Change is good for construction, but this level of disruption means the economic indicators are harder to interpret
It will be a long while before the pall of the pandemic dissipates and we can see clearly the path ahead for construction activity, the damage done and emerging opportunities.
The bald figures show construction losing 12.5% of its output in 2020. A huge hit. The consequences were softened by schemes such as furlough, but the highly contractual nature of the business suggests the full scale of the damage wreaked has yet to be settled. Meanwhile, the lasting damage done to core clients in sectors such as retail and hospitality is also incalculable at this point.
Looking at wider indicators, the data themselves can only provide some clues. Indeed, some data may end up being misleading. The scale of change experienced tests the statistical methodologies beyond anything that would normally be expected. So, reading the health warnings on data is wise.
Within all this confusion many architects, along with others in construction, will inevitably be wondering what this means for the future. While fog lies thick, we are not totally without signs in all this confusion. Occasional glimpses appear in data, corporate statements, or news reports that provide clues to what might lie ahead. Some appear as positive rays of sunshine. Some as gloomy clouds. It’s a mixed bag.
Meanwhile, one abiding paradox associated with construction may offer some solace. The industry is persistently berated for its resistance to change. Yet, in so many ways, change drives the industry’s workload. Change, on balance, is good for construction activity.
So, where are we and what do the data say?
Let’s start with the GDP figures as the strength of the economy underpins workloads (Chart 1). A near 10% annual fall with the promise of two years of recovery that will fail to take it back to 2019 levels is far from encouraging. Against the benchmark of 2018=100, the index of GDP in January 2020 was 101.5. In December 2020 it was 94.5 falling to 92.1 this January. To put that in context it is the lowest monthly figure pre-pandemic since January 2014.
The construction data is a little more encouraging. The ONS index of activity came close to hitting the 2018 level (100) last November, which would have brought it close to the position at the start of 2020. It dipped slightly in December 2020 to 96.3, bouncing back a bit to 97.3 in January. It is worth remembering that the index dropped to 57.1 in April.
Chart 2 shows the progress of the index of activity on a three-monthly moving average basis to smooth the trend. The key point of note is that repair and maintenance (which includes home improvements) is faring much better than new build. Which should be good news for many smaller locally based architects.
But the picture is very uneven across the sectors, as we see in Chart 3, which picks out key sectors. Looking at the five quarters from 2019 Q4 reveals that infrastructure work has been the most resilient through the crisis, but private housing RMI has been the star performer in recent months. Private commercial presents the biggest headache.
Interestingly, when we look at the comparison of measures produced by IHS Markit/CIPS and the Bank of England, there are different views over the strength of construction activity (Chart 4). Admittedly the Bank of England data only runs to January and is a more encompassing measure, but it paints a far duller picture of the construction sector.
This reflects not just the differences in what is being measured and how, but the difficulties in assessing the actual level of gain or pain felt within any industry when massive shocks occur. For instance, it is hard to know, but worth considering, whether the IHS Markit/CIPS methodology adjusts well for statistical survivor bias. If those responding now represent a ‘survivor’ subset of the pre-pandemic sample, you’d expect elevated results. Either way, taking the surveys together illustrates the likely unevenness of any recovery.
A similar issue may also be at play in the RIBA Future Trends survey. These things are hard to correct in surveys – particularly where sentiment plays a role. But they provide useful indicators. Chart 5 shows the sentiment among architects. To smooth for fluctuations, which abound in periods of crisis, the figures are averaged over three months.
The message from architects seems to be that there has been modest growth since the shock of the first lockdown. This is to be expected, given the scale of the fall over the first lockdown. Interpreting the data poses some issues if we are trying to understand the level of activity, as the survey measures change.
But it tells us a lot about the distribution of work by sector and region. For instance, the market in London remains the weakest, but in January a positive workload balance was posted. After such a sustained period of poor performance, the level will be suppressed.
Interestingly, the strength in the market has tended to be in the north of England, although the January figures suggest there was less buoyancy in the northern regions. There will be significant volatility in the numbers given the nature of the impact of the pandemic. Recruitment figures probably provide a more reliable guide at this point. They seem to underline the relative strength of the north and the weakness in London and the south.
