The COVID-19 (coronavirus) outbreak has taken a toll on the economy and all the facets of the real estate business, including the construction industry. In an attempt to help stop the virus from spreading, construction sites are being shut down across the country, and many projects are being put on hold and reassessed.
How is the regional construction industry coping with the unprecedented event? In the executive Q&A below, Greg Fogle, a chief operating officer for Nabholz Corp. who’s based in the company’s Central Operations headquarters office in Rogers, discusses how the industry is and will, potentially, be impacted.
Paul Gatling: How would you best characterize the construction activity in the Northwest Arkansas market in the wake of the coronavirus pandemic?
Greg Fogle: From our point of view, construction activity in Northwest Arkansas seems normal with only a few noticeable differences. While some of our clients have reduced our work inside their facilities, others have increased it to take advantage of this period when they have fewer people working on-site and disruption is minimal.
New construction is essentially unchanged. There is continued interest by owners in projects that were in the planning phase before the coronavirus, and new projects are being developed in several different market sectors in Northwest Arkansas.
Gatling: Construction sites across the U.S. have shut down to contain the spread of the virus. How can stakeholders involved in projects at various stages of completion cope with closures?
Fogle: I am not sure there is a good answer to this question. We have not had a project shut down in the middle of construction, although we were/are prepared to implement specific measures to protect the installed work to make sure a continuation of the project later is quick and efficient.
Gatling: An estimated 30% of all U.S. construction materials are imported from China. Supply shortages are already affecting the industry. How has decreased manufacturing there impacted construction costs in the U.S.?
Fogle: We have not seen much impact in either supply chain sourcing or in product costs. While there are a few materials that are not as accessible, there seems to be plenty of alternative products from both overseas and domestic manufacturers.
Gatling: What are the challenges posed right now by Northwest Arkansas’ construction labor market?
Fogle: The challenges today are the same as before the coronavirus: We need both craft professionals and managerial professionals. Overall, we have not noticed any appreciable change in the labor market because of the virus. Some of our subcontractors report needing projects for the third or fourth quarter, but others are so busy they have trouble accepting additional work assignments.
Gatling: What ramifications do you expect to see in Arkansas’ development scene? Have we moved past the “wait-and-see” mentality or is that still a guiding thought?
Fogle: I believe that some of the smaller more speculative development might pause briefly to see what happens, but other stronger developers will continue to be very active. The demand for office space may slow if employers continue work-from-home policies after the pandemic.
Gatling: Which real estate sector will be most impacted by a slowdown in deliveries?
Fogle: I do not believe that any specific real estate sector will be impacted by slower deliveries, at least substantially. I would expect Asian manufacturers to increase production to catch up from any delays they might have experienced. Further, I expect domestic manufacturers will be focused on better serving needs here in the United States, which will help mitigate supply chain issues.
Gatling: How will the crisis impact the construction financing landscape? What are lenders’ biggest concerns?
Fogle: Lenders will be focused on the financial health of their borrowers, just as they have been for some time. Given the impact of the coronavirus on so many businesses, lenders will certainly be thinking about who their borrowers depend on for their income, as in a landlord-tenant dependency.
Gatling: What advice would you give to construction companies facing the disruption caused by COVID-19?
Fogle: Take care of your team members and take care of your customers. Respect the concern that others have about the coronavirus and accommodate their needs the best you can. We have intentionally chosen to fully adopt the recommendations from public health officials. Our employees and customers alike appreciate the fact that they can continue to work with us knowing their health and safety are supported.
Gatling: Timely completion of construction projects is always a top priority for owners and developers. What are the legal impacts on contracts and schedules that are interrupted? Is COVID-19 force majeure?
Fogle: As with any legal matter, it depends. The specific language in each contract must be considered for each case. It has been my experience that most force majeure language in contracts is generally ignored because these events are so rare. Now that COVID-19 has entered our lives, we will see more effort placed on negotiating these terms in the future. The good news is all parties to a project share the same desire to complete a project on time. With strong relationships, these sorts of challenges can be met successfully with good communication and planning.
Gatling: A number of governments have also ordered that certain businesses stop working. However, the construction industry has generally not been the subject of ordered shutdowns. Just how essential is construction during a public health crisis?
Fogle: It is important to recognize that every business is essential, especially to the people who depend on that business for their livelihood. I certainly do not place any greater importance on construction than any other business. The Department of Homeland Security, Cybersecurity & Infrastructure Security Agency (CISA) created advisory guidelines for state and local governments to consider when deciding what is and is not essential work. Construction was deemed essential presumably because it supports other critical functions (healthcare, water, sewer, road/bridge, electrical service, communications, etc.).
These functions are in addition to required maintenance of existing buildings and homes. Understandably, it is difficult to separate essential construction from non-essential construction. A case can be argued either way.
As an ancillary point, construction does provide an inherent ability to work while adhering to public health guidelines. Project sites are closed to the public, and work activities can most often be arranged to allow social distancing. As a testament to this fact, we have been fortunate to not have any positive tests for COVID-19 across our entire workforce of 1,200 people.