between February and November 2020, according to a report by the U.S. Census Bureau. Simonson said all the growth was due to private residential construction, single and multifamily, which grew by 11%. Private nonresidential construction spending decreased by 8%, and construction spending on public projects decreased by 1%.
Simonson predicts that spending on public construction projects will decline in 2021 as big projects commenced pre-pandemic will be completed. He said that future public projects will be deferred until the need is clear and revenue is back.
Simonson predicts that office construction will be down very sharply in 2021, although there likely will continue to be a demand for data centers.
Hospitals and nursing homes suffered major revenue hits in 2020. Simonson said that there will be a shift away from delivering health care in hospitals and a move toward specialized care facilities, which saw an increase of 9% in construction spending between February and November, 2020. Simonson also predicts that the avoidance of nursing homes is likely to persist.
Simonson said the cost of inputs—all materials and services used in new construction—increased more than 8% from April to December, 2020, and he predicts that the increase in January, 2021 is likely to be worse. Simonson said that the construction industry has seen significant increases in the price of steel products, copper, diesel and lumber, but the bid price for new non-residential construction projects has remained flat. Consequently, there has been a large and growing price squeeze on contractors’ margins, he said.
Simonson noted that an effective vaccine rollout is crucial for recovery, and construction will lag behind the resumption of pre-pandemic activities.
“So many owners, whether their businesses, for their own accounts, investors, developers and institutions such as universities or state and local agencies, they’ve had a huge hit to their revenues and incurred a lot of unbudgeted expenses and have a lot of questions about whether they’ll really need a new facility. And, perhaps even if they do want to expand, there may be something that is now vacant that they could use,” he said.
“The best private prospects for this year appear to be remodeling, many types, not just offices, local distribution centers, data centers and then very selected niches in manufacturing and other types of structures. Certainly less demand for this year and for quite some time to come for new retail, office, higher ed, lodges, other travel related spaces, such as airports, convention centers,” said Simonson.
Simonson said K-12 schools offer the best prospects for future public construction projects. School districts rely very heavily on property tax receipts, and the property tax base is actually starting to climb in a number of areas nationwide.
“In fact yesterday we had two reports on house prices for houses that had resold and those were up by 9.5% to 11% on a national basis. Once the assessors come through and work that into the property tax base, school districts will be in a lot better shape than agencies that depend on income or sales or dedicated taxes such as a gas tax or airport fees,” he said.
Looking into the future, Simonson said that there has been a steady decline in population growth nationwide that is likely to persist through the next decade.
“And that means slower demand growth for most types of construction. Housing obviously, but with it come schools, local streets and utilities, local retail to a degree and some public facilities such as libraries and police and fire stations,” he said.
Nebraska’s 2020 construction employment peaked in February and declined by 1.4% between February and December. However, construction employment in Omaha and Lincoln rose during 2020. Omaha saw a 3.2% increase between December 2019 and December 2020; while Lincoln saw a 2.2% increase.
“So, basically, the impact of the pandemic has been less on Nebraska contractors than it has been on much of the country,” Simonson said.
Although Nebraska will see a 2.4% decrease in employment for 2020, Thompson predicts employment will increase by 2% in 2021 and by another 1.4% in 2022.
Thompson said that, unlike many other states, Nebraska has a very high birth rate, and population growth in Nebraska will be solid, especially in Omaha, Lincoln and Kearney.
“If there’s growing population, there’s growing customers, there’s growing workforce, and that’ll be very positive for the growth of the economy. A growing economy needs new buildings, needs new construction,” Thompson said.