United States

Real estate and construction industry outlook

Volume 8, Summer 2021


  • Residential construction remains hot, leading recovery in real estate.
  • Nonresidential construction is poised for a rebound as pent-up demand and savings are unleashed. 
  • Rising costs for core building materials and a shortage of skilled labor have been among the biggest challenges for residential and nonresidential contractors in recent months.
  • The post-pandemic new work model may call for a hybrid of office and remote work, and most companies are using the pandemic to closely examine their real estate footprints.
  • Despite declines in demand for university housing, investors are poised to benefit from the need to refurbish aging dormitories.
  • Pent-up demand is helping to drive an uptick in travel, where trips combining leisure and business are set to be the next trend.

Building ‘boomtown’ USA

Residential construction has been leading the economic recovery for over a year, a trend accelerated by the COVID-19 pandemic. Stay-at-home orders forced Americans to adapt to an environment of limited human contact, as work, school and recreation all moved into virtual space. This dramatic shift left many families seeking more from their residences—bigger layouts, dedicated offices and additional outdoor space—leading to the sharp boost in residential demand and a migration away from expensive urban centers. It’s all happening during a time of limited supply, as the industry faces challenges ranging from higher material prices to a dearth of available lots.

Meanwhile, nonresidential construction has tapered off, as projects were put on hold amid the economic slowdown. From traditional offices to retailers and hotels, businesses are reevaluating their footprints amid heightened safety protocols and an uptick in online transactions. Many former office employees are pushing to continue remote work, at least some of the time. 

Despite the divergent paths within the real estate market, we expect that nonresidential construction will pick up ground in the second half of 2021 and into 2022, while residential development will maintain its bullish pace. 


The residential construction market has been firing on all cylinders, as explosive demand outstrips supply. The initial shock from the pandemic, which sent housing starts and permits to three-year lows, was short-lived; demand for space began to rise in June 2020, bolstered by low mortgage rates, increased household savings and the desire for more space, creating greater imbalance in the equilibrium, which had started years before with a so-called underbuilding gap. 

“The demand environment is outstanding,” Ryan Marshall, CEO at PulteGroup, said during a homebuilding conference sponsored by JPMorgan Chase in May. In the first quarter, the homebuilder boosted its guidance to 32,000 closings for the year from 30,000.

Prior to the pandemic, the housing market experienced nearly two decades of underbuilding when demand surpassed supply. The shortfall was highlighted during the period following the Great Recession, as new home starts and permits fell below 1.5 million annualized units, the rate necessary to sustain market equilibrium. The limited building of new residential construction was a result of recent bias in the market caused by fears of housing instability. Builders have fallen short of sustainable supply by an estimated 5.5 million to 6.8 million housing units since 2001, according to a June report by the National Association of Realtors. 


Throughout 2021, existing home inventory has been below 1.5 million units, representing record low levels and adding additional stress to the market. Government estimates based on May 2021 inventory levels and the pace of sales show it would take only about 2.5 months to exhaust current existing home inventory. This is extremely worrisome, considering a six-to-seven-month supply is typically viewed as healthy. Subsequently, home prices have soared; nationwide, the median price of an existing home has risen to $350,300, while that of a new home is up to $374,400. Both are record highs. 

To address the housing market’s limited supply issues, builders must look to outpace the long-term equilibrium level of 1.5 million annual units built. Due to the scarcity in inventory, homebuilding should remain strong for the remainder of 2021 into 2022, despite potential building supply-side issues impacting residential construction. 

Nonresidential construction

Unlike residential construction, nonresidential construction has limped along since the start of the pandemic, as many companies suspended or canceled projects due to uncertainties facing their businesses. However, in recent months, with vaccination rates climbing and most states and municipalities reopening, the nonresidential construction industry is poised for a rebound as pent-up demand and savings are unleashed into the economy. 

“The snapback of recovery is pleasing to observe,” Bruce Flatt, CEO of the global commercial builder Brookfield said during a May call to discuss first-quarter results. He added: “Capital markets today are very robust. Interest rates remain low, and the demand for the type of assets we own is strong and getting stronger.”

The Architecture Billings Index, a nine-to-12-month leading indicator of construction work, turned positive in February and has continued to push higher, reaching a peak of 58.5 in May. Each of the index’s sub-indices, which measure the type of construction work being performed (commercial, institutional and residential), has seen significant growth since the start of the year, and in May was above the equilibrium reading of 50. Based on the previous four months of positive readings, it is expected that nonresidential construction will experience a significant increase in demand beginning in the second half of the year and continuing into 2022. 


The positive momentum in the marketplace will be welcome news for the construction industry. While the pandemic impact has not been as severe as in other sectors, many contractors were forced to chip away at their existing backlog to survive. According to data from the trade group Associated Builders and Contractors, throughout 2019 most contractors had a backlog of work averaging between 8.5 and 9 months. At the start of the pandemic, backlog fell below eight months and has remained there for much of the past year. 

