It’s no surprise that the construction industry—like many other sectors of the economy—is getting hammered by the coronavirus.
With so many moving parts involved in getting a project done, there can be slowdowns at every turn. From delays in getting raw materials out of China to appraisers who can’t get their jobs done because homeowners are sheltering in place, many builders feel a lot of things are out of their control right now.
“We’re reacting to news and dealing with it accordingly,” says Joe Fowler, president of the Home Builders Association of Greater Austin. “This is so fluid and things keep changing based on whatever is happening on any given day.”
Global Impact Felt Here at Home
About 30% of materials used in home construction come from China, so the speed at which the factories and the delivery networks in that country get back to full capacity is crucial to the builders. We’re talking everything from steel to finished products like bathtubs, sinks, appliances, and more.
For example, Toll Brothers, one of the country’s largest homebuilders, recently announced that shortages of lighting fixtures and small appliances will delay the sale of some of their new homes in California.
Some consultants are telling their builder clients to seek out alternative suppliers in the U.S. or in countries that haven’t been impacted by major supply chain interruptions.
“In construction, everything comes down to time and money. With the coronavirus, we don’t know how big it’s going to be, how long it will last, and what its full impact is going to be,” says attorney Steve Lesser, a past chairman of the American Bar Association’s Forum on Construction Law.
Uncertainty About the Future Makes Homebuyers Nervous
Perhaps what is nailing the construction industry the most is the threat of a looming recession. Prior to the pandemic, low unemployment, solid wage growth, and low mortgage rates all signaled the housing industry was expected to have a stellar year. Fannie Mae economists predicted that housing starts would go from 1% per year to 10% in 2020.
This year was expected to be one of the best since the last housing boom in 2007. But now, with sudden massive unemployment and uncertainty in the financial markets, it’s understandable that homebuyers and commercial developers are getting skittish and pulling back.
It’s also reflected by the significantly lower traffic new homebuilders are seeing at their sales centers and Realtors are noticing at their open houses—both largely due to social distancing measures and buyer feelings of economic insecurity. Even website browsing on sites like Zillow and Redfin is down as much as 35% compared to before the pandemic, according to ATTOM Data Solutions, a real estate data provider.
In addition, the National Association of Realtors released a survey that found almost half of agents agreed that homebuying interest had declined due to COVID-19. For the homebuyers who are still active, they are checking out virtual showings online or their Realtors are FaceTiming with them to walk through a house.
Ripple Effect Hits Inspectors, Appraisers, Lenders, & More
Meanwhile, appraisers and home inspectors can’t get inside homes with families sheltering in place. Getting permits and approvals from planning and zoning departments has slowed because workers at home don’t always have access to records and blueprints kept at their county and city offices.
Backups in appraisals and inspections also causes delays for lenders, who are dealing with a flood of refinance applications. These kinds of setbacks at every phase of a project have everyone involved scrutinizing their contracts and insurance policies to find out whether they are covered for unforeseen events and not held liable for cost-overruns and hold-ups.
“There are many terms that will be relevant to those discussions, including the various contractual terms relating to the contractor’s schedules, substantial completion, delays, liquidated damages, and other contractual provisions,” said Michael Keester, a partner at law firm Hall Estill in Tulsa, Oklahoma.
While the risk of infection on a construction site is thought to be low given the open-air nature of the work, many bosses are making modifications to how the work is done. Workers can be kept separated by rotating breaks and lunches, materials can be stored in a way that doesn’t force workers to come into contact with each other, and different trades can stagger the times that they are scheduled to work.
How Will Coronavirus Impact Real Estate Investors?
So, is there a silver lining in all of this for investors? Yes!
Economic downturns have always been fertile ground for those who are savvy in what to look for and can stick to a strategic plan.
Investors who are in a position to do so can pick up properties at distressed prices, and we’ll see more of these depending on the length of the pandemic. While some sellers are holding off putting homes on the market until the economy improves, there are some who have to sell now. And they know in the current climate where demand is down, they are not in the driver’s seat.
Plus, financing rates are lower than ever. So if you can qualify, now is a good time to borrow and buy.
Some experts say in our current economic climate the outlook for rentals is particularly good, especially with Class B properties. This is because tenants who could afford the more expensive “A” properties during better times may not be able to do so now. And the tenants who rent the working-class “C” properties may be facing unemployment.
Also, single-family homes may grow in demand, as they can accommodate working from home or can be rented to two or more professionals—sort of like an upscale boarding house.
No one knows when everyone will get back to work or if the coronavirus will behave once the curve has flattened. Some medical experts say it could surge back again later this year, and social distancing may have to be practiced off and on over the next 18 months. That, of course, would create a serious threat to any economic recovery.
Attorney Steve Lesser says the uncertainty of it all is why many feel paralyzed to act and instead have a “wait and see” attitude: “Until people feel more secure, it’s going to be a roller coaster of a ride.”
What’s your investing strategy amid the coronavirus pandemic? What’s your plan once things are less tumultuous?
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.