A new report from Moody Analytics, “Downturns, Construction Delays, and the COVID-19 Pandemic: The Economics of Supply Growth in the Age of Coronavirus” notes that, “Economic downturns cause delays and cancellations for new construction in multifamily and commercial real estate, as uncertainty about the timing and magnitude of future cash flows prompts market players to reassess priorities.”
The report added, the COVID-19 crisis adds complexity because shelter-in-place policies are disrupting supply chains, and, in some places, halting construction activity altogether.
“Construction delays are not uncommon,” said the report. In fact, 82% of multifamily projects that were begun during 2002 to 2019 encountered some type of delay, defined as any month beyond the initial expected date of completion.
Over this period of time, while the expected construction time for apartments was 12 to 18 months, average actual construction time was 22.2 months. For office projects, expected construction time was six to 12 months, with average actual construction time being 15.1 months. For retail, the numbers were six to 12 months expected and 13.9 months actual. And, for industrial, three to six months expected and 9.9 months actual.
While delays are the norm, and always have been, COVID-19 is adding more pressure.
“The current downturn is different from typical recessions because of three factors,” said the report. “First, the slowdown in activity was prompted by a deliberate policy choice to shelter in place,” while previous recessions were driven either by an asset bubble bursting and/or credit conditions worsening.
Second, the scope of the shock is not simply national, but also global.
“Global supply chains have been disrupted, delaying the arrival of imported construction material, given how many countries have restricted business activities,” the report said
Third is the uncertainty of reinfection. “Without a credible and reliable treatment and vaccination protocol made widely available, economic activity will likely remain curtailed. Construction companies are trying to adapt to the ‘new normal.’”
What about the future? Prior to COVID-19, Moody’s expected over 300,000 apartment units to come online in 2020. Its updated forecast is slightly under 246,000, which is a 21% reduction.
For the office sector, it now predicts a 6.3% reduction in 2020, from 50.8 million square feet to 47.8 million square feet.
For the retail sector, it was predicting 6.45 million square feet and is now predicting 5.44 million, which is a 15.7 % reduction.
And, for the industrial sector, it expected 120 million square feet pre-pandemic, and now predicts 89.3 million square feet—a 24.4% decline.