COVID-19 Impacts on the Construction Industry
By Eric Johnson
As the impact of the COVID-19 virus on the economy grows more and more severe, an increasing number of industries have become well aware of the sharp impact the virus will have on their operations and end customers. In particular, the construction industry is poised to experience a downturn that we believe will occur immediately and be recognized in earnings between Q2 – Q4. Of course, this all depends on the severity of the virus. Any mutations or reemergence at successive points in the future will create additional uncertainty.
Construction industry drivers are largely related to the growth of economic output in manufacturing sectors but also service industries, through the building and maintenance of housing and facilities to develop intermediate and finished goods (and services, e.g. hotels, healthcare facilities). Thus, the construction industry is dependent on other industries such as chemicals, manufacturing, hospitality, etc.
As these drivers are related to economic health, let’s look at what has happened and what may be to come, arranged by causality.
1. Stock market responses to news
Stocks fall sharply early, based on initial news reports, as an early bellwether reflecting both fear and an assumption of reduced corporate earnings. Many of these reflect construction firms themselves.
2. Rising infections
Infections rise at a parabolic rate in the US and across the globe. Governments put plans in place to limit travel. Construction organizations start to take notice.
3. Sheltering in place / travel bans
People respond to travel bans and shelter in place, sharply reducing demand and creating an increase in overall uncertainty. Construction firms lose front line employees and middle management/planning works remotely
4. Employee reduced hours
Projects are put on hold and employers reduce hours, increasing unemployment. Mostly all projects are put on hold.
5. Supply chain employee reduced hours
Even if employees were available, upstream vendors face similar supply chain issues. The entire chain is disrupted for most if not all businesses due to lack of manpower. Construction is no different.
6. Emergency financing
Output along the supply chain is disrupted. Construction firms have already put emergency funding in to place via loans or government emergency subsidies. The sufficiency of these funds is dependent on the capital and financial structure of firms coming into the crisis. Those on shaking financial grounds will face increased risk of bankruptcy.
7. Furloughs / layoffs
Construction firms – like most companies – are forced to layoff employees.
8. Continued uncertainty over duration
Some firms go out of business due to the prolonged lack of projects and others struggle in a wait-and-see mode.
9. Long term future effects
As the economic effects of the virus wane, memories of the difficulties will cause a shift in the industry. Consolidations occur in this relatively fragmented industry due to increased focus on economies of scale. Technology receives renewed interest in simplifying the construction processes, providing greater access to prefabricated materials, and reducing costs associated with green / LEED construction. A shortage of qualified employees re-emerges from the last downturn as former front-line employees leave the industry for other fields with greater stability. The census bureau noted that 60% of employees left the industry after the great recession.
It is possible that the end of the current crisis will be driven by a vaccine or a significant reduction in new cases – we are already seeing this in China with no new reported infections. Additionally, the COVID-19 virus could be a seasonal illness that recurs annually, based on recent reports from medical experts. As consumer spending is roughly 70% of economic output, based on this assumption, two scenarios are likely:
Consumers initiate a fast recovery: Job losses are not too severe that consumers unleash pent-up spending desires and initiate a buying spree that signals a rapid recovery. Demand increases and supply chains ramp up orders, sparking a return to the bull market. Construction projects on average resume (while limited by supply chain ramp-ups) and employees on “hold” return to work with their desired skillsets. Seasonal outbreaks are routed quickly with vaccines and lessons learned. Fear is kept to a minimum and disruptions are slight.
Consumers initiate a slow recovery: Severe job losses prompt memories of 2008 and consumers become hesitant to spend, attempting to save under increasing uncertainty. Demand slows immediately and is slow to rise over the remaining 12 months. Supply chains take many months to recover. Construction firms lose employees and have difficulty gaining them back as those former employees shift to other professions. Seasonal outbreaks create additional uncertainty for years to come.
Hopefully the first scenario will be the one to manifest. If so, we can look toward a “V” shaped recovery – a sharp decline followed by a sharp recovery. The second scenario points to an “L” shaped recovery – sharp decline followed by a long recovery. As the construction industry moves toward an uncertain immediate future, those that respond with a shift in business model to provide move service-related products to clients and can maintain relationships will be best positioned when the bottom occurs and the market moves into recovery.
At Propulo, we can help you develop strategies for smart COVID-19 re-entry that is effective now and sustainable in the future.