2020 us construction industry analysis during covid

RESEARCH & CONSULTING

2020 US CONSTRUCTION INDUSTRY ANALYSIS DURING COVID

Updated Analysis and Outlook for 2021

November 2020


At a Glance

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Industry Insights Leading Up to COVID CRISIS


Sources: Census, NAHB, AIA, FRED, CBRE, HUD, NAR, Ducker Interviews and Expertise

C O N S T R U C T I O N ( $ ) P I P T R E N D

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Residential Building Nonresidential Building Nonbuilding Construction

Great Recession

• Residential construction spending experienced significant decline in past recession due to unqualified lending and less healthy consumers

• Residential was demonstrating an adjustment in 2019, however likely a false negative given excellent rebound in December through February

• Nonresidential performing typical cycle behaviors with some concern for office/bank/retail activity in 2018 and 2019• Infrastructure needs, improved state and local balance sheets and political alignment fueled slow, steady growth in spending

Construction Has Not Kept Up with Household GrowthResidential construction has not kept pace with the minimum housing requirement – causing a shortage of available supply for new households and likely

long-term benefits beyond 2020.


Sources: Ducker Analysis, JCHS, Freddie Mac

0.50

0.75

1.00

1.25

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1.75

2.00

2.25

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Minimum Housing Requirement Completions & Placements of New Units

M I N I M U M H O U S I N G R E Q U I R E M E N T S V S . C O M P L E T I O N S & P L A C E M E N T S O F N E W H O U S I N G U N I T S

Millions of units

▪ After a decade of low levels of building due to conservative development plans, housing stock is currently well short of US demand

▪ In 2017 Freddie Mac estimated the U.S. was ~2.5 million housing units below what is needed to match long term demand, with an annual rate of construction ~370,000 units below the level required to meet demand

▪ Single family builders cite labor shortages, profitability concerns, and land economics/availability as reasons for inability to meet full demand and likely a long runway of build potential

▪ New SF home rental communities looking to fill the gap

The Census Bureau indicates the U.S. Housing market needs 350 K units per year above new households just to replace lost units, which has not happened since 2008

Industry Insights Leading Up to COVID CRISIS



Multifamily has outperformed single-family for the last several years. Very strong start to 2020 pre COVID and opportunities will continue long term, particularly in nonurban areas for low - and mid-rise projects (rental living increases relative to ownership)

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S F, M F S TA R T S I N D E X E D , O O O s

SF MF

Great Recession

Land mixLabor shortageEntry level segment

Industry Insights Through COVID Crisis



Multi-family has outperformed single family for the last several years but has been more volatile through the COVID crisis. Single family to be the growth

driver going forward, particularly in nonurban areas

-30%

-20%

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Jan Feb Mar Apr May Jun Jul Aug Sep

Exis

tin

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Single Family Starts Multi-Family Starts Total Starts Existing Home Sales

▪ Housing starts recovered rapidly after April-May collapse led by single family activity

▪ Single family September YTD up 4 percent over prior year. Multi-family up 10 percent

▪ Similar V curve for existing home sales which rose to a new 14 year high in September

▪ Home sales still 2% behind 2019 YTD

▪ Activity still constrained by a lack of inventory but delayed selling season - low interest rates and millennials coming to the market have fueled strong demand

Housing Starts (‘000)

2019A 2020F change 2021F change

Single Family 888 938 +6% 1,047 +12%

Multi-Family 402 410 +2% 349 -15%

Total Starts 1,290 1,348 +4% 1,395 +4%

Industry Insights Through COVID Crisis



• Retail building material expenditures have driven the growth in construction activity - significantly outpacing wholesale expenditures• Price increases over the past year for most material categories, led by lumber and softwood lumber pricing• Cost of new home builds increasing up to 20% from initial budgets

-20.0%

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Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

Y E A R - O N - Y E A R C H A N G E I N C E N S U S B U I L D I N G M A T E R I A L E X P E N D I T U R E S

Retail Wholesale

2.8% -0.1% 2.4%

52.4%

81.2%

28.4%

5.5%

-10%0%10%20%30%40%50%60%70%80%90%

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S E P T E M B E R P R O D U C E R P R I C E I N D E X , 1 2 M O N T H C H A N G E

Sep-20 PPP change vs. Sep-19

*Structural, Architectural, Pre-Engineered Metal Products

Retail YTD +10%

Wholesale YTD +1%

AIA Indicators and RecoveryA healthy, early indicator of future construction and major remodeling activity is the AIA/ABI Index on activities, inquiries and sentiment across the architectural community. Data through September show improving conditions with a steady increase in inquiries.


