Market forecast Market Data Market analysis

Building Progress

Comparing construction figures from the first half of 2020 with early projections shows COVID-19’s true impact.

Substantial levels of new construction were set to hit markets across the United States in 2020 — but this is a banner year no more. Supply increases for both multifamily and industrial were ready to aid in reducing housing shortages and add capacity and efficiency to a logistics industry facing upheaval due to shifting shopping habits.

But when the calendar turned to February, everything changed. By April, the pandemic and subsequent economic shutdowns caused construction projects to dramatically decelerate, if not halt completely. REIS survey data allows us to examine the magnitude of the short-term effects on inventory by observing the deviation in pandemic construction activity from pre-COVID-19 forecasts.

Early Expectations vs. Reality

The pipeline of construction activity was, and remains, quite full. The pandemic has undoubtably slowed the rate of completions, but projects where substantial progress had already been made will be finished, albeit with delay. The current level of completions in relation to pre-pandemic expectations is a key to understanding delays and their impact on the timing of new supply. 

At the sector level, multifamily was readying for record growth in 2020. Over 300,000 units were to come online by year end, a nearly 3 percent increase in existing stock. For context, the next highest level of annual activity since 1999 (when REIS began tracking national level statistics) was 265,000 units in 2018. Further, the average annual growth in the previous 20 years was only about 150,000 units. For actual 2020 outcomes, with just 73,899 units built though the first half of the year and preliminary data from 3Q2020 exhibiting a similar pace, completions will not come anywhere close to meeting pre-pandemic expectations. For the remaining sectors, office was set to add about 50 million square feet, which would have been the most since the Great Recession. Like multifamily, the likelihood of meeting this expectation is minute. 

U.S. Construction Completions


For industrial, with a focus on distribution and warehouse, we had forecasted an additional 118.1 million sf of new space, 25 million more than 2019 — only surpassed in recent history by 2017 and 2018. Unlike other sectors, 2020 activity has remained high and is on pace to surpass expectations, likely due to the acceleration of e-commerce. Finally, retail was the only sector to have had a forecast below recent averages. The 6.4 million sf of new space expected at the start of 2019 is significantly below the average of nearly 20 million sf over the last 20 years. This sector is also now well behind that modest expectation.

Recent Data and a Change in Forecast

By the end of the second quarter, we had already cut the forecast for apartment, office, and retail sectors between approximately 10 percent and 20 percent — but that was when epidemiologists were still somewhat bullish that the virus could be mostly contained by mid-summer. Given the continued stubbornness of the virus, we have now further pushed many of these completions to 2021 and beyond. 

To get a better sense of how this pandemic and corresponding recession are stretching project end dates and altering our forecast, look back to the Great Recession. During that time, the average recorded delay for multifamily projects was about four months, while other sectors averaged about six months. Needless to say, the combination of a shut down in activity, lack of construction being designated as “essential,” supply chain disruptions, and laborers actually becoming ill will increase COVID-19 delays. Additionally, some projects, especially those in very early stages, may never make it to market or may make it with significant changes in scale and design.

Long-Term Effects

An abundance of theories have been posited regarding the upcoming pandemic-induced structural shifts — away from density, toward remote work, and out of brick-and-mortar, for example. While the pandemic has surely increased the pace of some trends in CRE, we do not anticipate the extreme outcomes some are predicting. New York and San Francisco, as well as other centers of density, are showing the greatest levels of rent and vacancy stress. Undoubtably, short-term pain will continue in these areas as the economy sorts itself out. Also, during the last decade both metros have experienced gains to inventory in submarkets in and around their densely populated central business districts. Further, the pipeline is still active. Combining fallout from the pandemic in terms of residential and business location preference shifts away from the CBDs with the growth in inventory, vacancy levels are primed to rise in those areas. As time progresses, we anticipate developers to shy away from some of these centers until uncertainty diminishes and confidence builds that young adults, empty nesters, and immigrants will still crave city life, and that corporations will still find productivity to be highest in dense areas. 

Following shifting capital will be a great indicator for developer sentiment.

Economists often point to uncertainty as a major cause in a reduction in economic activity, especially with long-term investments like CRE. We are currently in one of the most uncertain times of the past few generations. Interestingly, if developers are unsure about urban centers, then capital, which is still available, may flow toward industrial and/or more suburban and Southern multifamily projects. Following shifting capital flows will be a great indicator for developer sentiment. Additionally, we also anticipate construction activity and available capital to go toward renovations, retrofits, and conversions. We are already seeing changing office layouts, some building repurposing, and a shift in apartment design toward convertible common areas that grant separate work-from-home spaces. 

To conclude, a packed pipeline of CRE projects has been delayed but not cancelled. The new supply along with demand uncertainty will push vacancies up and rents down across all property types, except distribution and warehouse (outside of a severe recession). Mid- to long-term changes in the placement of projects and the style of projects are likely, but many developers are in a holding period, waiting to see the magnitude of change related to household and business migration, office space needs, and consumer shopping habits. 

Victor Calanog, PhD, CRE

Victor Calanog, PhD, CRE is the chief economist and senior vice president at Moody's Analytics Reis.

Thomas P. LaSalvia, PhD

Senior economist at Moody's Analytics REIS.

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