Adding to the positive momentum is the hotly debated infrastructure bill that President Biden and a bipartisan group of senators have agreed upon. Regardless of the legislation’s final shape, it is expected to result in a significant contribution to construction spend and further brighten the outlook beyond 2022. 

But here are some headwinds contractors will have to face. 

Boomtown challenges

Rising costs for lumber and other core building materials have been among the biggest challenges for residential and nonresidential contractors in recent months. While prices may remain elevated for the rest of the year, expectations are for price volatility to begin to subside. This should relieve some of the stress contractors have experienced in the bidding and estimating processes.


Rising cost for lumber and other core building materials have been among the biggest challeges for the construction industry in recent months.


A second major challenge contractors face is a shortage of skilled labor. Contractors have already begun reporting difficulties finding skilled workers to complete necessary work. According to data from the Bureau of Labor and Statistics’ Job Openings and Labor Turnover Survey, or JOLTS, the construction industry had 357,000 open positions in April 2021, its second-highest reading in the past five years. The data underscores the current lack of skilled labor; the challenge of finding employees will only get worse as demand for construction services picks up. Contractors should be evaluating other ways to augment their labor force through the adoption of technology to help satisfy future demand. 

Office and student housing: back to the future?

The office is calling—and it wants workers back. 

Many employees have become increasingly fatigued by the onslaught of virtual meetings brought on by remote work. And some large corporations, including JPMorgan Chase, Goldman Sachs, Amazon and Google, are reportedly taking a bold stance to promote an office-centric culture post-pandemic. While employers want their workers back in the office to drive collaboration and spur innovation, they realize the office of the future will need to be more flexible than it was pre-pandemic. 

Recognizing the new work model may call for a hybrid of office and remote work, most companies are using the pandemic to closely examine their real estate footprints. In his annual letter to shareholders, JPMorgan Chase Chairman and CEO Jamie Dimon stated: “Remote work will change how we manage our real estate. We will quickly move to a more open seating arrangement.” He went on to add: “This will significantly reduce our need for real estate.” 

The return to office life presents a host of new challenges for businesses, including how to handle employee vaccinations. Most U.S. employers aren’t taking a hard stance on vaccination requirement. Some, however, including Morgan Stanley, BlackRock Inc. and Bank of America, are for now allowing only vaccinated employees in their offices, a protocol that permits maskless interaction. 


The return to office life presents a host of new challenges for businesses including how to handle vaccinations. However, employers can make a strong argument that remote work hinders collaboration.

Employers can make a strong argument that remote work hinders collaboration. A study by Ethan Bernstein and Ben Waber highlighted in the December 2019 issue of the Harvard Business Review found that remote work, while more cost-effective, tends to significantly inhibit collaboration, even with enhanced digital channels and communication tools. The study reviewed the workforce of a major technology company, following its employees from 2008 to 2012; it found that remote workers communicated around 80% less about their assignments than did team members located in the same office. On 17% of their projects, remote workers didn’t communicate at all! 

In addition to office footprints, companies are also rethinking their broader real estate strategies. Some are trading in high-tax jurisdictions and poor weather for sunshine and business-friendly venues. Texas has been the top relocation choice for some former California-based companies, while Florida is attracting New York private equity shops. Arizona and Kentucky are also beneficiaries of the post-COVID-19 corporate relocation trend, according to Bloomberg data. With states like Illinois looking to eliminate or restrict corporate income tax breaks and New York proposing a temporary high-income surcharge, some companies are deciding the benefits of big cities like Chicago and New York are no longer commensurate with the costs of doing business there. 


The pandemic left many families seeking more from their residences—bigger layouts, dedicated offices and additional outdoor space—all bolstering demand for new homes.

As employers set plans for the return to office, the multifamily sector has been benefiting, too. Apartment rents were up 160 basis points in April and 140 basis points in May, significantly higher-than-usual gains for those months, according to CoStar data. The storyline that cities are dead has itself been laid to rest, as downtown rentals set records in the first quarter in 2021, and overall national vacancy rates of 5.6% dipped below pre-COVID levels. San Francisco, New York and other major coastal cities have begun to recover as restaurants, museums and other urban destinations reopen. And despite media reports otherwise, higher home prices in the United States are not fueling rentals. Instead, would-be buyers are seeking rentals due to the limited supply of homes for sale in what is expected to remain a hot housing market through the remainder of 2021.

The call back to campus

It’s been a long strange trip for students during the pandemic, with many attending class virtually in far-flung locales. Colleges and universities are trying to figure out the right formula for real estate investment as a future that combines in-classroom and asynchronous learning unfolds. Higher-ed institutions, whose revenue streams were gutted by the loss of residential income and food hall sales, face a multiyear recovery at best. Forbes’ annual review of college and university financials shows that around 20% now have a “D” rating. Adding insult to injury is a looming demographic squeeze; by 2026, smaller high school graduating classes will result in even greater competition by colleges for students.


