May 4, 2020
It is no surprise that construction trade associations are publishing statistics showing a major downturn in the commercial construction sector. The American Institute of Architects (AIA) reported on April 22 that
demand for design services from architecture firms noted a record fall
. AIA’s Architecture Billings Index (ABI) score of 33.3 for March reflects a decrease in design services provided by U.S. architecture firms (any score below 50 indicates a decrease in billings).
During March, both the new project inquiries and design contracts scores dropped dramatically, posting scores of 23.8 and 27.1 respectively. Key ABI figures for March include:
- Regional averages: West (45.3); South (44.2); Midwest (44.2); Northeast (38.4)
- Sector index breakdown: institutional (46.9); multi-family residential (43.3); commercial/industrial (41.9); mixed practice (40.6)
- Project inquiries index: 23.8
- Design contracts index: 27.1
The regional and sector categories are calculated as a three-month moving average, whereas the national index, design contracts and inquiries are monthly numbers.
Construction Dive reported on April 23 that the dramatic drop in demand for architecture services signifies an equally dire future for the construction sector, according to Dodge Data & Analytics Chief Economist Richard Branch. He expects construction starts in the second quarter to post a drastic decline. "A pullback in new jobs and delays to ongoing projects will lead to a sharp retreat in activity across virtually every sector of the construction industry," explains Branch.
Associated Builders and Contractors (ABC) Chief Economist Anirban Basu also sees a steep decline in activity for U.S. commercial builders. He told Construction Dive that he believes the decline will happen in three phases:
- Phase one is the situation we are dealing with now with the economic impact of social distancing directives and other CDC recommendations on construction activity, as well as shutdown orders in Boston, Pennsylvania and California.
- Phase two will be the result of the downturn of the U.S. economy. Basu predicts at this point we will be in the deepest recession since the Great Depression.
- Phase three centers around longer-term problems in construction activity. There will be an unprecedented number of empty storefronts and office suites for many years.
"Construction activity tends to lag the broader economy by 12 to 18 months, so that weakness will eventually catch up with the construction sector," adds Basu.
ABC reported on April 21 that its
Construction Backlog Indicator
fell to 8.2 months in February, a 7.7% decrease from January’s reading. Backlog for firms working in the infrastructure segment rose by 1.3 months in February while backlog for commercial and institutional and heavy industrial firms declined by 0.6 months and 0.7 months, respectively.
“The impact of the pandemic on backlog was immediate,” said Basu. “While financial markets, the National Basketball Association, and other elements of American society didn’t respond meaningfully to the emerging crisis until early-March, those who consume construction services appear to have begun responding to the crisis in February, resulting in a significant decline in backlog in commercial and industrial segments. Declining backlog was registered in every region of the country with the exception of the Middle States, where social distancing directives were implemented at a slower rate.
“Backlog is likely to decline further,” added Basu. “Many economic actors are striving to preserve as much liquidity as possible, inducing them into postponing construction projects or perhaps canceling them altogether. While infrastructure-related backlog expanded in February, this is unlikely to persist, as the crisis has crushed the finances of many state and local governments. These governments will complete their current fiscal year with substantial shortfalls—shortfalls that must be addressed during the next fiscal year absent significant additional financial assistance from the federal government.”
ABC also released its
Construction Confidence Index
on April 23. Confidence among U.S. construction industry leaders plummeted in response to the economic fallout associated with COVID-19. Readings for sales, profit margins and staffing levels expectations fell below the threshold of 50 for the first time in the history of the series, signaling expected contraction along all three dimensions. CCI is based on a survey of ABC members, which was conducted March 20-31.
Fewer than 30% of survey respondents expected their sales to increase over the next six months, while less than 20% of contractors expected their profit margins to increase. More than one in five contractors expect a significant decrease in profit margins, while one in four expect a significant decline in sales volumes. The CCI for:
- Sales expectations decreased from 68.3 to 38.1.
- Profit margin expectations decreased from 61.9 to 36.6.
- Staffing levels decreased from 69 to 45.2.
“In the course of a month, construction industry confidence has shifted from ecstatic to utterly dismayed,” said Basu. “If anything, confidence is likely to decline further as construction industry leaders come to terms with the full extent of the COVID-19 crisis. The finances of key sources of demand for construction services, including commercial real estate investment trusts, state and local governments, retailers and hoteliers, have been savaged by the crisis, translating into fewer funds available to finance construction.
“Normally, construction activity is partially shielded from the initial stages of downturn due to the presence of backlog, which stood at 8.2 months as of February 2020,” said Basu. “But this time is at least somewhat different, with certain construction activities halted in California, Pennsylvania, Massachusetts and elsewhere. While construction will hold up better in the near-term than retail, restaurants, airlines, auto manufacturing, lodging, and a number of other key industries, its recovery is also likely to be less profound than in these other segments absent a federal infrastructure-oriented stimulus package.”
We will continue to monitor this and keep you abreast of changes.
Please visit our
COVID-19 Resource Page
for more updates.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at
Richard.Higgins@MCC-CPAs.com
. I can be reached at
Marty.McCarthy@MCC-CPAs.com
. As always, we are happy to help.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Sources: American Institute of Architects (AIA), Construction Dive, Associated Builders and Contractors (ABC)
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
