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AZ Construction is Faring Better than Expected

By Rebekah Morris for AZBEX 

Two major indicators of construction market activity have come out for March/April 2020 and both are surprisingly positive. Total statewide construction activity is now available for March 2020, and it shows no signs of the COVID-19 economic slowdown, which took effect in the middle of the month. Additionally, statewide construction employment for April 2020 has been released (AZBEX May 22, 2020). While Arizona construction employment did lose 4,200 jobs for the month, statewide construction employment decreased year over year by only 500 jobs.  

In the April 2020 BEX Leading Market Series discussion regarding the overall Economic Impacts of COVID-19, Dr. George Hammond, Director and Professor of Research for the University of Arizona, repeatedly stated that we really could not see the impacts yet and that it will take months to start to see what is really going on and how deep of a recession is going to be caused by the COVID-19 pandemic. 

Demand for new single-family homes was projected to dramatically drop due to the pandemic and related government-imposed restrictions on economic activity. According to Jim Belfiore in his latest Market Update, “Both Metro Phoenix Area and Metro Tucson homebuilders performed much better than initially expected following COVID-19. Traffic plummeted, as did sales, in the second half of March, but Governor Ducey’s Stay in Place orders listing homebuilders as essential services most certainly helped those in the industry deciding to stay open to continue to sell homes at a fairly healthy pace.” Belfiore went on to note that prices for new homes have not gone down at this point and have even gone up in some cases. 

March Statewide Construction Activity Jumps 18.57 Percent Y-o-Y 

Contracting is a taxable activity in Arizona and can thus be measured by sales tax volume, tracked by the Department of RevenueThere is a significant lag in reporting the data; the most current information available is through March of 2020. 

When the economic shock of COVID-19 really started to take effect in mid-March, construction was protected by Governor Ducey as he deemed construction an essential activity. Doing so spared the abrupt shutdown seen in other parts of the country that did not enjoy a similar protection.  

Arizona monthly volume of construction activity topped $1.368B, an 18.57 percent jump from March of 2019. Looking at the first three months of 2020 compared to the same time period in 2019, statewide construction activity increased 15.71 percent. Construction has been on a roll, enjoying double digit increases in year-over-year volume since 2017. BEX predictions in January 2020 estimated that double-digit percentage increase to continue in 2020 with a projected 15.69 percent Y-o-Y increase, or $17.1B total construction activity for the state. 

 

Statewide Construction Employment Spared from the Bloodbath 

Employment numbers are reported with greater speed than sales tax data, more current data is available on this metric. April 2020 shows a drop of 4,200 construction jobs in Arizona, but only a drop of 500 jobs Y-o-Y. Compared to the leisure and hospitality industry which shed more than 122K jobs in one month, construction has been remarkably spared.  

We can conclude that the vast majority of construction firms and projects are still in process. Construction is a risky business; it would be incredibly costly and inefficient to stop work once it has begun. While we have heard anecdotal reports of less workers on individual projects and projects earlier in the design and planning stages being put on hold or canceled, construction projects already underway are much less likely to stop entirely. 

Conclusion – Construction is Still Rolling… For Now 

Construction is less likely to see abrupt changes in volume since large projects take months or years to move through planning, design, city/AHJ approvals and through construction. Undoubtedly, the industry has benefitted from the designation as an essential activity and work continues to progress. 

Construction is going to slow down at some point if a broad-based recession continues; it would be naïve to think it will not hit this industry at some point. Some of the sectors we predicted as stable and growing are likely to be hit hard: hospitality and healthcare specifically. While we predicted multifamily to continue on its rapid growth path, reductions in overall employment and the restrictions placed on the economy are hindering people’s ability to move.  

Migration is a primary driver of Arizona’s economy – without people moving here, we will not grow as fast. Without new job creation and the sudden switch to working from home, demand for office and retail space is going to decline. Swift and deep reductions to sales tax revenue means less funds for public works projects like streets and utilities. 

We will continue to pay close attention to metrics such as industry employment and construction activity. While so much of the news is dismal, we can be very grateful that in this moment, from everything we can see right now, construction in Arizona is doing very well. 

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