Despite waning demand, developers are partnering with universities to improve outmoded university dorms.

With money tight and hybrid education set to stay, the need for on-campus housing and dining will continue to decline. However, in good news for investors, existing housing stock at many schools is severely outdated and lacking modern amenities, making it ripe for an overhaul. These institutions continue to prioritize their limited capital on infrastructure, and developers are partnering directly with college and universities to upgrade on-campus housing.

Early-to-open states lead hospitality rebound

The travel industry is heating up! Fueled by rising vaccination rates and higher personal savings, discretionary spending has shifted from goods and services to hospitality. U.S. weekly hotel occupancy hit 68%, its highest level in 21 months, in the week ended June 19, according to STR data. In addition, the average daily rate of $128.90 and revenue per available room (RevPAR) of $87.62 reached pandemic-era highs. The recovery is nationwide, with more than 72% of all U.S. hotel markets posting RevPAR at 80% of 2019 levels or better—and 45% of all hotels posting RevPAR higher than the comparable week in 2019. 

Tourist cities in states that experienced less severe pandemic lockdowns such as Florida and Texas are seeing significantly more improvement than their urban counterparts with tighter restrictions. Tampa and Miami’s 12-month occupancy through May 2021 was greater than 50%; by comparison, Chicago was 36% and New York City was 43% for the same period. Moreover, RevPAR for Tampa and Miami (at $70 and $97, respectively) significantly outpaced Chicago’s $31 and New York City’s $58. The higher-performing markets were able to return from lockdown more quickly and attract new talent on-site.

Dave Hilfman, interim executive director of the Global Business Travel Association (GBTA), characterized the current hospitality environment in a February 2021 release on the state of the industry: “Economic recovery is already underway, although very uneven across countries and sectors. The continued rollout of the vaccine will be central to recovery globally, as will decisions the new Biden Administration makes regarding global trade and border and quarantine policies." In its policy response, the U.S. Department of Commerce is planning to announce a $750 million investment in travel and tourism, Gina Raimondo, department secretary, told a virtual forum hosted by the American Hotel and Lodging Association. The noticeable disruption in the travel industry will require continued government support until full recovery.

Leisure travel boost demand

Pent-up demand is driving a strong uptake in bookings, as leisure travel shows indications of a rebound in the United States. June throughput measured by the Transportation Security Administration is more than four times higher than a year ago. As such, all facets of hotel business, including branding, products and services, customer experience, and loyalty programs will need to recalibrate for a predominantly leisure-driven market. New customers and loyalists alike will need to be targeted using personalized marketing content that inspires leisure travel based on specific needs and desires. Hotel marketing departments will continue to dive into data from customer insights to tailor experiences that capture a wider array of leisure travelers.


Pent-up demand is driving a strong uptake in bookings for leisure travel. As work and recreational life continue to blend, business travel will increasingly take on leisure components.

Meanwhile, concern that business travel will suffer permanent losses continues following the successful shift to virtual meetings by many businesses during the pandemic. The GBTA forecasts that business travel will see a 21% increase in 2021, with most gain expected to come at the end of year as vaccinations increase globally and consumer confidence returns; next year, GBTA expects a significant increase in group and international travel, while in 2023 and 2024, it projects business travel growth to slow back to pre-pandemic levels. Full recovery is expected by 2025. 

Post-pandemic travel is likely to look very different, as some lifestyle shifts driven by the pandemic linger. According to survey data released in April from Accenture, after a year of lockdowns, 95% of respondents said they made at least one change to their lifestyle they expect will be permanent; 79% would like to work from a location other than their home or office; and 46% either will not travel at all for work or will reduce their business travel by half. The survey, which polled more than 9,600 people in 19 countries, revealed that more than half of respondents would be willing to personally pay up to $100 per month to work from a café, bar, hotel or retailer with a dedicated space. Given that business and group travel will continue to lag in the short-run, front-of-mind strategy will need to focus on re-imagining travel and hospitality, specifically for high-value travelers.

‘Bleisure’ may represent the future of travel

In the era of increasing work-life integration, travel will blend aspects of work and play. The so-called bleisure traveler—who combines business and leisure—will become the focus as the travel industry looks to capture the market's newest entrant. The bleisure traveler’s customer profile focuses on personal health and wellness, local communities, sustainability and unique opportunities to connect with friends and family.

The stress and anxiety of the global pandemic has shifted the mindset of travelers to an all-inclusive travel experience. “This year, more than any other, has highlighted the importance of looking after your health and wellness,” said Paul Joseph, founder of Health and Fitness Travel, a travel booking platform, in a December article published on Lonely Planet.com. “The various global restrictions coupled with the outbreak of the pandemic in 2020 have only made people appreciate any opportunities to better their health both physically and mentally.”

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