COVID-19 Impact: Commercial Real Estate
Labor shortages, material delays, and project cancellations due to COVID-19 are impacting the commercial real estate construction industry in the U.S.
- In cities where stay-at-home orders have not been issued, most construction projects are still moving forward, but 70% of construction companies report that COVID-19 has caused anxiety among workers.
- In cities were stay-at-home orders have been issued, commercial construction is not always considered an essential business, so projects have halted entirely.
- A recent survey found that 18% of contractors report shortages of craftworkers and 16% report shortages of "government workers needed for inspections, permits and other actions."
- About 13% of contractors said their projects were delayed due to a potentially infected person visiting the job site.
- However, for construction projects that are considered essential, a lack of specialty contractors could cause completion delays.
- As construction attorney Steve Lesser stated, "If you have a subcontractor whose work force becomes unavailable, who is going to pick up the slack to perform that work? That’s a real problem especially here in Florida and elsewhere where they have specific licensing requirements associated with the performance of specialty trades such as roofing, electrical and swimming pools."
- Michael Keester, a shareholder/partner at the national law firm Hall Estill, agrees, saying, "As workers become infected, sick and quarantined, labor shortages could very well arise."
- The concern behind labor shortages is the delay in projects, which can affect the cost of those projects. Keester stated, "Construction projects always have a ‘time for completion’ component and many contractual provisions may certainly come into play in any construction project which is affected by labor shortages from the coronavirus."
- There will likely be many arguments over contract language about what is and isn't permissible in terms of delivering an overdue project.
- Commercial builders who obtain their supplies from Chinese manufacturers are likely experiencing delays in shipments because many Chinese factories have been shut down due to COVID-19.
- Joe Natarelli, national construction industry leader at accounting services firm Marcum, stated that "U.S. builders look to China for everything from steel and stone to millwork and plumbing fixtures," so any delay in manufacturing causes delays in the U.S.
- Construction Dive estimates that 30% of all U.S. building imports come from China, but some construction companies rely on China for as much as 80% of their supplies.
- A survey conducted by the Associated General Contractors of America found that 23% of contractors are reporting "shortages of material, parts and equipment, including vital personal protective equipment for workers such as respirators."
- Advisors are telling their construction company clients to "aggressively seek out alternative suppliers in the U.S. or in countries that haven’t been negatively impacted by major supply chain interruptions," but they warn that this could result in higher material prices.
- A late March survey conducted by the Associated General Contractors of America found that 39% of contractors have reported that "project owners have halted or canceled current construction projects amid deteriorating economic conditions."
- These project cancellations could result in massive job losses unless Congress passes a relief package for the construction industry.
- The spread of COVID-19 has caused an abrupt drop in economic activity, which is affecting owners' decisions to continue their projects.
- About 18% of contractors report that their project cancellations came from elected officials.
- The drop in demand is in contrast to the strong employment levels that the construction industry was experiencing in February.