During the Great Recession, the building industry took a beating. Between 2007 and 2013, the number of construction enterprises plummeted by about 150,000, and over 2.3 million jobs were lost as a result of layoffs, early retirement, and workers seeking better pastures. Due to the effects of the coronavirus (COVID-19) epidemic, Federal Reserve Chairman Jerome Powell recently stated that we may already be in a recession.
Owners of construction companies should begin looking for strategies to recession-proof their businesses as soon as possible. Even if the next recession isn’t as severe as the last, establishing a resilient firm that can withstand any adversity is always a good idea.
Here are some recommendations on how to assure your company’s continuous prosperity, whether it’s due to a recession, a few unproductive projects, subcontractor default, or some other business-ending disaster.
Is construction beneficial during a downturn?
A job search during the start of a recession, or even a modest economic slump, is never a good idea. Although the construction business is one that suffers the most when times are tough, that doesn’t make it a bad career option in general. When you see professionals who have been doing this for 30 or 40 years, you know they’ve persevered through difficult economic times. It’s logical to believe you can as well. If you’re concerned that a recession would force you to change careers, there are reasons to be optimistic about this one. Here are a few things to think about when you make your decision.
In a downturn, what happens to the construction industry?
We might start by looking at the current outlook for new starts, backlog, and spending.
Construction starts increased by 4% in 2018, after increasing by 10% the year before. The number of new starts in 2019 is up 4%, including revisions. Starts are expected to fall by 4% in 2020. The current backlog has increased by 30% in the last four years, reaching an all-time high. Despite the fact that spending is expected to rise only 4% each year over the next two years, it is at an all-time high.
In 2018, the number of residential construction starts reached an all-time high. Starts in 2019 are flat year over year, but have been flat or declining since mid-2018. In 2020, spending is expected to increase by 5%, then decline by 1% in 2021.
For the four years 2017-2020, the starting backlog for nonresidential buildings climbed by 10% per year. Since mid-2018, starts have been flat or slightly declining. Starts in 2019 are down 9% from 2018. In 2020 and 2021, spending is expected to increase by 3%.
For the three years 2018-2020, the infrastructure starting backlog has grown at a rate of 15% per year. Spending is expected to increase by 6% in 2020 and 8% in 2021.
It’s crucial to know when spending from the backlog occurs. According to average cash flow curves for nonresidential projects, roughly 15% -20% of spending from new starts occurs in the first year, and about 40% -50 percent occurs the second year. Backlog accounts for 80% of all nonresidential spending in any given year. In the first year, a 10% reduction in new starts has just a 1.5 percent to 2% impact on total spending. Spending would fall by 4% to 5% the next year.
Residential spending is much more reliant on new construction than it is on backlog. Backlog accounts for just approximately 30% of residential spending, whereas new starts account for 70%. If new residential construction falls by 10%, total spending will fall by 7% in that year.
In the event of a recession, new construction starts would be drastically limited. Although some projects will be canceled or postponed in the middle of their construction, the majority of those that are already underway will be completed. The majority of the reduction is due to a decrease in new starters.
Residential starts fell 70% from $400 billion to $110 billion during the Great Recession, from 2005 to 2009.
Between 2008 and 2010, the number of nonresidential building starts fell by 35%. In 2009, non-building starts declined by only 6%. From $1.160 trillion in 2006 to $788 billion in 2011, total spending fell by 30%.
Whatever causes a building recession, in this case a global pandemic, the current enormous backlog of work will do everything it can to dampen its impact.
No analyst had predicted a significant drop in new construction starts in the coming years. Some predicted a slight slowdown at worst. Data up until today seemed to point to a mild slowdown.
Although Dodge predicts a 6% drop in the dollar value of home starts in 2020, the number of units recorded by the US Census in Q4 2019 is at a post-recession high, lowering the likelihood of such a drop.
It’s unclear how much current or new work will be canceled. This research cuts new construction starts by 20% in 2020 and 10% in 2021 from the baseline to gain a sense of how a recession would affect construction investment. That’s about normal for what happened during the Great Recession, but it was much higher in residential and much lower in non-building infrastructure at the time. Except for the Great Recession, only once in the last 20 years have new construction starts dropped more than 5% in any sector in a single year.
