HDTS Special Report: Projected strength in residential markets set to be derailed by global pandemic

Residential construction is traditionally one of the most closely watched markets in our economy. Homebuilding has historically been an accurate leading indicator of economic cycles, both for heading into a downturn, and coming out of one. This sector also gives an early indication of how severe a downturn is likely to be. In the 2008-2009 Great Recession, for example, spending on new homes declined over 75% from its pre-recession high to its recessionary low, suggesting that the broader economic downturn was going to be extremely severe by historical standards. Home improvement spending can also be a helpful predictor of broader consumer behavior. During the Great Recession, home improvement activity declined almost 25%, again pointing to a substantial pullback in household spending.

Given the magnitude of the downturn in the residential sector during the last recession, it has taken many years for the residential market to recover. Consumers initiated construction on fewer than ten million new homes nationally over the past decade, a figure that compares unfavorably to the fourteen to fifteen million homes built in each decade since the 1970s. Still, there has been considerable progress in the recovery of the housing market coming out of the last devastating recession. Early in the recovery, most of the gains were made with multifamily projects. In recent years, single-family homes have generated most of the growth. As a result, total residential construction levels approached 1.3 million housing units in 2019.

With years of overbuilding, the large millennial generation reaching their prime home-building years, and mortgage rates near historical lows, the outlook was bright for the housing sector entering 2020. Most forecasters were expecting housing production to average 1.5 to 1.6 million units per year over the coming years. In fact, in the months leading up the COVID-19 outbreak, home construction rates were on a pace consistent with those levels.  

Coping with a significant setback

Over the course of just a few weeks, however, it is clear that the momentum building in the housing market has completely reversed itself. Instead of residential construction activity ramping back up to historical levels, the industry will see activity cycle down for at least the next several months. A recent survey conducted by the American Institute of Architects (AIA) (detailed below) reports that revenue at residential architecture firms for March is estimated to have been 15% below their expectations at the beginning of the month, while April is expected to be almost 20% below previous expectations. Other surveys conducted by the AIA and the Associated General Contractors of America document that architects and contractors are reporting a host of issues that are depressing the industry’s ability to build and remodel homes, including:

• State or local government-mandated halts to nonessential construction activity. A growing number of state and local governments are limiting or freezing work on construction projects.
• Difficulty in obtaining building permits, inspections, and certificates of occupancy. Local governments are increasingly requiring their employees to work remotely and shelter in place, limiting their ability to approve progress on construction projects.
• Financing issues, since lenders may be hesitant to make construction loans or write mortgages given the uncertainty in the economy.
• Delays or cancellations by suppliers in delivering building materials to the jobsite.
• Homeowners requesting project holds, particularly for home improvement projects where the household would need to interact with the construction crew.
• Consumer nervousness about proceeding with projects. This will ultimately be the most significant determinant of the future pace of residential construction and remodeling activity. The loss in wealth from the stock market declines has been significant, and job losses continue to grow at a startling pace, limiting the willingness of consumers to make major investments.  

Projected impact of the COVID-19 outbreak on residential architecture firms

The beginnings of this reversal in housing activity is detailed in a recent national survey of residential architecture firms conducted by the AIA. These findings build on a separate recent survey of architecture firms serving the nonresidential buildings market, the nonresidential report. Key findings from the survey of residential architects include the following:

• 70% of firms indicate that inquiries for new work declined in March.
• 78% of firms have already seen slowing or stoppage of projects.
• Around 90% of firms have seen problems with current projects due to COVID-19.
• Most residential firms, about two thirds, indicated that virtually all/majority of their staff are now working remotely.
• Few firms have started to lay off staff, but 17% are starting to consider layoffs or staff furloughs.
• Residential firms anticipate accelerated revenue losses in April, with almost 70% expecting losses of 10% or more for the month relative to their expectations in early March.

Most residential firms expect declining interest in new work

When asked about indicators of future work at their firms, inquiries for new work and the value of new design contracts, residential firms were significantly more likely to report declining interest from February to March than nonresidential firms. The majority of residential firms, 70%, reported that they expect inquiries for new work to decline, compared to 59% of nonresidential firms. Only 3% of residential firms reported that they expect inquires for new work to increase. (Figure 1) Over half of residential firms, 59%, reported that they expect the value of new design contracts to decrease, compared to 50% of nonresidential firms. Of the residential respondents, only 3% expect the value of new design contracts to increase. These numbers have shifted significantly from the fourth quarter of 2019, where 36% of residential firms reported an increase in inquiries for new work and 22% reported an increase in the value of new design contracts.

Nearly all residential firms have encountered problems with current projects due to COVID-19

The majority of responding firms, 78%, also indicated that they have seen prospective project inquiries or negotiations for new projects moving more slowly or completely stopping due to issues related to the COVID-19 outbreak. (Figure 2) When looking at regional differences, firms located in the Midwest and West reported a higher percentage of firms having seen prospective inquires or negations for new projects moving more slowly or completely stopping than compared to firms in other region.

Nearly all residential firms, about 90%, also reported that they have encountered problems with current projects due to the COVID-19 outbreak, such as stalled construction, difficulty obtaining permits, increased project cancellations, and difficulty getting products/materials. By far the most common problem reported was an increase in project delays/projects being put on hold, reported by 67% of firms. Some of these issues are likely partially due to government mandates and closures of offices. (Figure 3)

Most residential firms report staff are working remotely

One of the most common impacts residential firms reported when asked about their current office conditions as a result of the COVID-19 outbreak was remote working. About two thirds of firms (67%) indicated that virtually all/majority of their staff and or including themselves are now working remotely; almost 20 percentage points higher than nonresidential firms reported. This is likely due to residential firms typically being smaller in size and having employees that already telework. Few residential firms reported not being able to work remotely effectively and only 1% reported having started to lay off staff. (Figure 4) However, 17% reported that they are starting to consider layoffs or staff furloughs.

Most residential firms, 68%, also indicated that they are currently limiting in-person client meetings, and/or moving those meetings online. However, less than a quarter of firms have implemented a temporary work-related travel restriction or a strict no-travel policy for work for the foreseeable future.

Over half of residential firms expect revenue losses of 10% or more in the coming months

Firms were also asked to estimate how much of a loss in revenue they anticipate in March and April due to the COVID-19 outbreak. On average, residential firms expect a 15% loss in revenue in March, with slightly over half of firms expecting revenue losses of at least 10%. Revenue losses reported in April are expected to increase on average to 19%, with 69% of firms expecting revenue losses of at least 10%. (Figure 5)

Residential firms had a much higher share of firms reporting estimated revenue losses of at least 25% compared to nonresidential firms for both March and April. Almost a third of residential firms (30%) expect revenue losses of 25% or more in March due to the COVID-19 outbreak, with the share of respondents increasing to 43% in April, while only 13% of nonresidential firms expect a loss of 25% or more in March and 25% of firms in April. Firms located in the Northeast were more likely to expect revenue losses of at least 25% in March and April compared to firms in other locations.

These data are from a special survey to assess the short-term impact of the COVID-19 outbreak on residential architecture firms that was sent to the architecture firm leaders that comprise the AIA’s Home Design Trends Survey panel on March 23, 2020. The survey was closed on March 30, with a total of 179 responses received.

Download charts from the April 2020 special report (PDF)