Post-pandemic development and construction trends
Allen Matkins recently held his 14. Year view from above. Allen Matkins partner Mark Hartney hosted a discussion on current and future trends in development, licensing and construction, with a particular focus on how the pandemic has and will affect these areas. Panelist Aaron Fenton, Vice President, Development, San Francisco, Boston Properties; Matt Field, President, TMG Partner; Christopher Meany, partner, Wilson Meany; and Jesse Blout, founding partner of Strada Investment Group, shared their experiences and insights.
THE EFFECT ON DELIVERY TIMES
For many projects, pandemic restrictions on construction sites have affected schedules, schedules and delivery dates. Some projects have been delayed by months compared to the originally planned completion date. What factors contributed to this? One of the main problems was restrictions on access to vertical transportation. Due to COVID-related restrictions, fewer people were allowed in elevators at the same time – maybe only two or three instead of the usual eight or ten. This reduced the efficiency drastically in some cases. In general, there were fewer employees on site and thus less productivity. In addition, additional costs were incurred due to additional disinfection and on-site employees, whose sole responsibility is for COVID monitoring.
In other cases, housing construction has been relatively uninterrupted, although there have been some inefficiencies and cost increases. Commercial work has been stopped in some places where it was not considered strictly necessary. For this reason, ironically, a company could build apartments but not build a sales center for those apartments. On the claims side, the process was simply extended because the employees of the city authorities and offices are dealing with the same pandemic-related problems and pressures as everyone else. This has made it difficult for the various parties involved to come together and resolve issues that a simple meeting might reach.
THE EFFECT OF FLUCTUATION IN PRICE
Shortly after the pandemic began, the prices of many building materials rose significantly. What effects did this have on contracts and did you have disputes as a result?
Most firms have been able to amicably resolve cost-related problems with contractors, but the sharp fluctuations in the market have made contractors very cautious. Although some price spikes were temporary, contractors are now very cautious when it comes to price negotiations. As a result, some are now including indexing provisions for key commodities in their contracts.
Price increases occur for a variety of reasons. For example, a building in the Bay Area required metal decks. The order was placed eight months in advance – a lot of time under normal circumstances – but there was insufficient time due to COVID-related challenges. Hence, the company had to pay bonuses to expedite the material, including overtime to manufacture and deliver it. It was a significant additional cost for what is usually a standard construction product.
Some building material costs even fell during the pandemic. Due to price increases and fluctuations, contractors have therefore exercised a certain degree of caution when negotiating contracts.
WHAT ARE CONTRACTS LIKE NOW AND IN THE FUTURE?
During the height of the pandemic, it was sometimes difficult to accurately comply with the terms of contracts signed in advance of the pandemic. Although there has been much discussion about force majeure, in many cases this contractual clause did not cover the damage suffered. After all, it was uncharted territory and not every deal made it possible to have a meaningful discussion of who should be held liable for missed deadlines or work not completed. In the future, the language of the contract should take these issues into account, and there should be negotiations and clearly defined conditions for delays.
Some companies were able to foresee some of the issues to come and enter into a dialogue with contractors about liability and responsibility. Some companies drew up a list of on-site requirements for hygiene, social distancing, temperature controls, and scanning workers with a QR code when entering the site. Then if there was an outbreak because contractors didn’t follow these rules, the company would have some leverage. The parties also negotiated city-enforced closures and the company’s responsibilities to contractors in these circumstances.
WHAT DOES THE FUTURE BRING?
The last question for the panelists was about the future. What will the industry look like in a year? What can developers and contractors expect?
People are likely to gradually return to urban settings, provided that the premises in which they work are of high quality and equipped to ensure adequate protection of the health of workers. The demand for commercial space will gradually grow, but people will only return to the office when they feel safe. To achieve this, both renovations and new builds need to incorporate new designs and technologies.
Future building planning will be shaped by both the pandemic and climate change. Multi-story buildings will have access to each floor via well-designed public stairwells to avoid the restriction of elevators. HVAC systems are being upgraded for better air circulation and filtration, and carbon filtration is being used in California to filter smoke from forest fires.
The return to office is likely to continue through the first quarter of 2022, but the dynamics of working from home will remain in a hybrid format. For this reason, there is likely to be a general trend towards larger residential units with space for a home office.
The designs and technologies required in a post-COVID environment have been in development for a number of years. It is simply up to the developers and contractors to implement them and turn them into a reality. Contracts and negotiations are informed up to the last 18 months; nobody wants to be caught off guard if something like this happens again. Nevertheless, all participants in the discussion are optimistic about the future. A more cautious building environment is imminent, but that will ultimately benefit everyone involved.
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