Posted July 28, 2020

AGC shares July construction outlook

ABI, AIA’s Consensus Forecast, NABE survey predict decline in future construction.

Monthly, Associated General Contractors of America (AGC) chief economist Ken Simonson taps into construction data analysts to take the pulse of the industry. This month, he finds a COVID-19-tainted market.

“Demand for design services from architecture firms began to stabilize in June, following their peak declines in April,” the American Institute of Architects reported on July 22, based on a rise in the Architecture Billings Index (ABI) from an all-time low of 29.5 in April to 40.0 in June. AIA says the ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 9-12 months.It is derived from the share of responding architecture firms that reported a gain in billings over the previous month less the share reporting a decrease in billings, presented as a score between 0 and 100. Any score below 50 means that firms with decreased billings outnumbered firms with increased billings.

The share reporting declines slowed significantly. Index scores for new project inquiries and new design contracts also showed signs of stabilizing, AIA reports.

ABI scores by practice specialty, based on three-month moving averages, all increased from May but remained far below 50: residential (mostly multifamily), 44.7 up from 38.9 in May; institutional, 38.9 up from 36.7; mixed, 35.3 up from 33.7; and commercial/industrial, 30.1 up from 28.8. The index for design contracts climbed from 33.1 to 44.0.

“Overall, 45 percent of responding firms indicated that they expect the number of architecture positions at their firm at the end of the year to remain at about the same level as at the beginning of the year, while 38 percent expect the number to decrease, and 17 percent expect the number to increase,” AIA reports/

AIA also issued its semi-annual Consensus Construction Forecast. The average of eight forecasts for overall nonresidential building is a decrease of 8.1 percent in 2020 and a further 4.8 percent in 2021.

The average for commercial construction is -11.6 percent in 2020 (comprising office space, -11.1 percent; retail, -7.7 percent; and hotels, -20.5 percent) and -8.4 percent in 2021. The average for industrial construction is -8.3 percent in 2020 and -3.3 percent in 2021. The average for institutional construction is -4.5 percent in 2020 (healthcare facilities, 2.4 percent; education, -6.6 percent; religious, -9.9 percent; public safety, 15.6 percent; and amusement and recreation, -13.0 percent) and -1.7 percent in 2021. 

Real GDP forecast
Expectations for growth in inflation-adjusted gross domestic product (real GDP) for the year ending in the second quarter of 2021 vary widely among the 104 corporate economists in the latest quarterly Business Conditions Survey released recently by the National Association for Business Economics. Two-thirds  of respondents expect an increase in real GDP, including 16 percent who expect a gain of 6 percent or more. Nearly one-third (31 percent) expect real GDP to be flat or falling, with 18 percent expecting a decline of 2 percent or more. Only 5 percent out of 63 respondents reported an increase in capital spending on structures at their firms in the past three months, vs. 44 percent who reported such spending had declined. Similarly, only 5 percent expect an increase in the next three months, vs. 34 percent who expect a drop.

In contrast to the bearish forecasts of the AIA panel, “the total U.S. hotel construction pipeline stands at 5,582 projects/687,801 rooms, down a mere 1 percent by projects and rooms, year-over-year (yoy),” as of June 30, lodging-data provider Lodging Econometrics reported today. “Remarkably, despite some project cancellations, postponements, and delays, there has been minimal impact on the U.S. construction pipeline. Contrary to what is being experienced with hotel operations, the pipeline remains robust as interest rates are at all-time lows. Projects currently under construction stand at 1,771 projects/235,467 rooms, up 3 percent and one percent respectively, yoy. Projects scheduled to start construction in the next 12 months total 2,389 projects/276,247 rooms. Projects in the early planning stage stand at 1,422 projects/176,087 rooms. As expected, developers with projects under construction are still experiencing some opening delays.”

Turner Construction Company announced on July 10, that the Q2 2020 Turner Building Cost Index, which measures costs in the nonresidential building construction market in the United States, experienced a 1.01 percent quarterly reduction from Q1. This is the first time Turner’s projected quarterly Building Cost Index adjustment has reduced in value since Q2 2010. “Trade contractor competition has increased in many areas as they work to secure backlog due to the uncertainty they have about future opportunities industry,” said vice president Attilio Rivetti. The building costs and price trends tracked by the Turner Building Cost Index may or may not reflect regional conditions in any given quarter. The Cost Index is determined by several factors considered on a nationwide basis, including labor rates and productivity, material prices and the competitive condition of the marketplace.”

The wood-products trade publication Random Lengths recently reported record prices and delivery times for some types of lumber, oriented strand board (OSB) and plywood. The Random Lengths Framing Lumber Composite Price posted a new all-time high of $587, surpassing the $582 mark set in 2018. Recent production figures help explain the severely undersupplied market, especially the 25 percent reduction in lumber output in British Columbia through the first four months of the year. Producers widely acknowledged that they would increase output if they could, but were constrained by log supplies and personnel issues, some of them related to the COVID-19 virus. Some southern pine mills were unable to ship orders on time amid diminished staffing due to virus cases.

An epic week of trading vaulted OSB prices to their largest weekly gains in history, with some triple-digit increases recorded. Southern plywood mills quoted shipments for the weeks of August 17 and 24. Shipping was complicated by a shortage of trucks. Reported prices of rated sheathing rose by double digits and underlayment and concrete form also posted steep price gains. Western plywood mills pushed into late August or early September and Canadian plywood mill order files extending to mid- to late September were said to be unprecedented. Some mills quoted shipments for early October.”