By Tasha Anderson for AZBEX
Despite the collective gut-punch that COVID-19 brought in 2020, Arizona’s state economy and construction industry has done really well, and BEX predicts 2021 will be another big year for construction.
Such was the overall takeaway from the BEX 2021 Construction Activity Forecast event, held on Friday, January 15th, via a virtual Zoom webinar.
More than 150 attendees logged in with anticipation to hear the state of the construction industry in 2020, as well as the top projects and players and future outlook in each market sector presented by Rebekah Morris, BEX President & Founder; Rachel Pratt, Vice President of Operations; Kristen Amado, Senior Market Researcher; and Roger Alvarez, Market Researcher.
All data was taken from DATABEX, our online searchable database that tracks public and private projects around the state with valuations of at least $5M.
Morris began the presentation by giving attendees an overview of the overall market, starting with statewide population growth. From 2004-2006 rates all exceeded 3 percent. During the low times of 2009-2010, growth was less than 0.5 percent, but has since recovered to more than 1.5 percent for 2018-2019. 2020 population growth rate decreased just slightly to 1.47 percent.
Arizona recorded a total of 2.893M jobs in 2020, which shows a 7.97 percent gain from the 2007 pre-recession peak of 2.679M; however, when looking at construction employment specifically, “we are still 27.17 percent lower than our peak,” said Morris comparing the 175K jobs recorded in 2020 versus the 240.3K jobs recorded in 2006. Though the numbers are climbing back up from 110.8K in 2010.
Total construction activity peaked at $21B in 2006-2007 and dropped to $8.6B in 2010-2011. Since the Recession, construction activity has seen a slow, measured recovery until 2017, with more significant increases measured, Morris stated. 2020 ended at $17.6B in total construction activity.
After the higher–level market overview, the BEX research team dug deeper into the public sector, housing and private construction.
Rachel Pratt and Kristen Amado dove into the Public sector, which included K-12 and higher education, public spaces, transportation and parks and utilities.
The K-12 and Higher Education markets accounted for $502M and $542M, or 2.74 and 2.97 percent of the market respectively, with top projects being the Lukachukai Community School – New K-8 Elementary School and the NAU Multi-Discipline Academic/Research STEM Building. The K-12 market is projected to remain heavily bond driven and a pent-up demand for schools is anticipated to hit in 2022-2023. There is also an increase in the diversity of the K-12 meaning new players are breaking through the K-12 wall.
Higher Education is facing challenges such as new deals moving slower and more projects being put on hold. ASU is still dominant in the sector but is slowly losing ground.
Public spaces accounts for 3.11 percent, or $567M of the total market, with the top project once again being the City Hall at Goodyear Civic Square at Estrella Falls.
While CIP funding is holding strong, more projects are being delayed and put on hold because of labor shortages, increasing construction costs and COVID-19.
Transportation and Parks account for 11.71 percent or $2.2B of the total market, with the top project once again being the South Central Light Rail. Investment in transportation is seen as an economic development investment and preservation, maintenance and modernization look to be the future project opportunities. Regional funding for transportation via sales tax will be a big topic. Less people are driving due to COVID-19, which is leading to less gas tax.
Utilities accounts for 4.32 percent, or $781M of the total market, with the top project again being the SunZia Southwest Transmission Project. Massive utility scale production projects are discreetly popping up, and water availability for these projects remain a concern. Spending is predicted to increase to about $1.2B in 2021 due to the large power projects.
After the Public sector, BEX Market Researcher, Roger Alvarez discussed the single and multifamily housing markets.
Single-family residential permits are climbing their way up at a healthy pace from 7.37K in 2010. “2020 was actually one of the best years, since 2005, in terms of demand, Alvarez explained. Pre-recession peak numbers in 2005 were 78.53K and 2020 reached 40.47K permits.
The multifamily market, composed of apartments and condos, student housing, senior housing and single-family for rent, accounted for 19.16 percent, or $3.595B of the total construction market in 2020, with the top project being the Central Station Redevelopment project. The annual volume of multifamily permits in 2020 is the highest it’s been in the past 20 years with a total of 15.56K.
The sector is predicted to continue its uphill trajectory with a focus shift toward more affordable, attainable and workforce housing products. There is also expected to be a change in amenity demand, such as keyless entry, built-in desks, etc. due to COVID-19.
Morris rounded out the presentation with a look into the final “big chunk” of the market, private construction. Private construction is composed of healthcare, industrial, office and retail and hospitality.
Healthcare accounts for 6.97 percent, or $1.217B of the total market with the top project being the Valleywise (MIHS) Roosevelt Campus Redevelopment. The large institutional healthcare systems are dominant in the space, with five owners covering 65 percent of the market. Because owners’ resources are constrained, they are forced to get creative in delivering projects.
Industrial took the top spot away from multifamily this year, accounting for 22 percent, or $3.035B, of the total market, with top project being the Intel Chandler facility. As Morris stated, the industrial market is the “darling of the traditional CRE sectors, representing approximately five times the volume of Office & Retail combined.” Speculative development is the most popular, representing about 65 to 70 percent of the industrial market.
The construction of the Loop 202 and Loop 303, there is even more opportunity for industrial development. According to Morris, the only likely thing to slow it down is rising construction costs and land prices.
Office and Retail account for 3.98 percent, or $739M, of the total construction market, with the top project being The Union at Riverview. COVID-19 has damaged but not destroyed these sectors. Pent up demands are anticipated to hit, and BEX predicts 2021 construction to be strong with an aim for 2020 deliveries.
Last, but certainly, not least, the Hospitality sector accounts for 4.57 percent, or $841M of the total construction market, with the top project being the Legacy Sports Park in Mesa. While very diverse, the pandemic hit this sector hard in 2020 as large sports and entertainment projects are mostly delayed or reduced in scope. BEX predicts a bump in activity in 2021 for 2022 deliveries.
All-in-all the outlook of the overall construction market was positive; however, there were some drawbacks. Labor availability and materials pricing continued to constrain growth, and while Industrial and Multifamily continued to be the darlings of the industry throughout 2020, Hospitality, Office and Retail were the most impacted by and the Public sector pulled back the most due to the pandemic. BEX does predict these sectors to bounce back in anticipation of future demand.
In May, BEX will host the 2021 Private Development Summit. Hear from owners and industry leaders in the private sector for construction in Arizona. Stay tuned for registration details!