By Meghan Hall
2020 marked the end of the longest economic expansion in United States history, unexpectedly pumping the brakes on 128 months of consistent growth. The second quarter saw gross domestic product (GDP) contract nine percent from its first quarter value, a decline of 37.1 percent year-over-year. In the span of a months, 22.8 million jobs were lost and unemployment rose from 3.5 percent—its lowest level in 50 years—to 14.7 percent, a new peak since the Great Recession. However, while the construction industry saw its own challenges as a result of the pandemic, it was not as disrupted as other sectors. In 2020, the industry contributed $1.01 trillion to the economy and created eight million jobs, and a recent report released by NAIOP on the economic impacts of commercial real estate indicates its strength will be critical to the recovery of the U.S. economy moving forward.
“Still, construction spending in 2020 was not as negatively impacted by the pandemic as other sectors in the national economy,” explained Dr. Steve Fuller, University Professor Emeritus at George Mason University and author of NAIOP’s most recent report. “This more positive performance can be attributed to many factors and these varied among states.”
There are a vast number of reasons why construction spending was not as impacted by the emergence of COVID-19. Chief among these reasons: construction was designated as an essential business in many states. In states where construction was paused, such pauses were largely temporary. Additionally, construction activity has a lengthy lead time, with annual spending already well underway prior to the pandemic.
According to NAIOP’s report, commercial real estate sectors were impacted differently by the pandemic. Office expenditures totaled $38.8 billion in 2020, down 28.5 percent from 2019, while retail expenditures totaled $11.7 billion last year, a decrease of 29.5 percent. The reduction of retail construction expenditures marks a fifth straight year in decline; the last time retail construction spending saw an increase was in 2015. Warehouse construction remained relatively stable, with a slight decrease by 0.3 percent. However, residential construction increased 14.6 percent, and publicly funded construction grew by 3.7 percent, gains that greatly offset decreases in other areas of privately funded, commercial construction.
The construction sector has one of the heist economic multipliers—at 3.0154—among all sectors of the U.S. economy, meaning that for every dollar invested in the industry, the national economy expands nearly three-fold. NAIOP states in its report that the industry has such a strong multiplier because it is closely intertwined with other economic sectors, including professional and business services, manufacturing, financial activities, transportation and infrastructure and government initiatives. As construction spending grows, so does labor income, leading to the creation of new jobs and a general strengthening of the economy overall. Historically, the federal government will accelerate construction in times of recovery or market correction to stimulate the economy.
“This is not only a NAIOP perspective, it is in the national interest to re-accelerate the economy and construction spending has been proven an effective means for accomplishing this objective,” stated Fuller, who noted that after the Great Recession of 2009, GDP growth did not recover until construction spending became positive. “…Construction spending boosted the economy’s growth rate; it helped move the U.S. growth rate higher, offsetting other lagging sectors. This has been the historic pattern of all past economic recoveries.”
Residential construction growth is expected to continue in 2021, fueled by historically-low mortgage rates and increases in product demand. NAIOP predicts that office and warehouse construction will also rise, especially in markets where overbuilding or higher vacancy rates have not severely impacted the health of these traditional competitive markets. Retail construction could also see a rebound, particularly in markets that are seeing demographic shifts and large population growth. Manufacturing construction spending will also increase selectively, and will remain largely dependent on new technologies and efforts to modernize U.S. production facilities.
“Many factors point to a commercial real estate rebound in 2021,” said Thomas J. Bisacquino, president and CEO of NAIOP. “Obviously, we dealt with several unknowns and an unexpected downturn in 2020; however, we believe that while the pandemic has accelerated trends already progressing in real estate, we have a bright future. Office workers will return to the offices with some regularity in 2021, the industrial and warehouse sectors will continue to expand as e-commerce demand intensifies, and the retail sector will be reshaped as the shopping experience evolves.”
NAIOP notes that as construction spending and the wider sector recovers with the rest of the economy, full employment within the U.S. won’t be reached until the middle of 2022, and unemployment is expected to remain above four percent through 2025. Any GDP growth that the nation sees in the coming year is what is known as replacement growth and will make up for what was lost in 2020. Four percent GDP growth is expected in 2021, bringing the value of total GDP close to pre-pandemic levels measured in February of 2020.
“The recovery process will be variable in 2021. Not all sectors of the economy have experienced the unprecedented contraction with the same severity,” states NAIOP’s report. “The construction sector, while being slowed by supply chain and workforce disruptions, efficiency losses from social distancing and market uncertainty, was not as seriously impacted in 2020 as other sectors. Still, the construction sector’s outlook in 2021 is uneven, as was demonstrated by its performance during the second half of 2020.”