At the turn of the year, a concise and powerful judgment circulates in the industry: "2020 was bad, 2021 will be better." Although the shadow of surging U.S. COVID-19 cases and record death tolls still looms, observers in the construction industry generally express cautious optimism as the new year begins.

"I expect the U.S. economy to contract by 4% to 5% in 2020," said Anirban Basu, chief economist at Associated Builders and Contractors, during a year-end webinar, while also offering the above "mixed" forecast. "But in 2021, we will see a strong recovery."

Glimmers of hope do exist: a second COVID-19 vaccine recently received emergency use authorization and began distribution, and President Trump signed a $900 billion economic relief package. However, the optimism among construction industry observers stems more from sector-specific factors, encompassing fundamental shifts in markets and processes that will drive broader and more diverse development activity in 2021.

Consider the perspective of Tom Stringer—he serves as managing director of site selection and business incentives at professional services firm BDO, where his role is to find suitable development sites for corporate clients planning new plants and offices. "Site selection is often a leading indicator of when companies in the economy begin to consider capital investment, and our phones have been ringing," Stringer said. "So, if your readers are in the contracting business, they will soon be busy too."

Stringer is not alone in this view. A post-election survey by Deloitte of engineering and construction industry executives showed that 68% of respondents viewed the industry's business outlook as "somewhat optimistic" or "very optimistic." "As we close out 2020 and move into 2021, we are definitely seeing pent-up demand building," said Michelle Meisels, Deloitte's engineering and construction leader.

This widespread optimism among construction executives is rooted in several real-world factors—some positive, others less so—that will shape the direction of the construction industry in 2021. Here are six key factors influencing the industry landscape in the coming year:

Subcontractors struggle

In the coming months and beyond, subcontractors may bear the brunt, and general contractors who rely on them once projects restart will face knock-on pressure. "Subcontractors are facing sharply intensifying market competition, so unfortunately, some firms—especially smaller ones—will go out of business," Meisels said. "General contractors may have to take on a significant amount of work that was previously outsourced and build those capabilities in-house."

Michael Bordes, president of AA Jedson Company, a general contractor in New York City, has already taken this path. He said that during the pandemic, he had to pivot from his usual restaurant and gym projects to affordable housing projects still deemed essential. At the same time, he is changing strategy by increasing self-performed work to limit reliance on subcontractors. "We self-perform most of our construction work because subcontractors out there are in a very tough spot," Bordes said, noting that insurance costs are a major challenge for subcontractors. "The people we deal with may not openly say 'we're having trouble with insurance' or 'we're short on manpower.' If the work stays on your own payroll, you at least have 95% control."

Holding the safety line

Meanwhile, Bordes said he is protecting worker safety and health by combating complacency and continuously reinforcing preventive measures—a task that has become more challenging as the pandemic drags on. Although he hopes workers will get vaccinated, he made clear he will not mandate it if workers have concerns. "We know masks work, and we know that regular disinfection, frequent handwashing, and not touching your face can prevent infection," Bordes said. "But while we will advise employees that vaccination is important, we feel we cannot force them. Some people still worry about potential long-term side effects."

Although the U.S. Equal Employment Opportunity Commission and a group of construction industry attorneys recently ruled that employers can require worker vaccination under specific exceptions, the challenge for contractors in 2021 lies in how to handle workers who refuse vaccination due to underlying safety concerns—the consequences of mandating it will undoubtedly test management wisdom.

Hiring for the upcoming demand surge

While subcontractors are under pressure, contractors will inevitably face the challenge of hiring enough workers once the pandemic is controlled and backlogged projects return to the market—even for in-house positions. However, observers note that firms are not yet hiring at scale because many new projects have still not come to market as COVID-19 cases surge in 2021. "The reality is that projects are still being delayed, so companies won't hire unless they have positions to fill," said Patrick Jones, head of the architecture, engineering, and construction division at Orion Talent, a recruiting firm in Raleigh, North Carolina. "They won't hire just to build a talent bench."

He said that while experienced site supervisors and estimators remain in demand, companies are reluctant to hire newcomers who require training and investment when projects are scarce. "We are seeing a slowdown in hiring for what I would call entry-level positions," Jones said.