As a result, there would be 20% less work to bid on in 2020 and 10% less in 2021 compared to the baseline prediction. However, neither spending nor revenues would react in this way. The impact on spending, or revenues, is determined by the backlog and spending schedule curves.
Here’s how the spending graphs have changed as a result. The predicted spending to the right of the dateline is the only thing that varies.
Residential construction spending would fall by 14% in 2020 and subsequently by 13% in 2021, compared to the baseline scenario. Residential spending is significantly more reliant on fresh beginnings within the year than on backlog. As a result, residential spending falls faster than all other types of work.
Nonresidential Buildings spending is 4% lower in 2020 than it would have been in the baseline scenario, but then reduces 12% in 2021 and 10% in 2022. Because the backlog in this sector is substantial going into 2020, even though spending is 4 percent lower than the baseline, 2020 nevertheless sees a 1.5 percent increase in spending. 2021 sees an 8% drop, while 2022 sees a 1% increase.
Non-building infrastructure investment is 3% lower in 2020 than it would have been under the baseline scenario, but then reduces 9% in 2021 and 10% in 2022. Non-building infrastructure has so much work on the books that spending is expected to increase by 6% in 2020 and 1% in 2021. In 2022, it will decrease by 2%.
Most residential investment comes from new starts within the year, thus the largest declines in 2020 are in that sector; however, the strength of the backlog going into 2020 pushes most of the declines out to 2021 and 2022.
Total spending would fall from $1.365 trillion to $1.260 trillion in 2020, compared to the current expectation of $1.365 trillion. Instead of $1,370 trillion in baseline spending in 2021 and 2022, it would fall to $1.230 trillion, the same amount as in 2016. The Great Recession’s losses, which totaled about $400 billion, pushed construction investment growth back 12 years.
Boston was not alone in shutting down non-essential construction projects; New York and California followed suit. Construction spending in Boston is over $20 billion each year, whereas in New York and California, it is above $280 billion. Assume that all construction in California, New York, and Boston is halted for a month. Let’s say it accounts for 80% of all construction. In less than a month, $20 billion worth of work will be halted.
Temporary shutdowns differ from a reduction in fresh starts in that work shut down is postponed. In 2020, total spending will be reduced in that month, but the entire spending schedule will be shifted out by a number of months. Some of the work will resume in 2020, while others will most certainly be pushed to 2021 or later, but all of the delayed work will be completed eventually. If 20% of all building in the United States stopped for a month, $25 billion worth of work would be delayed for a month. If 20% of all new building starts in the United States in 2020 are canceled, the future workload will be reduced by $250 billion over the next three years.
The magnitude of spending cuts would have an impact on the labor market. Because employment losses of this level do not always coincide with volume losses, we are unlikely to see a staff decrease of this magnitude in 2020. However, spending cuts in 2021 and 2022 could result in the loss of 500,000 to 750,000 employment. We lost 2.3 million jobs over the duration of the Great Recession.
What industry grows during a downturn?
Healthcare, food, consumer staples, and basic transportation are examples of generally inelastic industries that can thrive during economic downturns. During a public health emergency, they may also benefit from being classified as critical industries.
How can a construction company weather the storm?
6 Ways to Make Your Construction Company Recession-Proof
- Make sure you have cash on hand. It’s a good idea to save enough money to get your firm through a bad patch.
Pursue projects that effectively use available manpower and equipment
Making the most of your available resources will help you maintain project profit margins high, which is exactly what you need when the flow of work stops.
If your construction company decides to take on a project that is too big, it may face equipment and staff shortages. A project that is too small, on the other hand, would not be an efficient use of the same resources, resulting in reduced profit margins.
Examining jobs you’ve performed over the last several years and noting which ones were the most successful is one technique to discover the most efficient use of your resources. Pay attention to their scope, timeline, and budget, and then utilize this information to design (and pursue) ideal projects for your company.
Focus on attracting employment that meet this “ideal project” criteria during a recession. These are the initiatives with the highest profit potential.
Is the building business immune to the downturn?
A recession-proof industry is one that is vital to society’s long-term viability, regardless of the crisis. This can manifest itself in a variety of ways, including:
- Industries that provide vital item and person maintenance and repair services. These industries include auto mechanics and healthcare services, for example.
- Industries that provide essential commodities. This category includes grocery stores, medicine stores, and gas stations.
- Industries that provide low-cost products. Fast food restaurants and huge box retailers are two examples.
