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Will The Coronavirus Impact Construction Prices?
The impact of the coronavirus / Covid-19 pandemic is incredibly vast. As we try to plan for how this will impact our businesses, how the cost of construction could change is a common — and key — question. Here are some of the factors that could play a role in pushing the cost of construction either up or down.
April 23, 2020
The current Covid-19/coronavirus pandemic is throwing every single industry into some level of chaos. This entire situation is stressing the world in ways that no one predicted or fully planned for. Time will tell how things will shake out in the end, but the most common question I get is around the cost of construction. Most people in the Seattle area know that construction prices have risen significantly over the past five years or so. I would even wager that they have gone up much higher than the numbers you read about, in sectors like custom residential construction. The last few years, it seemed like every month we figured that costs would have to stop their increase, only to find them going up again. Now, however, we are in uncharted territory and the normal path of speculation has proven rather fruitless.
Here are some initial thoughts on how construction costs could be impacted by the current pandemic.
Unfortunately, there is no magic answer here, but as things develop, we will all know more.
Won’t People Be Hungry for Work and Reduce Their Rates?
This is a complicated question. The challenge is that in talking with numerous business owners, the reality is that the cost of doing business is just so high that there is not a lot of margin to eat into. Some business owners would rather contract their company and focus on profitable projects than work at a loss. Some people who were laid off may start a company with lower overhead and be cost-competitive, but start-ups are also unable to deliver the full level of service for larger projects, at least initially. From our perspective, we have seen general contractors operate with very thin margins and are not seeing much opportunity for them to reduce costs. Sub-contractors, however, often seem to have diverse levels of profit margins and we anticipate some of them being extra careful to “sharpen their pencils” and provide their best numbers.
Will There Still Be the Same Number of General Contractors Available to Work?
The big question I have is what happens with the small to medium general contracting firms. Current aid programs offered by the government aren’t well-suited to companies that have had to lay off staff and a lot of these firms seem to operate with very thin profit margins. I think that the larger construction firms are likely able to weather this situation (especially since larger commercial work is often still under construction), while the medium-sized residential construction firms are all on pause and taking an enormous financial hit. It is very feasible that the number of general contractors will decrease the longer this goes on if there isn’t additional federal assistance. If that is the case, when this all ends, we’ll be left with a much smaller pool of qualified contractors and possibly an only slightly smaller pool of projects. Supply and demand economics kick in and it is possible that costs could stay where they are or even be driven up!
Won’t All the Construction Companies Be Saved by the Government’s Help?
Service firms like Board & Vellum have been able to continue operating during this downturn. We’re actually quite busy at the moment. A construction crew, however, cannot work, and the first thing they likely did when construction stopped was to lay off the majority of their staff as there’s nothing for them to do. It is very similar to a restaurant laying off their staff when there are no customers. The government assistance thus far has been grants to ensure you keep staff employed or loans. The grants don’t make much sense for a construction company, as they require staff to be brought back to work when many of the staff would have nothing to do and actually might make more money on unemployment pay; so, the firms have little incentive to bring back staff to sit around. Conversely, a loan only means that the firm has to pay that money back. With no income they are just saddling themselves with debt and no solid way to ensure they can actually pay them back. From our perspective, there’s no great solution coming from the government for the construction market.
What About New Standards for Work Safety?
Another factor to consider is if the re-opening of the construction market comes with the caveat that certain social distancing rules apply. This may mean the typical pace of construction schedules could slow down in order to comply with the new rules of operation. Before the pandemic, it was common to stack sub-contractors on top of each other during a rush to work on a project and that simply isn't safe right now. This could mean projects will take longer to build, which invariably costs more.
Does the Stock Market Dropping Impact Things?
Here’s a depressing reality about the stock market. During the Great Recession, high-end residential construction was booming. Many clients were set up to be immune from the highs and lows of the stock market and took advantage of the depressed construction costs. Many developers were also set up to do a lot of their work when the market was depressed. We have an economic system that isn’t always equal and while some of us will be hit by the changes in the stock market, many other people who were sitting on the sidelines are using this opportunity to jump right back in. All in all, it is probably a wash and not greatly impacting the market for construction.
Is the Demand for New Projects Dropping?
We have seen only a very slight decrease in the number of new inquiries. Our firm has a pretty diverse portfolio, which has given us insight into multiple markets. So far, the only market we are seeing soften dramatically is for restaurants and cafés, for pretty obvious reasons. In the custom residential market, we are finding a lot of clients working from home and being extra observant about their living situation and deciding to take the plunge and start a project. We are hearing that they have enough access to capital to move forward and are committed to being in Seattle. On the multifamily front, construction costs have been rising right to the edge of not making projects pencil for long enough that a lot of local and regional developers have saved enough equity to confidently move forward with projects now with the assumption that prices must drop.
When Will This All End?
A recession was likely due at some point as the market had been so hot for so long. No one, however, could have predicted such a dramatic and historic correction. It appears to be clear now that there will not be a dramatic “V-shape” recovery of the market, but more of a gradual “U-shape”. When a vaccine for Covid-19 is closer to a reality, it seems likely that there will be tremendous growth as people prepare for the recoup of months of economic decline. New businesses will need to be formed and whole industries and markets will change. Construction projects take a long time to plan and build and it is likely that those who can wait out the hard times will be well situated to come roaring back.
So What Do You Do?
I have been advising all of our clients to cautiously move ahead and keep aware of what is happening. Do I think that construction costs will drop? Yes, but I’m not totally certain about this, and there are enough factors at play that I could easily be wrong. A project that is dear to your heart is something you can’t always plan perfect timing for. Think carefully about how long you will be enjoying the benefits of a completed project and plan accordingly. Our whole team is here to help walk you through the different scenarios available to you and help you understand the risks and rewards in this uncharted time.