Meanwhile, according to Ken Simonson, chief economist at the Associated General Contractors of America, nonresidential construction has recovered only 58% of the jobs lost since the pandemic began. He noted that the industry's seasonally unadjusted unemployment rate in November was 7.3%, with 732,000 former construction workers idle.

On the surface, this might suggest contractors will find hiring easier once the pandemic ends. But Basu believes that may not be the case. In his December economic forecast, Basu asked an audience of over 1,000 how many planned to add staff in the new year, and more than half answered affirmatively. This aligns with ABC's November Construction Confidence Index, which showed most firms plan to increase headcount over the next six months.

Given project demand, coupled with many firms trying to secure workers when projects are finally released in 2021, contractors may again face labor shortages. "I predict that many of you will continue to struggle to find truly motivated, skilled workers," Basu told the contractor audience. "One thing that happened in past recessions is that many construction workers who lost their jobs left the industry entirely."

Infrastructure moves up the agenda

On the positive side, more infrastructure and construction projects should appear on the horizon. This is especially evident as President-elect Joe Biden pushes his "Build Back Better" initiative—envisioned as a broad spending plan that could benefit contractors at multiple levels.

"He is seeking a multi-trillion-dollar infrastructure bill with a broad definition of infrastructure—whether it's surface transportation, aviation, waterfronts, the Army Corps of Engineers, civil works, flood mitigation projects, clean drinking water, renewable energy projects, K-12 public school construction, or broadband," said Jimmy Christianson, AGC's vice president of government relations. "There's a lot in there."

Meisels also sees opportunities for contractors under such a plan. "Infrastructure and utility projects could see a sharp rebound," Meisels said. "If the new administration follows through and directs funding, you will see a surge of projects driven by those government expenditures."

Office, manufacturing, and distribution projects poised to take off

Part of this kickoff effect may already be happening in the private sector. Take the recent activity observed by site selection executive Stringer: his clients are calling with interest in expanding offices in tertiary markets beyond their dense urban headquarters. At the same time, they are seeking to build manufacturing and distribution facilities to mitigate the fragility of just-in-time supply chains exposed by the pandemic.

"The supply chain issues that proliferated early in the crisis have really created significant business opportunities for the 'unsexy traditional methods'—like inventory and warehouse construction," Stringer said. "Hopefully we will never run out of toilet paper again."

In fact, the explosive growth of e-commerce has already driven a boom in this sector. "The most obvious change this year is the strong development of warehouse and distribution facilities to meet the sudden surge in e-commerce demand," said Robert Smietana, CEO of HSA Commercial Real Estate, an industrial developer and advisory firm based in Chicago.

For example, CRG, the real estate development and investment arm of Chicago-based Clayco, plans to pursue industrial development and acquisition opportunities in cities such as Atlanta, Chicago, Philadelphia, St. Louis, and Columbus, Ohio. "It's no secret that e-commerce has been a tailwind for industrial real estate over the past cycle," said Kevin Scott, CRG's vice president of investments and development. "But e-commerce users still represent only a small portion of the overall industrial user base. Specialized uses like cold storage and data centers continue to grow, and we're excited about the opportunities there."

Environmental issues regain focus

Data center construction is one of two high-growth sectors where construction recruiting expert Jones sees demand for specialized subcontractors. The other is utility-scale solar. "The big players in utility-scale solar have been on a growth trajectory, and next year they will really hit their stride," Jones said. "Clearly, the new administration will also be favorable for this."

For example, Fort Lauderdale, Florida-based Moss Construction has highlighted several utility-scale solar projects it has worked on in recent years in its portfolio, declaring on its website that it is "helping our nation move toward a cleaner energy future." According to sister publication Utility Dive, this growth stems from renewable energy now costing less than any new fossil fuel-based electricity capacity.

But this opportunity also reflects a broader corporate awareness of environmental issues. For instance, contractor giants AECOM and Fluor said on recent earnings calls that client interest in their environmental services businesses has increased; Jacobs announced it had achieved net-zero carbon emissions for its 2020 operations and business travel, with a goal of becoming carbon-negative by 2030. Balfour Beatty and Lendlease have also recently announced carbon reduction plans.

"The construction industry is under tremendous pressure to improve energy use," Meisels said. "But I also believe that construction firms that build capabilities to support green building standards and clients' sustainability efforts will be poised to thrive. If you want to be a leader in this space, you can't avoid this issue."