- Industries involved in the provision of public works services. Electricity and gas firms are included in this category.
- Industries that are anti-cyclical. These are the businesses that prosper when the rest of the world is in a slump. This category includes debt collectors and bankruptcy attorneys.
Even during the worst recessions, construction continues, although it is not considered recession-proof. When the next recession hits, it will be critical for construction enterprises to strategize for success. Let’s look at how you may prepare your firm for a crisis so that you can stay in business for a long time.
Do building costs drop during a downturn?
When my husband and I began shopping for a new home during a recession, we decided to do something that few others had considered: we decided to construct one.
Friends and family reacted with everything from “You’re insane!” to “Hey, you’ll definitely save a lot of money on construction costs!”
We asked our builder how he could compete with the rock-bottom prices for existing houses on the market at our first meeting. His response was as follows: “I’m sorry, but I can’t.”
While the cost of housing is falling, the cost of materials is not. Many key components used in the construction of a home are today more expensive than they were during the building boom’s heyday. Take, for example, lumber. “In the face of sluggish demand, production has fallen – so much so that prices have risen dramatically,” according to the Daily Markets website.
The same thing happened with the prices of steel and sheet metal used in HVAC ducting – when demand fell, so did manufacturer supplies.
The tightening lending market and the increasingly conservative nature of appraisals are exacerbating the problem (after years of appraisal fraud). So, while interest rates are low, we can only take advantage of them if we can qualify for a mortgage and put down at least 20%.
The one question the builder never asked us was, “So, why are you doing this in the first place?”
It just does not make financial sense to construct. However, as any purchaser knows, buying a home is also an emotional decision. My husband and I desired a house in the woodsy design with certain finishes and accents. We’d been looking for houses for weeks and hadn’t found anything we liked on a lot we loved – and if we remodeled, we’d be right back where we started with the exorbitant cost of materials.
As a result, we felt that construction would be a better option. We’d pay more per square foot, but each foot would be exactly what we needed there would be no wasted space. And, because we intend to live there for the rest of our lives, the extra money we’ll spend now will be repaid over the next 30 years.
We’re almost finished, and we’ll be moving in in a few weeks. Here’s what we’ve learned so far if you’re considering about doing what we did…
Avoid the architect
You don’t have to start from scratch just because you’re building a new home. We used a floor design that our builder had previously built, but we tweaked it to match our needs. We didn’t have to hire an architect this way.
We discovered our builder by looking at homes he had built that were for sale and that we were interested in purchasing. We didn’t do as much study as we could have we should have gone through MSN’s checklist but we got lucky. We’ve seen his outstanding work and heard nice things about him from his subcontractors now that we’re several months into our project.
Custom work can save you money
One of the most surprising findings was that going custom can sometimes be more cost-effective. Our solid-wood, entirely handcrafted cabinets from a high-quality local cabinetmaker cost tens of thousands of dollars less than a similar (but lower-quality) cabinet from a stock cabinet company.
Our custom-made concrete farmhouse sink was also less expensive than some of the big-name plumbing brands’ fireclay and cast iron options.
Low overhead is the reason for the low price. The sink manufacturer has a little workshop in his backyard and a basic website. Our cabinetmaker has a modest storefront and no online presence. We learned about them by word of mouth, as do the majority of their clients. Because there are no commission-paying intermediaries or a large advertising budget to support, the savings are passed on to us.
Online shopping works even for building a home
We were also able to save a lot of money by shopping online for some specialty items, such as clearance balusters, which were 90 percent off. Stacking coupons and cash-back programs, as well as online overstock merchants, helped save a lot of money on light fixtures.
Overall, though, building a new home during a downturn is not a bargain. The dangers of putting a builder out of business, the high cost of raw materials, and the possibility of a home not appraising for what it costs to build are all significant. Even yet, if you can afford it during a downturn, there’s nothing like a custom-built home.
Is there a slowdown in the construction industry?
While overall nonresidential construction spending is down 4% year over year, government construction spending is down more than 5%. In 11 of the 16 nonresidential divisions, spending was down year over year. At this time, the only industries that have expanded since last year are: a business (3.4 percent )
Which industries are recession-resistant?
The following are the five industries that have been least affected by the recession.
- Healthcare is a growing industry. When I think of companies that can function well during an economic downturn, the healthcare industry is the first that comes to mind.