Real estate and management services and investment firm JLL and its research division recently its released its 2021 Construction Outlook, which appeared promising for residential single-family construction, but not as positive for commercial real estate.
“After weathering an extremely volatile year, 2021 is expected to bring more stability to the construction industry, but this year will look unlike anything we saw during the last recession and recovery cycle,” JLL Construction Research Lead Henry D’Esposito wrote in the report. “One of the biggest differences will be growth in residential construction, which will continue to impact labor and material markets, and drive-up construction costs across the industry. The net impact for non-residential work in 2021 will be a challenging combination of decreasing work volume, but increasing costs.”
The COVID-19 pandemic played a role in the JLL’s less than optimistic outlook for CRE construction this year. Non-residential construction starts were down 24% last year, meaning less work will take place this year, even if new projects start back up again. Meanwhile, non-residential construction volume overall is expected to fall this year after already doing so in 2020. Construction price hikes has not helped matters either.
“Adding to the challenges this year, construction cost escalation picked back up in earnest in the fourth quarter of 2020 and we expect it to continue throughout 2021,” D’Esposito wrote. “Both construction labor and material markets have experienced shortages that are driving input prices higher.”
If there’s a bright side to JLL’s projections for CRE construction in 2021, it’s that the industry remains stable. Project teams created strict pandemic safety protocols and worked with local governments to keep jobsites open and used a lot more construction technology. Keeping the lights on in 2020 put the construction industry as a whole in a good position to work though a likely unsteady pandemic recovery this year. The downside is a lot of construction growth is not expected.
“Only a few months into the New Year, and the relative stability of construction this year is already a welcome relief from recent volatility,” the report said. “What 2021 will not bring, however, is a growth year. The construction industry always operates with a lag behind the rest of the economy, and that dynamic will play out again this year. Although the overall economy is forecast to grow in 2021, we expect non-residential construction spending to shrink, a result of fewer new projects and delayed starts in 2020.”
The construction industry’s recovery cycle will also work on an uneven timetable, especially for non-residential construction like warehouses and hospitality venues. Regional and city level differences won’t be as significant as the gaps between sectors, but there will be enough of a difference that recovery timing will vary across the U.S. It will be a tougher scenario for CRE construction because typically when construction demand is down, so if cost inflations. Unfortunately this year non-residential construction will face less demand and construction spending, but higher cost inflation.
What makes this recovery different?
JLL pointed to two key dynamics to why this construction recovery is different from the prior one. The first reason is there’s a bigger gap between the different sector forecasts than ever has been before. JLL analyzed three primary future growth indicators for nine different sectors: construction starts, construction industry sentiment and forecast construction spending. Distribution and healthcare fared the best, while hotels and entertainment venues showed the least promise in terms of construction recovery. Among the sectors that fell somewhere in the middle, offices had the least amount of consensus as the amount of project starts significantly outpaced forecasted spending and sentiment.
The second factor that has put this construction recovery in a class of its own is the disparity between the different real estate types. In this case, the construction downturn is impacting CRE while most, single-family residential construction is, “booming”, according to JLL.
“It is no surprise that the pandemic has shifted the average consumer’s time, energy, and spending away from shared public spaces, like offices and entertainment venues, and into private homes,” D’Esposito wrote. “This dynamic has shaped growth within different sectors of non-residential work but has also caused a boom in single-family construction.
“This year will present a challenging combination of lower growth and higher inflation for the construction industry. The clearest way to picture the year ahead is to group the first half of the year in with 2020, as a challenging and volatile period to be managed through, and to group the second half of the year in with 2022, an economic rebound, full reopening, growing demand and a return to growth. The key, of course, will be where exactly that midpoint ends up.”
JLL’s full H1 2021 Construction Outlook can be downloaded here.
Joe Dyton can be reached at joed@fifthgenmedia.com.
