COVID-19 Creates Disruption for Apartment Construction Pipelines

March 31, 2020

COVID-19 Creates Disruption for Apartment Construction Pipelines

March 31, 2020

As impacts to economic activity and “shelter-in-place” recommendations become more widespread, so too are the effects of COVID-19 on the apartment industry’s construction pipelines. Contractors employing over 7 million construction workers are now mired in uncertainty about their next steps.

There’s no doubt that apartment development will remain a uniquely attractive investment vehicle in the long term. However, it is unlikely that construction pipelines across the country will be as active over the next two years as previous estimates expected. Making sense of how construction pipelines are most likely to react to the COVID-19 crisis immediately and in the future allows apartment investors and asset holders to move forward with a sure footing.

Construction Bans Spread as COVID-19 Concerns Worsen

COVID-19 Takes Its Toll On Apartment Construction Pipelines
Local governments have expressed differing opinions about whether the construction industry is an essential service.

In some metros, such as Los Angeles, construction continues. That said, this is not the case in many other cities and states where the virus is spreading rapidly. Responses collected by the Associated General Contractors found that 39% of contractors surveyed said that they had projects that were halted due to COVID-19, increasing from 28% the week before.

This trend and examples of recent construction moratoriums suggest that residential construction and property operations may not be widely considered “essential” business in the near future:

  • Boston’s temporary construction moratorium is now indefinite due to COVID-19 as per Mayor Martin Walsh’s announcement on March 25. The move comes even as Gov. Charlie Baker encourages development to continue statewide.
  • Construction will continue in the Miami-Dade metro, but a recent order from Mayor Carlos Gimenez places a ban on construction inspections. Contractors will be asked to acquire their own compliance engineers in the meantime, presenting a new challenge for meeting deadlines.
  • Washington Governor Jay Inslee has put a stop to all construction statewide as of mid-March, with a few notable exceptions. These include health care and emergency projects as well as the $930 million Seattle Center arena.
  • Austin’s largest and longest-running building boom is on pause. Only critical infrastructure projects would be allowed to continue as of one week ago when leaders of Austin and Travis County announced a ban on “nonessential” construction.

Legal Hurdles Constrain Apartment Construction Pipelines

The fates of stalled projects will ultimately be decided by the presence of “force majeure” language in existing contracts.

A long list of unpredictable factors, ranging from new sanitary expectations in the workplace to major international supply chain disruptions, are expected to hinder apartment construction timelines before the end of the year. One of these factors that deserves special consideration is the upcoming rise of legal action revolving around project contracts, liability, and the specific details of “force majeure” clauses.

In a recent mailbag Q&A with Construction Dive, construction attorneys representing the Minneapolis law firm Dorsey & Whitney commented on how “acts of God” clauses would be interpreted in the case of a nationwide pandemic. The team noted that several factors, including the presence of “force majeure” language and how the language is worded, will determine a contractor’s ultimate liability if a project cannot be completed due to city or statewide moratoriums.

“Amending a contract to address the reality of performing the contract due to this unanticipated national and international crisis is in the best interests of both parties,” said the team from Dorsey & Whitney, encouraging flexibility between parties in order to achieve mutually beneficial outcomes.  “This should be a first course of action for parties to undertake in this environment.”

Turning Our Eyes Forward

The reality is that many COVID-19 hot spots overlap the country’s most active apartment construction hubs. Cities like Boston, Chicago, Miami, Los Angeles, Detroit, Indianapolis, and many more are expected to experience worsening outbreaks, as confirmed cases surpassed 800,000 globally.

It is unclear how big COVID-19 is going to get and how long it will last. What is clear is that most contractors will be incentivized to get to work as soon as possible once health concerns subside. Americans will continue to need places to live. Deals will continue to be done. Berkadia will continue to provide the most accurate and sound insights to our clients as we work together to make sense of these unpredictable times.