How Will a Recession Impact Commercial Construction?

After years of economic shifts, supply chain disruptions and labor issues, a recession is looming. The future is still uncertain, but this seems increasingly likely, so firms must brace for what’s coming. That starts with understanding what commercial construction during a recession will look like. Economists rank construction as one of the most at-risk industries […]

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After years of economic shifts, supply chain disruptions and labor issues, a recession is looming. The future is still uncertain, but this seems increasingly likely, so firms must brace for what’s coming. That starts with understanding what commercial construction during a recession will look like.

Economists rank construction as one of the most at-risk industries in a recession, largely thanks to its high expenses and dependence on larger spending. However, commercial building activity doesn’t always align with the residential sector, and recent trends may set it on an entirely different course. Here’s a closer look at how a recession could impact commercial construction.

Earnings

The first thing that likely comes to your mind amid recession fears is how it could impact earnings. A tighter economy could drive businesses to reduce their spending, potentially limiting project availability. Rising interest rates and living costs have already kickstarted this trend in the residential sector, but commercial construction may be safer in this specific scenario.

Unlike many residential firms, commercial contractors still face considerable backlogs. Nonresidential backlogs were higher than at any other point between March 2020 and March 2022, despite a drop since the first quarter of 2022. Consequently, many commercial firms have projects to fall back on even if new contracts slow down.

The Infrastructure Investment and Jobs Act (IIJA) may also help the sector through a recession. The bill allocates many funds for large construction projects, helping nonresidential firms find contacts even if businesses delay their new building plans.

Supply Chain Operations

Another concern over commercial construction during a recession is the supply chain. Companies have faced issues like a fastener shortage, lumber delivery delays and rising material costs since the pandemic’s onset. A recession could worsen some of these challenges.

Material suppliers may raise their prices to offset recession-induced losses on their end. Considering how the pandemic has caused many supply chains to dip into and even run out of their safety stocks, some items’ availability may also dwindle.

On the other hand, reduced demand from the residential sector may make some materials more available and lead to dropping prices to account for lower demand. In that scenario, a recession could balance the supply chain issues that have plagued the industry over the past few years. Which way supply chains will go is still uncertain, so it’s best to keep a close eye on your suppliers and emphasize transparency and resiliency.

Employment

The third major area of commercial construction a recession could impact is employment. In past recessions, employment has dropped as firms aim to cut costs and face dwindling demand. However, current labor shortages could reverse that trend.

Industry insiders and experts expect labor shortages to last well into 2023 as the aging workforce retires and fewer young recruits enter the sector. This shortage means many construction firms can’t afford to lay off employees, even amid declining demand. A recession could even spur a wave of new hires.

Price cuts in other sectors could lead to a larger unemployed workforce seeking jobs to account for the rising cost of living. This trend could help you find the talent you need to sustain post-recession growth or finish backlogged projects. If employment doesn’t rise in the industry, it will likely stay roughly the same instead of declining as you’d expect in a typical recession.

How Firms Can Prepare

Overall, commercial construction during a recession won’t suffer as much as the residential sector but could still face some challenges. Even if the recession won’t spell the end for your firm, it’s best to prepare for some changes before an economic downturn.

Backlogs provide your best safety net for dwindling demand, so aim to build a larger one. It’s impossible to tell how long a recession will last, but having a backlog of around 12 months’ worth of work is a safe target. These projects should fall within your expertise. Pursuing new areas you have little experience in is too risky for a recession.

IIJA and large backlogs may provide work throughout the downturn, but remember that this is an increasingly competitive industry. More than 37,000 new construction businesses emerged between 2021 and 2022 alone, meaning you’ll have to compete for government projects and similar bids. Consequently, it’s best to avoid large purchases and closely monitor your finances until the economy starts looking up.

Given current labor shortages, it’s also important to avoid laying off workers. In fact, it may be best to hone in on hiring practices to take advantage of the increase of unemployed job-seekers.

Finally, commercial contractors should rethink their supply chains. These operations still carry much uncertainty and may need to adapt quickly. Work with partners to bolster supplier relations, improve logistics visibility and embrace resiliency over pure efficiency.

Commercial Construction During a Recession

Commercial construction will likely experience some losses during a recession, but it’ll be better off than some sectors. The industry could see higher earnings, fewer disruptions and steady employment than residential building.

This is promising news, but a recession will not be easy. Firms should take the time to review their standings and prepare for a slower, tighter economy. Proper preparation can ensure success, even amid a recession.

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