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Photo Credit: Trustile

At the WDMA 2020 Fall Conference, Kermit Baker Chief Economist for the American Institute of Architects took a look at the fundamentals, strengths and weaknesses of the commercial, institutional and multifamily markets. The research helps provide a window into how the year following the COVID-19 year will shake out.

Economic Conditions

Some of best indicators for the health of an economy are the payroll numbers. It’s no surprise that in payroll figures dropped sharply in March and April 2020 as widespread economic shutdowns occurred in the wake of the pandemic. These figures began to recover throughout the summer and continued with ups and downs as companies and municipalities worked to deal with the pandemic.

Another area researchers look at is consumer sentiment. This segment is down significantly by 19.8 points but improving. Conversely the U.S. saw retail sales go up by 4 percent, which is encouraging.

Even with a few weak months for homebuilding, 2020 was quite strong for housing starts both in the single-family and multifamily segments. One of the reasons for this is this market has been significantly under-supplied for over a decade. Coming out of the great recession, there was strong growth in multifamily construction, but sluggish growth in single family. Coupled with that is the fact that the national homeownership rate is rebounding from its lowest rate in the last 50 years as more millennials buy homes.

Architecture Billings Index Data

The Architecture Billings Index (ABI) is a monthly survey by the American Institute of Architects that looks at several conditions at architecture firms such as billings, design contracts, project inquiries and more. It saw a steep drop off in March, but reported a bounce-back by September and seemed to stabilize somewhat.  This and other indicators show that the construction industry in general, while weakened, is doing better than other segments in the economy. The three main sectors the ABI looks at are multifamily, commercial/industrial and Institutional. Multifamily is the strongest segment and the only one that can be classified as being in recovery mode. The ABI reported that architecture firms are projecting revenue declines of an average 5.5% across all firms and regions for the year.

Looking forward to 2021

2021 will see a number of long-term changes and trends that stemmed from the pandemic in terms of what the market needs. 2021 will look different in the following ways:

  • Locational changes
    • De-urbanization with people moving out of urbanized areas and major cities
    • Avoidance of public transportation
    • Declining rates of mobility
  • Continued weak demand for commercial space
    • Continued popularity of telecommuting will reduce demand for offices
    • E-commerce will limit demand for bricks and mortar retail
    • Business and personal travel will limit need for hotel space
  • Repurposing commercial/high-end residential space
    • Retrofitting existing offices and hospitality
    • Conversion of excess retail/office/hotel space to alternative (residential, for example) uses
    • Filtering of high-end rentals—many may become available for sales

Work on existing facilities, which includes renovations, rehabilitations, additions and historic preservation has already seen significant growth, going from 34% in 2005 to 49% in 2019—and this segment is expected to continue to grow in light of these trends. Conversely, new building is likely to trend down.

Conclusions

Construction spending is expected to decline in most segments in 2021, but more modestly than what was seen in 2020. In the commercial sector, hotels will see a decline of spending by 16.5%, followed by Office with a drop in spending by 7.6%, and Retail seeing a drop by 7.2%.

In the institutional sector, the hardest hit segment by far will be the amusement and recreation spaces, which are dependent on gatherings and large crowds, with a drop of 11.9%. Education will only see a 1% drop.

The exception to all the declines will be seen in the one institutional segment area that will see growth. Spending in the health segment will actually increase by 3.2%.

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