Sources: Ducker, AIA

A B I A C T I V I T Y T R A C K I N G A I A S E N T I M E N T F O R S E R V I C E S B Y B U I L D I N G T Y P E

• Since mid-May – inquiries increasing at significant rate for architectural and design services, both for new construction but also for built out and remodel for post-covid environment – occupancy protection, management, densify/open plan etc.

• Contracts kept pace through early July - rebound after holiday vacation dip and slower processes to award work

• Broad categories of commercial and industrial had the biggest decline but also are seeing a V shaped recovery given scale of demand and opportunities across many geographies and applications

Industry Insights Post COVID



$0

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2023F

A B I A C T I V I T Y T R A C K I N G

Residential Nonresidential Building Nonbuilding

C O N S T R U C T I O N ( $ ) P I P F O R E C A S T –O C T O B E R 2 0 2 0 S C E N A R I O F O R F U T U R E

( P O S T - C O V I D ) O P T I M I S T I C

Residential - rapid recovery after spring drop. Single family strength with low interest rates and new market entrants unleashing short-term pent-up demand. Flattening over next 2 years with lagged impact of severe economic downturn dampening continued increase in existing home sales.

Nonresidential - greater negative impact and declines for a period depending on suburban growth, vaccine. Healthcare and services offer unique opportunities of demand.

The long-term growth of infrastructure will pause until Federal stimulus kicks in. Some tail of activity will continue due to recent bonds passage and multi-year funded projects. Future local government balance sheets likely to be strained – tax revenues down, reducing project spend and a lag period of impact. OPEX likely to outperform CAPEX.

Infrastructure OPEX typically outperforms CAPEX

Healthy Q1 2020 SF AND MF rapid recovery post COVID

Industry Insights Post COVID – Forecast Scenarios



C O N S T R U C T I O N ( $ ) P I P F O R E C A S T – A P R I L 2 0 2 0 S C E N A R I O F O R F U T U R E ( P O S T C O V I D )

2019-2023CAGR

Residential Building 2.1%

Nonresidential Building -4.4%

Nonbuilding Construction 0.9%

Total PIP Construction -0.3%

2019-2023CAGR




Total PIP Construction -1.5%

2019-2023CAGR




Total PIP Construction 1.4%

All scenarios show an overall decline but with different projections for each segment. Residential housing impact very different to previous recession and shorter and less severe than originally forecasted. Non-residential building hardest hit and recovery likely to be delayed for 2 to 3 years. Nonresidential building dependent on future government policy.

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DOWNSIDE - POST COVID PIP $,000

Residential Nonresidential Building

Nonbuilding Construction

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BASE CASE - POST COVID PIP $,000



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UPSIDE - POST COVID PIP $,000



Five Key Factors Representing New Norm in ConstructionThe COVID crisis has shifted practices, housing preferences and regional construction dynamics offering new opportunities with new strategies and business models.



P O S T V I R U S S O C I E T Y D R I V E S A N E W N O R M I N C O N S T R U C T I O N

1

• Accelerating digitalization in each stage of design and construction process• Governments upgrading communications, digital competencies • Network bandwidth expansion for infrastructure across public, private data demand

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• Severe shock to society drives conservancy in spending, balance sheet and affordability • Refocus on what’s most important to protect, maintain business and living • Building owner and homeowners focus on home improvement and “quality of home”

• Purposeful, disciplined construction process that favors longer cycles, prefab construction• Decrease in open plan environments, increase in private spaces (social distance friendly)• Increased square footage in demand, value trade-off against premium finishes

• Increase in storage, warehousing and multi-function areas • Healthcare facilities upgrade, retrofit and build out • Expanding distribution and last-mile storage/delivery • Finally addressing infrastructure needs – road and communications investments

• Growth of lower density construction areas – suburban, rural in demand • More renting- rental communities with homes, single payment will thrive • Luxury and Custom construction/remodel to lead the rebound in 2021• Bump to existing home sales and remodeling outside of large urban areas

