Residential and non-residential construction are headed in two different directions due to the coronavirus pandemic. New home construction is booming, especially in some areas of the country. Commercial projects are more of a mixed bag. This creates challenges for HVAC contractors in both segments.
Both sectors saw major declines in the late winter/early spring as states shut down most construction projects. They bounced back going into the summer as those restrictions were lifted. Then in the mid-summer, they started to diverge.
Construction spending in November increased 0.9% from October and 3.8% from November 2019 to a seasonally adjusted annual rate of $1.459 trillion, the Census Bureau reported Jan. 4, 2020. The difference between the two segments was stark.
Private residential construction spending rose 2.7% for the month and 11% from February to November, with nine-month gains of 9.6% for new single-family construction, 11% for new multifamily, and 13% for owner-occupied improvements. Private nonresidential construction spending declined for the fifth consecutive month, by 0.8% since October and 8.5% since February. Some of that, such as less road construction, doesn’t impact HVAC contractors, but many segments do. For example, lodging had the largest nine-month decrease in spending, dropping by 23%.
Pandemic Drives People Out Of Office Buildings, Into Suburbs
New-home construction remained strong as consumers fled from cities and densely populated areas like the Northeast. Ken Simonson, chief economist for the Associated General Contractors (AGC), said new-home construction has returned to pre-pandemic levels.
Much of this is driven by the high price of existing homes. With rates low and demand outstripping supply, new-home prices shot up almost 10%, according to Robert Dietz, chief economist and senior vice president for economics and housing policy for the National Association of Home Builders (NAHB).
“That’s going to price buyers out of the market,” Dietz said.
The solution to that problem is increasing supply by building more homes. That’s easier said than done. Construction in general faces supply issues, ranging from materials to workers. Both AGC and NAHB report high inflation of basic materials, such as lumber. There are also delays in getting mechanical components, such as HVAC equipment.
Those working on construction sites already incurred considerable extra expenses during the past year. This includes the need for additional personal protective equipment, COVID tests, and paid time off while workers quarantined. To make matters more challenging, Rosana Privitera Biondo said during an AGC webinar that different work sites came with different safety requirements.
“That’s money we’ll never recover,” said Biondo, president of Mark One Electric in Kansas City, Missouri.
Gloomy Outlook for Commercial Construction
Many contractors did receive money through the Paycheck Protection Program (PPP). That helped, but it mostly paid for salaries, not additional employee costs. Also speaking at the webinar, Michael Kennedy, CEO of KAI Enterprises in St. Louis, said his firm had a customer change the number of workers allowed on each floor of a project after the bidding.
Bob Shafer, president of Ranger Construction in West Palm Beach, Florida, said his clients face the same cost and that impacts his business.
“They have to take that money from somewhere in the budget,” Shafer said.
The commercial construction business was flat from July on, Simonson said. That was mostly due to the need to complete projects. The source of future work remains uncertain. Overall, though, general contractors are mostly pessimistic about the outlook according to the 2021 AGC-Sage Construction Hiring and Business Outlook Survey. They were most negative about retail construction, followed by lodging and private office, higher education, and public building.
Only 25% of respondents reported winning new or expanded projects as a result of the pandemic, while 78% reported at least one project had been postponed or canceled. But the pandemic could also help commercial HVAC contractors. Simonson said while new projects may prove fewer, there is some opportunity for retrofitting existing buildings, a positive for the HVAC industry. Also good news for HVAC contractors is the areas Simonson expects to grow in the next year — warehouses, data centers, and healthcare facilities — all have substantial needs for temperature control and ventilation.
Biondo said despite the gloomy outlook, contractors must seek out new projects.
“It’s your job to find work,” she said. “There is work available, but you do have to work to get it.”
Kennedy pointed to recent bonds that passed for government construction projects. These are mostly infrastructure bonds, but he said there were some bonds passed in Texas for recreational facilities. Kennedy said companies need to position themselves to take advantage of what projects there are. For one thing, he said they need to look at the compensation of their staffs. Diversity is becoming a bigger issue in contract consideration.
Contractors also need to be financially prepared to take on new work. Kennedy recommends talking with banks on a regular basis and explaining the plan for operating in a more competitive commercial market.
“Tell them you see the bumps and you know how you’re going to get pass the bumps,” he said.