In terms of sectors, private housing is the most buoyant, which is what might be expected given the pattern of construction output growth. Likewise, commercial sector work is proving the weakest.
This reversal of fortune makes more sense when we look at the early impacts of the pandemic and how it has changed demand within the built environment.
The most recorded impact has been the ‘race for space’ among households. This has changed the pattern of home buying, but it has also encouraged home improvement. Early pre-publication data provided by Barbour ABI on home improvement shows a marked upward trend in the appetite among homeowners in 2020.
As Chart 6 shows, despite entering 2020 on a downward trend and despite the confusion and uncertainty generated by the pandemic and lockdown, there was a 4% rise in home improvement planning applications in 2020 overall compared with 2019. Interestingly, according to Barbour ABI, the rise in home improvement applications is higher outside of London and the South East. Indeed, in London there was a continued drop in home improvement planning applications, for a fourth year. The broad pattern seems to echo the activity levels among architects.
We don’t know how this will feed through into workloads. For instance, home improvement projects in London would tend to be of higher value, given the higher value of homes. So, the weakness in London may limit the overall growth rate. We also don’t know whether the recent surge in applications was down to an increase in smaller more specific and less wide-ranging projects, or not.
But, for architects, the trends are positive. Interestingly, car sales dropped sharply in 2020 to 1.63 million from 2.31 million in 2019 and remain weak. This suggests household spending on big-ticket items has clearly shifted toward housing. Furthermore, the Bank of England’s Monetary Policy Report February 2021 reckons additional deposits between March and November 2020 suggest that households have accumulated an excess stock of savings of £125 billion. This figure is expected to rise substantially over the first half of 2021.
This excess stock of savings is weighted to a demographic that is more likely to spend on home improvement. It is early days, and much can change, but there is good reason to expect a rise in home improvement work in 2021.
This will build on the significant rise in some areas of home improvements, such as improved outdoor space. Data from builders’ merchants provide clues to the type of work that has been growing. Unsurprisingly, landscaping products have been in huge demand, as Chart 7 illustrates.
But there are other areas of activity that we might also expect to see blossom in 2021. The notion of ‘hybrid working’ – where employees work flexibly between home, the main office and other satellite offices – is becoming a very commonplace theme among those delivering office space in the wake of the pandemic.
For instance, the 2020 full-year results presentation from IWG, owner of Regus, the flexible offices provider, clearly sees it as a big opportunity and makes great play on its benefits. This may be self-interest but, looking more widely, it has implications for the design of office space. Converting a huge acreage of the existing office floorspace to suit radically different work patterns appears, on the face of it, to be a big opportunity for architects too.
How fast change will occur and how deep it will run is unclear, but if new working patterns are adopted rapidly this would generate a surge in activity.
Along with this, there is likely to be the repurposing and reconfiguration of the built environment that serves the retail industry. How much of a role there will be for architects here is yet to be seen, as is the potential pot of work that may result from rebuilding retail after the pandemic.
There is certainly plenty of change to be addressed by the wider construction sector. The need appears to be there. The big restraint, however, is likely to be funding. Although another emerging restraint may be labour shortages.
One consequence of the pandemic has been the loss of a large chunk of the migrant workforce, particularly those from the EU. The data is problematic, as the ONS recognises. But on the face of it the Labour Force Survey data suggest that the cohort of those born outside of the UK working in construction has fallen by more than 100,000, about a third. The biggest impact will have been in London.
However, this may be an underestimate of the impact. A blog entitled Estimating the UK population during the pandemic on the Economic Statistics Centre of Excellence website suggests that the fall in the population of non-UK born people may be 1.3 million, more than half from London. This does not just have implications for the construction workforce, but the shape of population growth and the workforce in general. That means it has implications for the wider built environment.
So, looking ahead to an opening of society and the economy as 2021 unfolds, there are good reasons to be upbeat. And, as always, more than enough to worry about.