The current slowdown is unfortunate in its cause, with all of the people suffering from the virus. It is hugely disruptive to all of us both professionally and personally, but it is the reality. Though this arose fairly quickly, our clients are intelligent, optimistic, and focused and are already asking how much prices are going to come down and when.
The best predictor of the future is usually the past, so I did some research. RS Means, a widely respected resource for pricing in our industry, reports that the 2008-2010 recession had stable pricing, not decreasing. I think we all know this isn’t right, so I checked the Turner Construction Company historical index. It seems more realistic, reporting an 8.4% decrease in construction costs in 2009 and a 4.0% decrease in 2010 for a total of 12.4% This seems more accurate. All recessions are different. There was a milder recession in 2002 and 2003. Prices didn’t go down in those two years, according to Turner, but went up 1.0% and .3%, while not a decrease, it was a significant decrease in the percentage increases before and after the recession.
It is tough to predict this one because it is so different. 2008 was the start of the great recession. It seems we will not have one similar again. And it lasted a long time with systemic issues in our financial system. In this recession, there is a dramatic drop in activity with some but not most states shutting down construction. But backlogs for contractors in those states are staying high since it is not being worked off. This means that when work restrictions are lifted, it is expected that work will take off again. Further, the stimulus package just passed helps many of us keep our staff, so even if projects are shut down, we will be ready and able to pounce on projects, ramping up activity quickly. In states where work can continue, the backlog is being worked off, and contractors will have a greater need for work, decreasing prices, depending on how long it takes for banks to start lending.
The bigger question and impact is what kind of shape the banks will be in after all this. Most lenders are cautious now, so limited new loans are being made. That will cause a lag in new starts that could depress prices. But presuming the slowdown is limited to 3 or 4 months to contain the virus, I don’t’ expect that to have nearly the pricing pressure of the 2-3 year great recession. So, my prediction would be a lower reduction, Probably 3-4%, and maybe as much as 5%.
Everyone will have an opinion on this, and I would love to hear yours because we are in uncharted waters with this one. The subcontractor market will ultimately determine what happens with pricing, not us. It will be interesting to see.
Peter Douglas, President
The Douglas CompanyRead More >