The pandemic caused a downturn in new construction in 2020—and high material prices are a concern—but South Florida seems poised for a rebound.
COVID-19 turned 2020 into an unprecedented year, as stay-at-home orders, lockdowns, and consumer hesitancy caused issues for many sectors of the economy. Restaurants and hotels mightily struggled because people weren’t traveling, and most retailers selling non-essential goods experienced a downturn.
The construction industry also went through a significant slowdown in 2020 because developers delayed many of their major projects. For example, South Florida saw a 25% decline in money spent on new construction in May 2020 compared to May 2019.
But 2021 is a year that has people all over the nation full of optimism. Not only does the country seem poised to put the pandemic behind it, thanks in large part to a successful vaccine rollout, but developers are sitting on cash they didn’t spend last year and looking to invest it.
As projects restart in the post-COVID world, the demand for new construction could increase exponentially in South Florida. Here’s a look at some reasons why new construction declined in 2020 and what we might expect moving forward.
Why 2020 was slower
In May 2019, South Florida saw $749.4 million in new construction projects. By May 2020, that number was down to $558.8 million.
Much of this decrease was in non-residential construction like office, retail, government, hotel, and industrial buildings, which saw a 35% year-over-year decline. Of course, one significant reason for the lack of new construction is that many CRE investors couldn’t find tenants for existing buildings.
With so many in the corporate sector working from home, the retail and hotel industries slowing down, and economic uncertainty dominating decisions, there was far less reason to commence large-scale construction projects.
High lumber and other material prices are another cause of the residual slowdown in construction. Contractor expenses are at all-time highs, and they’re passing these costs on to developers. By February 2021, lumber prices had increased by 170% from last April. These increases are driven by slower domestic production and tariffs on imported Canadian lumber, increasing expenses for everyone involved.
The good news is that some increased prices are unsustainable. We’ll likely see them come back down to earth in the coming months, either through market pressure or government action.
Why 2021 and beyond should be better for development
In South Florida, new construction will be driven by the region’s growing population. Between 2015 and 2020, Florida overall attracted between 307,000 and 387,000 net new residents annually, a trend that could see the state end up with five million transplants by 2030.
These people will need places to work, dine, live, and shop, and new construction will be required to accommodate them as developers take advantage of this growth.
In addition, Florida’s weather and low-tax environment are attracting businesses as well as residents. Financial firms like Goldman Sachs, Blackstone, and Elliott Management are setting up offices in South Florida. The region is also becoming a hotspot for tech giants like Microsoft and Live Nation and numerous startups.
If South Florida continues to grow as a financial and tech hub, the need for many forms of new construction will outweigh many of the underlying costs. There will also be more high-paying jobs and executives looking for housing in area communities. Many arrows point toward a rebound—and a looming, long-term increase—in the amount of new construction in South Florida.
Staying up to date on the trends
Naturally, watching how new construction evolves as South Florida moves further into the post-COVID recovery stage is essential for any CRE investor. As construction supplies like lumber return to more sustainable prices, production could bounce back in a big way, especially as corporate entities and people move here and use up existing available real estate.
Carefully watching material prices also provides insight into when a significant uptick in new construction will occur. There are still projects waiting for costs to come down before they commence.
Morris Southeast Group can help as you examine the CRE market in South Florida and plan your next move. Whether you’re considering new construction or investing in an existing building, researching the costs and determining where you can make a profit are essential to an intelligent strategy. Contact Morris Southeast Group at 954.474.1776 to discuss your evolving portfolio. You can also reach Ken Morris directly at 954.240.4400 or email kenmorris@morrissegroup.com.
