Even before the COVID-19 pandemic shuttered businesses, caused stock markets to plummet and halted many U.S. construction projects, a survey of architecture, engineering and construction (A/E/C) professionals indicated that weaker conditions were already on the way.
For the 4th quarter of 2019, design and construction industry firm leaders reported the lowest level of proposal activity in nearly a decade, according to PSMJ’s Quarterly Market Forecast (QMF), and the 1st quarter 2020 results showed more severe erosion in key markets amid the crisis.
Although continuing opportunities in the healthcare and water/wastewater markets kept proposal activity in positive numbers for the 1st quarter of 2020, it marked the third consecutive quarter with a net plus/minus index (NPMI) under 20%. The last time this occurred was from the third quarter of 2007 through the first quarter of 2008, which preceded a Recession-era year of declining proposal activity.
The NPMI expresses the difference between the percentage of firms reporting an increase in proposal activity and those reporting a decrease. PSMJ’s QMF has proven to be a solid predictor of construction market health for the A/E/C industry since its inception in 2003.
After starting 2019 strong with back-to-back quarterly NPMI scores of 39%, the QMF recorded a steep decline to 19% in the 3rd quarter and 11% in the 4th quarter. The NPMI for proposal activity in the 1st quarter of 2020 was 17%, with nearly two-thirds of the respondents saying that proposal activity had declined or was flat when compared with the relatively weak 4th quarter results.
Of the 12 major A/E/C markets measured by the QMF, healthcare topped the field with an overall NPMI of 27%, followed closely by water/wastewater (24%). After that, the dropoff was sharp, with transportation taking the bronze (7%), followed by energy/utilities (1%) and environmental (-5%).
The worst performing markets were both commercial – developers (-51%) and users (-47%). By contrast, healthcare’s NPMI led the previous quarter’s results at +55%, while education trailed the pack at +23%. “Close analysis of proposal activity reveals very sharp divisions in outlook by markets, some plummeting to levels not seen since the Great Recession.” said PSMJ Senior Principal Davis Burstein, P.E., AECPM.
Among the 58 submarkets tracked, only 20 showed positive NPMIs. Healthcare submarket medical labs reported the highest level of activity at +27%. Predictably, the restaurant submarket performed worst (75%). Multifamily housing, which has consistently displayed some of the strongest activity in the past decade, was relatively flat (-2%), while other housing markets such as condos (-28%), single family developments (-28%) and single-family homes (-31%) slumped badly.
“I expect to see a rapid rebound in housing and commercial development once the health crisis passes and the impact of record-low interest rates starts to be felt,” adds Burstein. “Pent-up demand should make its presence felt by the end of Q3, and even more so in Q4 if we see movement on an infrastructure bill.”
PSMJ has been using the QMF as a measure of the design and construction industry’s health every quarter for the past 17 years, assessing the results overall and across 12 major markets and 58 submarkets. The company chose proposal activity to gauge the AEC industry’s long-term outlook because it represents one of the earliest stages of the project lifecycle. A consistent group of over 300 firm leaders responds to the survey each quarter, including 289 for the most recent quarter.
