The COVID-19 pandemic and the nation’s reaction to it have hit the industry and markets hard. Across the country and across virtually all market sectors, firms have seen their work and their prospects rapidly diminish.
The concern about the emergence of COVID-19 can be seen in the results of ENR’s latest Construction Industry Confidence Index survey. The Index plunged 20 points to a 36 rating in the second quarter of 2020 from the first quarter survey in March. This is the lowest CICI rating since the third quarter of 2010, when the industry was still recovering from the financial meltdown of 2008.
The index measures executive sentiment about the current market, where it will be in the next three to six months and over a 12- to 18-month period. A rating above 50 shows a growing market. The measure is based on 276 responses to surveys sent between May 18 and June 22 to 6,000 U.S. companies on ENR’s lists of leading general contractors, subcontractors and design firms.
Further, all 15 of the individual market sectors measured by the CICI survey fell in the second quarter, some dramatically. For example, the hotels and hospitality sector saw its rating plummet from a healthy 55 to 18, the entertainment and theme parks sector fell 35 points to a 17 rating, the commercial office sector was down 30 points to a 21 rating, and petroleum was down 28 points to a 25 rating. Finally, the beleaguered retail market scored the lowest rating, down 23 points to a 14 rating.
CFMA: CFOs Are Worried
Another market barometer is the soon-to-be-released results of the latest Confindex survey from the Princeton, N.J.-based Construction Financial Management Association (CFMA), which shows that chief financial officers are just as worried as the ENR survey respondents.
Each quarter, CFMA polls 200 CFOs from general and civil contractors and subcontractors about markets and business conditions. The Confindex is based on four financial and market components, each rated on a scale of 1 to 200. A rating of 100 indicates a stable market; higher ratings indicate market growth.
“The overall Confindex fell from 120 in the previous quarter to 87 in the current quarter,” says Stuart Binstock, CFMA’s CEO. He says all four components of the Confindex declined in the second quarter: “business conditions” fell to 71 from 116, “financial conditions” to 99 from 123, the “current conditions” dropped to 83 from 128, and the “year-ahead outlook” fell to 91 from 109. Binstock notes that the year-ahead outlook numbers had the smallest percentage drop of the four Confindex components, indicating that CFMA members expect next year to be slow, but not as devastating as the current market.
However, the Confindex numbers may be “understating” industry pessimism, says Anirban Basu, CEO of economic consultant Sage Policy Group, Baltimore, and a CFMA adviser: “The current index is lower than it was in the fourth quarter of 2008, after that year’s financial crash.” He notes that banks have been tightening credit and public agencies are experiencing budget shortfalls, which will hinder new project financing.
CICI participants agree that project financing has tightened. Nearly 47% of CICI survey respondents said clients’ access to capital for project financing has gotten tougher in the past six months, compared to 14.5% who saw credit tightening in the first quarter survey.
The CICI survey also asked whether survey respondents had seen projects canceled or delayed because of COVID-19. Only 6.2% had not seen any of their projects delayed or suspended. Further, 71.4% said they had seen projects canceled, with 32.6% saying at least 5% of their projects had been canceled and 15.6% saying more than 10% of their projects had been canceled.
There are bright spots among the gloom. The distribution and warehouse sector was down only 2 points in the CICI survey, to a 63 rating. “Some segments continue to do well,” says Basu. He notes that warehouses and fulfillment centers, data centers and public health facilities continue to press forward. “And manufacturing may grow as the trend toward locally sourced materials is encouraging companies to move their plants back to the U.S.,” he says.
However, Basu worries that the office, hospitality and retail markets may be a long time in recovering as more people have been working from home and businesses have been resisting business travel. “But there may be an active renovation market as Class B and C office buildings upgrade their HVAC systems to compete with the higher priced Class A space for clients looking to downsize their office space,” Basu says.
If there is a silver lining to the market plunge, it is that the skills shortages have paused. “For the first time in years, worker shortages was not the top concern of our members,” Binstock says.
Binstock also notes the widespread economic devastation may end up lessening the industry’s worker shortages in the long run. “Employees making a minimum wage in such sectors as the hospitality and retail sectors who have been laid off may see construction workers, who still are mostly working, and think of the industry as an alternative career. It’s their chance to move from minimum-wage jobs to a middle-class wage,” he says.