On April 6, 2020 Barry B. LePatner was invited to speak as part of a webinar addressing how the COVID-19 pandemic would impact the real estate, design and construction industry once the current moratorium on projects is lifted. Mr. LePatner provided a cogent perspective on the likely problems that would face the industry and set out five prescriptives for industry members to follow to minimize the uncertain times ahead.

The COVID-19 pandemic represents a crisis unlike any the real estate, design and construction communities have ever experienced. I would like to focus my discussion today first, on identifying the unique problems that owners, architects, engineers and contractors will face once construction resumes, and secondly, on how each of you can prepare to take advantage of the opportunities that will arise when the crisis abates.

Let’s take a look at what the industries will look like once the COVID-19 epidemic has ended. As many of you know, real estate and construction are a significant part of our national and local economy. Governmental decisions to require shelter-at-home stays for most of the country will clearly throw us into a recession and increase our national deficit by trillions of dollars.

A new report from the American Institute of Architects indicates that the pandemic will significantly reduce demand for architectural services for at least much of 2020. Similarly, the Association of General Contractors reports that 45% of contractors have already seen project delays or disruptions and this number will increase substantially as most construction comes to a halt except for projects the government deems essential. Hundreds of thousands of workers in both fields will be out of work for many months until the rebound in construction begins.

Owners planning new projects can expect to see lenders take a more cautious stance on funding as new criteria for vetting projects will reflect changing market conditions. Looking at retail, as one example, Coresight Research reports that the coronavirus outbreak will trigger an unprecedented number of retail closures. Retailers are shuttering stores temporarily, but many may never re-open. More than 15,000 store closures could occur in the U.S. in 2020, beating last year’s record of 9,300.

The halt in construction will severely impact the nation’s supply chain of products and materials, much of which come from overseas. Tens of thousands of these suppliers, vendors and manufacturers – foreign and domestic – lacking sufficient capital, will be out of business by the time the moratorium ends.

How can owners whose projects are on hold and architects, engineers and contractors, who are comprised of mostly small to medium-sized firms, plan for a positive recovery from such a traumatic blow to their businesses? Let me identify five important steps that smart firms in the industry must take to address the difficult times ahead:

Owners who have seen projects stall should be reaching out to their architects, engineers and construction team to consider modifications to the design shown in their current plans. By using the moratorium in a positive way, continuation of the project will not be blindsided by adverse post-COVID market conditions.
This is an excellent time for owners to discuss with their contractors how their projects will recommence once the moratorium on construction ends. The goal of every owner and contractor should be to negotiate during the suspension, the actual remobilization and other costs contractors will be seeking when a notice to proceed is sent by the owner. As these costs will increase the project budget owners should be discussing with their lenders extensions on their construction loans and advising them that remobilization costs will increase the project budget as well as extend the time for completion.
Taking a long term perspective, it is important to remember that the US is presently in the midst of massive growth in population. According to the US Census Bureau, we will be adding another 60 million residents by 2050. This new growth will spur a boom in construction of over $25 trillion dollars within the next 20 years as tens of millions of people move out of our cities into fast growing parts of the nation. This, in turn, will require new housing, schools, roads, bridges and needed retail. Business savvy firms will stay ahead of their competitors by marketing their services in these burgeoning areas of the nation.
Because the current stoppage of work is so widespread, many in the design and construction industry should be reassessing their current client lists and refocusing on the many new areas of design that will arise out of the crisis. In the next few years we will see new energy initiatives and more efficient HVAC systems that will lower operating costs for most facilities.
Finally, owners will be demanding fixed price contracts with tighter budgets and project schedules. They will be looking to retain design and construction firms that are proficient in the use of Building Information Modeling (or BIM) to prepare complete and coordinated designs that will enable contractors to negotiate fixed price contracts. Increasingly, those firms that fully adopt such technologies will bring greater efficiency to the construction process and greater ability to eliminate customary and unwarranted cost overruns of 20-40%.

AEC firms will need to develop carefully crafted business plans to survive the perils ahead. Four primary areas will help guide the industry through these difficult times: (1) It is imperative that each firm retains its existing client relationships; (2) they must research and identify the new markets for business opportunity where existing markets may not have recovered once the epidemic passes; (3) each must identify specific goals for revenue, expense and profit that are directly tied to realistic market conditions; and (4) each firm must increase its use of technology to achieve productivity and profitability objectives. Those who lack the skill to develop such a detailed plan will need to seek out advisors who can successfully guide them along this path.

These are turbulent times for our nation. In truth, things will get worse before they get better. But I am convinced that our nation will see a strong rebound from the recession ahead. With smart planning and good judgement we will, in time, see our nation and our industry rebound strongly in the years ahead.