By Richard Branch, Chief Economist, Dodge Data & Analytics
BEDFORD, MA – FEBRUARY 24, 2021 – In 2020, the COVID-19 pandemic raged on, pushing the U.S. economy into recession and constraining opportunity. Construction starts fell 9% to $778 billion but would have been down a total of 17% if single family construction had not provided a significant boost.
The COVID-19 vaccine rollout will help the overall economic recovery, but the construction sector’s recovery will be limited by reduced demand for nonresidential buildings, budgetary issues at the state and local level, and limited public works projects.
Hope for a better recovery, however, lies with the potential for an influx of federal stimulus funds directed to infrastructure. President Biden’s Build Back Better plan is said to include “a $2 trillion accelerated investment, with a plan to deploy those resources over his first term.” The last major spending program was in the wake of the Great Recession in 2009. Though the American Recovery Reinvestment Act of 2009 (ARRA) helped direct $100-$150 billion towards infrastructure, it did not provide consistent and significant upward momentum in public works starts.
If, however, President Biden’s (or similar Congressional) infrastructure package is aimed at investment across a broad range of construction types, it could significantly alter Dodge’s forecast trajectory. Below is a brief look at its potential impact by project type.
Potential High Impact
Public Works: Public works consist largely of roads, bridges, water supply, other water resources, and sewers/waste removal. In constant dollar terms (i.e., adjusted for inflation), public works construction peaked in 2002 at $68 billion. In the years since, starts have averaged just $59 billion after adjusting for inflation. This is arguably the “low hanging fruit” in any potential infrastructure plan. There is broad consensus across party lines for action beyond a renewal of the five-year surface transportation plan (FAST Act), which is set to expire on September 30, 2021.
Transit/High-Speed Rail: Throughout the COVID-19 pandemic, single family construction has been growing sharply in less dense (and more affordable) suburban and rural areas further away from downtown cores. While this pace is expected to cool somewhat as the pandemic eases, it will exacerbate congestion on roads and transit systems. Legislation for roads and transit would, therefore, likely include additional funds for high-speed rail projects such as the Dallas-Houston line, Los Angeles-Las Vegas line, and potential upgrades to Amtrak’s Acela line between Boston and New York. Land acquisition will be a significant challenge to overcome for these kinds of projects.
Renovations: Addressing climate change was a hallmark of Build Back Better, so improving energy efficiency for existing structures could be a significant element of the final plan. In 2020, nonresidential building renovations totaled $61 billion, accounting for 25% of all nonresidential building starts. The likely vehicle for funding these projects is tax credits, which could reduce the overall cost.
Potential Medium Impact
Renewables: Over the last decade, utility-scale renewable projects (mainly wind and solar) have accounted for almost 60% of all electric generation starts. In December 2020, the Investment Tax Credit and Production Tax Credit were extended through 2025 as part of the omnibus appropriations package, providing further tailwinds for this sector. Additional funds will likely be allocated in the infrastructure plan to build renewable resources. The current limiting factor to stronger growth in this sector is the lack of transmission capacity to carry the power to large markets.
Potential Small Impact
Data Centers: Access to broadband internet has been a key restraint to growth in many areas of the country and could be a boon in any potential infrastructure package. In turn, this could have a two-tailed effect on construction. First, from the actual buildout of the wiring and other assets, but also increased data center construction. It seems unlikely that data center developers would receive direct funds to build, but tax credits could potentially be made available. Even without support, data center construction starts have totaled nearly $30 billion since 2017 and are likely to remain robust.
Healthcare: The pandemic laid bare the lack of surge capacity within the nation’s hospitals. Over the last decade, healthcare construction starts have been heavily skewed towards outpatient clinics, while investment in hospitals has trended lower. Although the issue was not directly addressed during the campaign as part of an infrastructure package, it seems logical that insufficient in-patient bed counts could be addressed.
A program of this size is not without challenges. The current political environment presents the most significant impediment. Slim majorities in the House and Senate will require finesse in passing any large dollar spending program, especially since it comes on the heels of a big-ticket COVID-19 relief package.
The ultimate impact on the construction sector will also be determined by how spending programs are designed:
Much remains to be determined, but the possibilities for an infrastructure package on construction are significant. Once a plan has been submitted to Congress, Dodge Data & Analytics will be able to provide more guidance on the potential impact on our proprietary construction starts forecast.
This topic, and much more, will be discussed in our upcoming webinar The Rocky Road to Recovery: Dodge Construction 2021 Outlook – First Quarter Update on March 4th at 2 PM EST.
For more information and to register: https://register.gotowebinar.com/register/8230860895708523280?source=Reps
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