2021 looks to be slow for construction firms in U.S. and Minnesota

Construction firms across Minnesota and the U.S. are bracing for a solemn 2021 as demand wanes and projects are postponed or canceled as clients wrestle with the coronavirus pandemic and its economic fallout.

That is the situation according to survey results released Thursday by the Associated General Contractors of America (AGC) and Sage Construction and Real Estate.

"This is clearly going to be a difficult year for the construction industry," said AGC Chief Executive Stephen Sandherr during an online conference call with members Thursday. "Demand looks likely to continue shrinking, projects are getting delayed or canceled, productivity is declining, and few firms plan to expand their head count."

Nationwide, 59% of the surveyed U.S. construction firms reported project delays and cancellations because of the pandemic.

In Minnesota, 22 of the 29 construction firms surveyed here, or 76%, said they had clients postpone building projects. Another 48% reported jobs had been canceled altogether.

Nearly 83% of Minnesota managers surveyed worried that the pandemic would continue to hurt projects, workers and supply chains well into 2021. Nearly half predicted it will take more than 6 months for their firms to recover.

The construction industry was spared from much drama early during the pandemic as construction was deemed essential and projects continued. But then restaurant, theater and stadium events were canceled nationwide, and by spring many businesses sent their office workers home to work remotely.

That converted many once-vibrant downtowns into ghost towns and slowed commercial real estate transactions and many development projects.

Even stunning construction projects that were able to be completed — the Dayton's Project, the Rand Tower Hotel and the newly completed Thrivent headquarters tower in downtown Minneapolis — are largely sitting empty as prospective office tenants, hotel guests and employees wait out the pandemic's demise.

More than 41% of general construction firms across the state reported that the pandemic increased project costs and the time it took to complete building projects.

Builders reported that some workers on job sites became sick or learned they had been in contact with someone who had COVID-19.

"The pandemic is undermining construction productivity as contractors make significant changes to project staffing to protect workers and communities from the virus," AGC Chief Economist Ken Simonson said.

In other cases, builders faced clients who pulled out of building plans because of the uncertainties surrounding the pandemic and economic downturn.

The Sears building project near the State Capitol on Rice Street in St. Paul is one example. Set to be redeveloped into a mixture of housing, office and retail this year, plans froze when COVID-19 hit.

"We were involved in the Sears redevelopment for awhile but due to [the pandemic], the owners in New York canceled all efforts," said Matt Alexander, senior vice president of Minneapolis-based Kraus-Anderson Development.

As the corona­virus halted office work, travel and residential moves, plus causing millions of jobs across the economy to be shed, the construction markets changed.

"With COVID, some of these projects were put on hold," Alexander said. "They will be back. But it's just a matter of prioritizing their portfolios."

Nationwide, construction firms expect their industry will contract in 13 of 16 categories in 2021, the Associated General Contractors report found.

"Contractors are most pessimistic about the market for retail construction … They are similarly concerned about the markets for lodging and private office construction," the AGC report said.

Other types of construction facing severe headwinds included higher education, public buildings and K-12 school construction. Upbeat predictions only existed for projects targeting warehouses, clinics, testing facilities and medical labs, the report said.

"The outlook for the industry could improve, however, if federal officials are able to boost investments in infrastructure, backfill state and local construction budgets and avoid the temptation to impose costly new regulatory barriers," Sandherr said.

The somber report translated into subdued hiring plans. Only 35% of firms surveyed nationally said they will add workers this year, but the firms expected to have a hard time finding skilled job candidates. Another 24% plan to cut workers. About 41% said they planned to keep staff levels the same.

In Minnesota, 34% of surveyed firms anticipate employing fewer workers this year.

Sandherr and others on the conference call Thursday said the industry will continue to monitor its progress in the coming months, but that broad improvements might not be seen well into the summer or beyond.

Dee DePass • 612-673-7725