Construction starts plunge amid economic uncertainties

Even after many building projects roared back to life following a shutdown for part of the spring because of COVID-19, the Pittsburgh region’s construction industry still could face tough times ahead.

Nowhere is that more apparent than in construction starts. During the pandemic, they have dropped faster than the Pirates’ team batting average.

While the statistics vary, one thing appears to be clear: Economic uncertainties driven by an untamed virus are keeping toolboxes in check.

“It’s the economic uncertainty that’s chilling construction,” said Jeff Burd, owner of the Tall Timber

Group, publisher of Breaking Ground and Developing Pittsburgh magazines.

Mr. Burd predicts nonresidential and commercial construction starts for the year could be off by at least 30% in the Pittsburgh metropolitan area made up of seven counties — Allegheny, Armstrong, Beaver, Butler, Fayette, Washington and Westmoreland.

He originally estimated project starts would reach $4.8 billion in value this year. But through June, they have totaled $1.7 billion, by his accounting.

Now he’s become a “little grimmer,” wondering whether such starts will hit the $3 billion mark for the year.

A report by New Jerseybased Dodge Data & Analytics, which provides statistical information for the construction industry, paints an even bleaker picture, at least for the first six months of the year.

It recorded just $315.3 million in nonresidential construction starts through June in the seven-county Pittsburgh metro area compared to $1.4 billion over the same period last year — a whopping 78% plunge.

For June alone, the region experienced a 63% decline compared to the same month last year, with starts totaling $63.7 million, according to the report.

Nonresidential building starts included office, retail, hotels, warehouses, manufacturing, educational, health care, religious, government and recreational projects.

If there’s any consolation, the June numbers are downright encouraging compared to May and April, when nonresidential construction starts in the region, according to Dodge, plummeted 83% and 87%, respectively, amid stayat-home and government shutdown orders.

Jon O’Brien, executive director of the General Contractors Association of Pennsylvania, said there was some optimism in May when construction activities resumed in the state that low interest rates would help to drive demand for new construction.

But it hasn’t panned out that way. Many larger companies, he said, are taking a waitand-see attitude. They want to know how the presidential election will play out and whether COVID-19 cases spike again this fall.

Election jitters are not unique to 2020, Mr. O’Brien noted, adding that it seems to happen every four years. “Maybe it’s an easy excuse people like to give,” he said.

The only difference this year involves the oil and gas industry. Some union contractors believe that Joe Biden, the presumptive Democratic candidate, is “anti-fracking and anti-oil and gas,” Mr. O’Brien said.

Mr. Biden’s campaign has said the candidate does not want to ban fracking outright. His climate proposal calls for a ban on new oil and gas permits on public lands and waters.

Beyond such issues, Mr. O’Brien said it has simply taken time for the construction industry to power back up after the long layoff. He stressed that the industry and union contractors have done a good job implementing procedures to protect workers from COVID-19 and to stop its spread.

But as for construction, “It’s not like a light switch. It’s not like turning on a light and, bang, everyone starts working again.” he said. “It took an adjustment period. It took some time to ease in.”

The Pittsburgh and Philadelphia areas have been hit the hardest by construction slowdowns in Pennsylvania, Mr. O’Brien said. Despite the bleak numbers, he believes the tide is turning.

“I think little by little it’s picking up more and more,” he said, explaining that the safety protocols in place to prevent the spread of the virus have been reassuring to contractors and developers.

“I don’t think it’s going to match 2019 [in terms of starts], but I think it will be increasing as the year goes on.”

Mixed bag

Another who sees glimmers of hope is Gregg Broujos, regional principal of the Colliers International real estate firm. He said he’s aware of several construction projects that are moving forward after being in danger of being shelved.

He figures very low interest rates will be too enticing for developers and builders to pass up. “In the last two or three weeks, I think there has been a real turnaround,” he said.

Dan Adamski, senior managing director of the Jones Lang LaSalle real estate firm in Pittsburgh, believes the decline in construction starts through June is mainly the result of the statewide ban on construction activity for much of the second quarter.

“When activity resumed in June, there were still challenges and additional regulations for returning to the job site, which hindered a return to full capacity. Supply chain issues for construction materials are also impacting some projects and increasing the cost of others,” he said.

With the pandemic still raging throughout parts of the country, it won’t be easy changing fortunes, he suggested.

“Going forward, developers will be challenged with finding equity partners and lenders willing to underwrite projects during a period of such uncertainty,” Mr. Adamski said.

“The office market vacancy rate is rising, particularly Downtown, which is a trend predicted to continue and will impact development strategy.”

One factor that could keep vacancy rates surging is work-from-home trends that could reduce the demand for office space.

Even without COVID-19, the region probably would have seen a slowdown in construction starts in 2020, Mr. Burd said, although “it still was going to be a really good year.”

Now, with the economy in a recession, “The playbook has gone out the window without question,” he said.

On a national level, employment related to infrastructure and nonresidential building construction slid by 4,000 jobs in July, according to the Associated General Contractors of America.

Despite employment gains in the housing sector, the construction industry’s unemployment rate stood at 8.9% in July, with 870,000 people without work. The figures are more than double those in July 2019 and represented the highest totals for the month since 2013 and 2012, according to the AGC.

Residential optimism

On the residential side in the Pittsburgh region, Mr. Burd, for one, is more optimistic. He predicted single-family construction starts actually could be up 5% for the year despite the pandemic and the economic toll it has taken.

Year to date, by his calculation, single-family home starts are down 2.9%.

Part of that is because people couldn’t get out to shop for homes in March and April, he said.

“The residential market, I don’t think it’s going to have as much of a ding from the virus,” he said. “That’s assuming we won’t shut down again.”

According to the Dodge report, residential construction starts were down 21% during the first six months. That calculation included multifamily housing projects.

Mr. Burd said the biggest problem with single-family construction has been a shortage of lots to build on. Even with the high unemployment rate, there is still pent-up demand because of the lack of inventory in the region.

He doesn’t see that changing.

“The demand for singlefamily is still quite robust,” he said.