Dodge Makes Downward Adjustments to Construction Starts Forecast Due to COVID-19April 16th, 2020 by Jordan Scott
The economy is currently in a steep but short recession according to Richard Branch, chief economist for Dodge Data & Analytics, who hosted a webinar updating Dodge’s construction forecast for the year. In the webinar, titled “The Potential Impact of Coronavirus (COVID-19) on Construction Starts,” Branch said Dodge expects an economic rebound by the second half of 2021.
He pointed out that Dodge’s economic forecast was made using current assumptions. In this case, the forecast was made with the assumption that there would be 3-8 million confirmed U.S. infections, around 60,000-80,000 deaths and that infections would peak in May and abate by July.
“With a 1.5% fatality rate we’re expecting about 4 million confirmed infections, which is on the lower end due to physical distancing. But it comes at the cost of the economy,” said Branch. “Our usual data points haven’t captured the extent of the stoppage fully. The shear drop-off makes the drop in 2008 look somewhat gradual … We’re in a recession, full stop. We are trying to figure out the depth of the recession and what a potential recovery looks like.”
In January, Branch forecasted that the U.S. economy would grow 1.7% in 2020, a slowdown from the 2.3% growth in 2019. However, that forecast has been updated to a decrease of 2.2% in 2020, with a 2.5% decrease in the first quarter, an 18.3% decrease in the second quarter and a boost in the second half of the year assuming COVID-19’s peak is in May. Dodge expects the economy to grow 2.7% in 2021 with most of that growth in the second half of the year.
Dodge had originally expected a 2% decline in 2020 for single family construction starts, but first quarter data was strong. However, Branch said that physical distancing and declining consumer confidence will erode the single family sector, leading to home sales crashing.
“Second quarter home sales could decline 50% to levels we saw in the Great Recession,” he said. “The spring and summer selling season is gone and this weakness might continue into the third quarter. As the virus recedes, we’ll start to see construction pick up but the economic damage will take time to repair and heal. We’ll also likely see a stronger exodus of millennials into the suburbs rather than urban settings.”
Branch expects strong single family growth in 2022 and 2023 but forecasts a -19% decline in 2020 starts and a 2% decline in 2021 starts.
Multifamily construction had been strong but Branch expected a 13% decline in that segment in 2020. However, he said that as the economy starts to recover it will take time for renters to repair their balance sheets.
“The multifamily market will contend with strong growth on the single family side going into 2021 and we’re expecting strong growth in the single family side to erode multifamily starts in 2021,” he said, adding that Dodge expects a 10% decline for multifamily starts in 2020 and 5% growth in 2021.
Manufacturing starts reached 85 million square feet in 2018 and declined 21% in 2019 to 67 million square feet. However, Branch said there aren’t a lot of large projects in the pipeline to suggest that it will get back to the 2019 level.
“Will we see manufacturing come back to the United States? I’ll say a hesitant yes. We could see high-value manufacturing come back but there are many issues to deal with such as a shortage of skilled, high-tech manufacturing employees. These are similar workforce issues as faced in the construction industry,” said Branch. “Supply chains take a long time to recalibrate and normalize … the industry will likely hit an equilibrium in the mid to high 60 million square feet level past 2021.”
Dodge expects manufacturing starts to fall 22% in 2020 and fall another 2% in 2021.
“The construction has not kept up with population growth,” said Branch, who expects to see investment in the healthcare industry grow.
To conclude, Branch told the audience to be prepared for a painful second quarter, that 2021 will be better than 2020 and that 2022 will be better than 2021.