The impact of the Covid-19 pandemic has yet to seriously impact the construction industry, but experts believe that it is a matter of when, not if, the crisis will have deleterious effects on construction timetables, supply chains and an already shallow labor pool.
For expensive construction projects such as senior housing, that can lead to huge cost overruns and delays.
Add in major capital market shocks — and overall uncertainty about how hard senior living will be hit by the coronavirus and how quickly demand will bounce back when the pandemic wanes — and a major slowdown in construction could be coming.
Already, cities such as San Francisco and Boston are mandating that non-essential commercial real estate construction cease for the immediate future. Among projects in these cities is 1001 Van Ness, the luxury senior living development from Atria Senior Living and Related Companies in San Francisco.
“We expect new starts to crash to zero or near zero, and within two years for new supply growth to be less than 1% and perhaps near zero, due to Covid-19 fears and forces similar to the 2009/2010 capital markets freeze that pushed new seniors housing construction starts to near zero,” Capital One Analyst Daniel Bernstein wrote in a March 13 note.
A freeze on new development would result in an occupancy boost for communities that have lost census in recent years, as new supply has flooded certain markets, Bernstein observed.
But as with most aspects of the Covid-19 crisis, uncertainty reigns when it comes to what the impact on new development will ultimately be — last week, as the virus was first beginning to alter daily life, development transactions were not yet being put on ice, deal brokers and advisors told SHN.
Whatever the future holds, projects that are already underway are proceeding, and construction firms are doing their best to predict and prepare for Covid-19 fallout.
The pandemic may have its biggest impact on skilled tradesmen, many of whom are older and at higher risk of contracting the virus. If a construction site is in a densely populated area, the risk of exposure and transmission of Covid-19 escalates significantly. Construction firm The Weitz Company, which specializes in senior living, has a number of ongoing projects in the Bay Area, and many construction workers on those projects use Bay Area Rapid Transit (BART) to commute to and from work. The packed crowds inside buses and trains are ideal incubators for transmitting Covid-19.
Then there is the possibility that coronavirus enters a senior housing community undergoing renovations. Any community that does not have lockdown protocols in place will need to address stronger barriers between residents, staff, and construction workers to prevent intermingling.
“You need more permanent barriers than a plastic sheet,” Weitz Company Senior Vice President Larry Graeve said.
And the disruption may carry over to government workers responsible for permitting projects and inspecting construction sites for safety and compliance checks, Rider Levett Bucknall North America President Julian Anderson told Senior Housing News. Headquartered in London, Rider Levett Bucknall provides project and cost management services, as well as advisory services, to the construction industry.
“I would expect short-term delays on projects. The problem then becomes the impact [of Covid-19] on labor and while we aren’t seeing it yet, it’s only a matter of time where it will happen,” he said.
Destabilized supply chains
Covid-19 initially disrupted supply chains in the countries where the virus first spread — China and South Korea. Mostly, contractors in the U.S. dealt with limited delays on finished materials such as light fixtures and plumbing materials because Chinese manufacturers shut down in order to “flatten the curve” of infections, Anderson told SHN.
That impacted timetables and costs due to delays in fulfilling orders.
Now that the virus appears to be controlled in those Asian countries, the spread of Covid-19 in the U.S. means there is a possibility that supply and distribution chains from China will be further disrupted, Graeve said.
“I would expect short-term delays on projects. The problem then becomes the impact [of Covid-19] on labor and while we aren’t seeing it yet, it’s only a matter of time where it will happen.Rider Levett Bucknall North America President Julian Anderson
Des Moines, Iowa-based Weitz was already dealing with rising materials costs stemming from the Trump administration’s trade war with China, especially on copper and aluminum. If the supply chains begin to slow again, the cost overruns from delays and sourcing alternate suppliers will begin to mount.
To protect themselves from cost overruns, contractors insert language specifying which party is responsible for the overruns, and what those overruns are for. This language — known as “change orders” — is reviewed and amended throughout the construction process, to account for unforeseen variables that arise.
Typically, change orders are the responsibility of the client. But Covid-19 is a different and unpredictable beast, according to Graeve.
“If there is a delay due to the virus, we want to be fair with the customer. Knowing [Covid-19] is an unknown [variable], how can we relay that to the customer?” he said.
Keeping labor healthy
The construction industry has flourished in the extended post-Great Recession recovery. Over 76 million Americans were employed in the construction industry in February, according to Bureau of Labor Statistics data.
As with other industries, however, construction is grappling with labor pressures due to low unemployment and the problem is more acute with hourly workers. An August 2019 report from the Associated General Contractors of America determined that 80% of contractors surveyed struggle to fill hourly positions.
You need more permanent barriers than a plastic sheet.Weitz Company Senior Vice President Larry Graeve
The construction workforce is also growing older. The median age of construction workers is 42 years, according to a National Association of Home Builders analysis of the Census Bureau’s American Community Survey data. For skilled tradesmen, the average age is 55 and one-third of that workforce is over 50, according to BLS data.
Construction workers are also moderately paid. The median salary for construction laborers was $40,910, according to BLS data.
That puts skilled tradesmen at higher risk of contracting Covid-19 and, unless explicitly told to stay away, they will continue to come to work because they need the money, Graeve told SHN.
“A younger guy may feel bad and will still come in to work. An older person might just call in sick,” he said.
Weitz and other contractors are reviewing site safety protocols to assure that workers are both safe to come to work and to keep timetables on track. So are developers such as McCaffery Interests. The Chicago-based real estate development and services firm has projects in Chicago, Washington, D.C., Pittsburgh, Denver and Boston, and recently entered the senior housing space with Modena Reserve at Kensington, a $75 million senior housing community in Kensington, Maryland being built with Denver-based operator, Solera Senior Living.
McCaffery is monitoring the ongoing developments related to the pandemic and so far remains optimistic that Modena Reserve, as well as its other projects, remain on track, McCaffery Interests President Ed Woodbury told SHN.
“Our contractors, consultants and partners are all committed to the health and safety of our respective staffs and we will always act in their best interest,” Woodbury said.
Hits to inspections
The disruption Covid-19 poses to construction is not relegated to the site itself. There is a strong probability that state and local building inspectors will contract the virus and have to take leaves of absence to convalesce. This will leave the remaining healthy inspectors to pick up the slack and potentially delay necessary permitting and inspections to keep construction projects on track, Anderson told SHN.
State and local governments can be proactive on this front by declaring public health emergencies. This allows states to take more robust action and allows access to funds to combat the spread of the virus. But the response, and how it impacts construction timetables, will vary from state to state.
For developers with multi-state pipelines such as McCaffery, that means becoming expert in multiple state and local regulations.
“Of course, supply chains, labor availability, permitting and inspections may potentially have an impact on the work. We’ll continue to be mindful of applicable regulations and orders that come from federal, state and local leaders,” Woodbury said.