Residential Construction COVID Developments


01

Business Profitability • Profitability of select producers and suppliers far better through the crisis than forecasted – some note record quarterly performance • Financials lifted through improving demand, lower SG&A costs and ability to sell out inventories • Lower cost of sales with favorable input prices helped several sectors outperform adjusted forecast or YOY targets

02

Significant Pricing Dynamics

03

Big Box Retail Performance

04

Continued home remodeling, outdoor and exteriors pent up demand

• Import challenges increase domestic source demand and improve average pricing through the channel• Lumber price appreciation significant- negative impact to framing and new housing costs • Resin/plastic price favorability leading contributing to improved cost basis and better margins - remodeling• Many sectors launching price increases for early 2021 - ranging from 4-9% upside

• COVID themes and risks driving more outdoor living, family and pet friendly environments • Migration from apartment living to existing single-family increasing upgrades and improvements • Long lead times for windows, siding, fencing, decking will create pent-up demand through Q2 2021 as industry works to balance new

construction growth and remodeling demand

• Essential business status led to significant store traffic and purchases by DIY and DIFM • Transition from renter to home-buyer increased variety of interior project/décor spend • New digital programs by Lowes and Home Depot – and healthy inventory attracted professionals

Nonresidential COVID Related Developments


While nonresidential, new construction reachedpeak in late 2019, starts in Q4 allowed progresson backlog through Q3 2020 –however, futureactivity likely to slow with completion of backlogand reduction in permits/starts.

Nonresidential Backlog Delayed Office Vacancy Decline

Federal and state stimulus helped businessescomplete lease payments through the early COVIDcrisis. Some businesses returning. Full affect ofoffice vacancy and lease levels yet to beexperienced with many implementing office layoutimprovements or posting return to office in H22021.

Aging nonresidential building stock stillrepresents a significant opportunity for theindustry. Planned expenditures and majorimprovements paused in April/May but resumedin June with many MRO participants. Interiorsredesign post-COVID to enclosed workspacesrepresent new opportunities for occupancysafety, health and design.

Building Stock MRO and Reset REIT $ Shift to Detached Rental Housing

With pressures on nonresidential lease rates,vacancy levels and new construction projects,more REIT development and investment movingfunds to address trend in large single-family rentalcommunities. New partnerships and venturesforming with REIT players and independentbuilder/developer - new trend to watch in 2021.

Industry Developments Our Experts are Watching for in 2021


For a more comprehensive analysis of these developments, please look for Ducker’s 2021 Industry Outlook and Key Opportunity/RiskAnalysis for the US construction industry coming in early 2021

USG Post COVID Opportunities


D U C K E R ’ S W O R K A C R O S S T H E C O R P O R AT E A N D P R I VAT E E Q U I T Y S P E C T R U M Y I E L D I M P O R TA N T N E W D I S C I P L I N E S A N D A R E A S O F F O C U S F O R B E S T - I N - C L A S S B U I L D I N G P R O D U C T B U S I N E S S E S F O R P O S T C O V I D S U C C E S S .

BNC CORPORATE STRATEGY FOCUS

Portfolio and Market Mix

Optimization

Digital Channel and UX Experience

Update

Pricing Audits and Program

Optimization

Adjacency Profile and Pursuit

Innovation: Product, Service, Business Model

Modular Systems and Design-to-

Install Programs

Today’s presentation was prepared by Ducker Research and Consulting/Ducker Holdings LLC. To the fullest extent permissible by applicable law, all information contained herein is for informational purposes only and is provided “AS IS”. The information is provided (i) with no guaranty of accuracy, completeness, timeliness or that any defects will be corrected and (ii) without any representations, warranties or other contractual terms of any kind including, without limitation, warranties of title, merchantability or fitness for a particular purpose. Even if Ducker was advised, knew or should have known that claims or damages could arise from the use, misuse or delay of use of the information, Ducker assumes no legal liability for any direct, indirect, consequential, special, punitive or similar claims or damages. The information contained herein does not represent financial, legal, regulatory or other advice and recommendations from Ducker. Any use of the information is undertaken at your sole risk.

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2020 us construction industry analysis during covid

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