July/August 2021 | Vol. 26 No. 4
by Fred Ashton, Senior Economist, NEMA
Private nonresidential construction continued to lag the broader economic recovery through the first quarter of 2021. While gross domestic product, the broadest measure of economic activity, is expected to surpass its pre- pandemic high in the second quarter of 2022, private nonresidential construction has seen no such rebound.
In the final quarter of 2019, the last measure of GDP unaffected by the COVID-19 pandemic, real private nonresidential construction in structures, totaled $545.1 billion at an annualized rate. By the first quarter of 2021, that number plummeted to just over $450 billion, with nearly every major category experiencing declines exceeding 10 percent. Sectors most affected by the pandemic, such as food and beverage establishments, saw construction fall nearly 35 percent from Q4 2019 to Q1 2020. Over that same period, commercial and health care facilities construction sank 8.3 percent, and the building of mines and wells also collapsed more than 30 percent. However, warehouse construction, shown in the graph nearby, managed to gain more than 10 percent to an annual rate of $30.5 billion in Q1 2021.
The economic lockdowns at the onset of the pandemic ushered in a surge in e-commerce sales. As quoted in an article in Logistics Management, James Breeze, a Senior Director at CBRE, commented, “Most consumers are not only buying more product online; they are expecting it to be delivered in a timely manner.” The article also noted that “Consequently, developers are seeing upwards of five years of e-commerce growth in one year—a trend, they say, that’s not going away.” To fulfill the promise of timely deliveries, building warehouses and fulfillment centers closer to customers is paramount. With this trend in mind, NBC News reported that Amazon is “buying up disused malls across the country and turning them into distribution centers.” In March 2021, Amazon purchased three malls in various parts of the country totaling over 3.6 million square feet to transform them into distribution centers. Even before the COVID-related surge in e-commerce sales, Amazon converted approximately 25 shopping malls into fulfillment centers between 2016 and 2019.
A surge in demand for manufactured goods has also contributed to the construction of warehouses. From the same Logistics Management article, Carter Andrus of Prologis said, “Beyond carrying higher inventory levels to favor resiliency over efficiency in their supply chains, companies are also considering more diversified manufacturing locations.” More manufacturing locations will likely result in the need for more warehousing space.
These trends coupled together “have the potential to generate more than 500 million square feet of additional warehouse and DC space in the next two to three years,” according to Andrus. While most of the private nonresidential construction sector remains in the doldrums, warehouse construction is poised to stay at the forefront. COVID-19 accelerated the pace of e-commerce, forcing firms to adapt and open distribution centers closer to their customers. At the same time, vulnerabilities in the supply chain were exposed, which could lead to higher inventory levels for manufacturers and a premium on warehouses. ei