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Construction industry faces another tough year

(The Daily Record file photo)

Construction industry analysts said they expect less volatility in the construction sector in 2021, but also anticipate the industry, particularly in nonresidential construction, to underperform through the end of the year. (The Daily Record file photo)

The construction industry, nationally as well as in Maryland, faces another tough year as the economic damage caused by the COVID-19 outbreak continues into the spring.

Industry analysts expect less volatility in the construction sector in 2021, but number crunchers also anticipate the industry, particularly in nonresidential construction, to underperform through the end of the year.

“Only a few months into the new year, and the relative stability of construction this year is already a welcome relief from recent volatility. What 2021 will not bring, however, is a growth year,” JLL analysts project in the company’s annual construction forecast. “The construction industry always operates with a lag behind the rest of the economy, and that dynamic will play out again this year.”

That trend could have an impact on the state’s overall economy as well.

Construction represents more than 4% of Maryland’s roughly $400 billion of Gross Domestic Product, according to the Associated General Contractors of America. Nonresidential construction starts in Maryland tops $7 billion annually.

Starts on nonresidential buildings nationally, according to Dodge Data and Analytics, remained flat in January. The Northeast and West were the only regions in the nation’s five sections not to experience a drop in the number of groundbreakings.

Those nonresidential construction starts were largely bolstered by work building industrial and warehouse properties.

Those facilities, particularly distribution properties, have remained the most in-demand commercial real estate properties in Maryland’s major metro areas. The rise of e-commerce, and the commensurate need for distribution space, continues to drive demand for those types of properties.

Dodge Data and Analytics, however, contends measuring construction projects from one month to the next isn’t an accurate calculation of the industry’s health.

The number of construction starts in the 12 months ending in January 2021, according to those same analysts, actually fell 11% compared to the 12-month period ending in January 2020.

“The tenuous beginning to construction starts in 2021 highlights the long and rocky road ahead for the sector this year,” Richard Branch, chief economist for Dodge Data & Analytics, said. “Over the course of the year the economy will recover as more Americans receive vaccinations. However, the construction sector’s recovery will take time to materialize due to the deep scars caused to the industry by the pandemic. Patience will be key in the months to come.”

The economic downturn comes at a time when the construction industry already faced substantial headwinds that are expected to remain through the end of 2021.

Contractors in Maryland, like those throughout the nation, were already struggling with a labor shortage and rising material costs stemming from trade disputes that erupted during former President Donald Trump’s term in the White House.

Both of those issues were exacerbated by the pandemic, which further shrunk the availability of workers and put substantial strain on supply chains, adding costs to already short supply of construction materials.

JLL expects those trends to continue with labor costs increasing between 2% and 5% this year. Meanwhile, the cost of construction materials is projected to rise between 4% and 6% through the end of the year.

The volume of nonresidential construction projects is expected to decline 5% to 8% nationally through 2021. In the second half of the year, however, JLL analysts expect the amount of nonresidential construction starts to increase month over month, culminating in a return to growth in 2022.

If those projections hold, that would be welcome news for areas like the Baltimore region, which was hard hit by the timing of the pandemic.

The outbreak occurred during a trough in new construction as a bevy of nonresidential projects had been delivered, and developers waited for the existing space to lease before breaking ground on new buildings.

Data on the value of nonresidential development permits, collected by the Baltimore Metropolitan Council, show the severity of the pandemic’s damage to the industry.

The value of a development permit in the metro area declined for the first time in seven quarters at the start of 2020 when the pandemic hit. Those permits continued to lose substantial value through the end of the year.

In the second quarter of 2019 a nonresidential development permit’s value in the Baltimore region increased by nearly 71%. By the second quarter of 2020 the value of that same permit had declined by more than 60%.

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