Allen Matkins recently held its 14th Annual View From the Top. Allen Matkins partner Mark Hartney moderated a discussion on current and future trends for development, permitting, and construction, with a special focus on how the pandemic has affected and will continue to affect these areas. Panelists Aaron Fenton, Vice President, Development, San Francisco, Boston Properties; Matt Field, President, TMG Partners; Christopher Meany, Partner, Wilson Meany; and Jesse Blout, Founding Partner, Strada Investment Group shared their experiences and insights.

The Impact on Delivery Times

On many projects, pandemic-related restrictions on construction sites have impacted timelines, schedules, and delivery dates. Some projects have been delayed by months from the originally projected completion date. What factors have contributed to this? One of the main issues has been limitations regarding access to vertical transportation. Because of COVID-related restrictions, fewer persons were allowed in elevators at one time – perhaps only two or three instead of the usual eight or 10. This drastically reduced efficiency in some instances. There have been generally fewer employees on-site and, as a result, less productivity. Also, additional costs have been incurred due to additional sanitizing and on-site employees whose sole responsibility is COVID monitoring.

In other cases, residential construction proceeded fairly uninterrupted, although there have been some inefficiencies and cost increases. Commercial work was halted in some locations where it was deemed nonessential. Because of this, ironically, one company could build housing but couldn’t build a sales center for that housing. On the entitlement side, the process has been elongated simply because personnel at city agencies and offices are dealing with the same pandemic-related issues and pressures as everyone else. This has made it more difficult for the various parties involved to get together and resolve issues that a simple meeting could accomplish.

The Effect of Price Fluctuation

Shortly after the start of the pandemic, prices on many building materials went up significantly. What impact did this have on contracts, and were there any disputes because of this?

Most firms have been able to amicably work out cost-related issues with contractors, but the wide fluctuation in the market has made contractors very cautious. Even though some pricing spikes were temporary, contractors are very wary now when it comes to negotiating prices. As a result, some are now including indexing provisions on key commodities in their contracts.

Price increases occur for various reasons. For example, one building in the Bay Area required metal decking. The order was placed eight months in advance – under normal circumstances, plenty of time – but because of COVID-related challenges, it wasn’t enough time. So the company had to pay premiums to expedite the material, including overtime to manufacture and deliver it. It was a significant upcharge for what is usually a standard building product.

Some costs for building materials actually dropped during the pandemic. So contractors have exercised some caution when dealing with contract negotiations because of price increases and fluctuation.

What About Contracts Now and in the Future?

During the height of the pandemic, it was sometimes difficult to fulfill the terms in contracts that had been signed pre-pandemic in accordance with their exact terms. While there were many discussions about force majeure, this contract clause in many cases didn’t cover the losses experienced. After all, these were uncharted waters, and it simply wasn’t possible in every deal to have a meaningful discussion about who should assume the liability for missed deadlines or unfinished work. Moving forward, contract language should contemplate these issues, and there should be negotiations and clearly defined terms regarding delays.

A few companies were able to foresee some of the coming issues and open a dialogue with contractors regarding liability and responsibility. Some companies created a list of on-site requirements with regard to sanitation, social distancing, temperature checks, and workers scanning in with a QR code upon entrance into the job site. Then, if there was an outbreak because contractors weren’t following these rules, the firm would have some leverage. Parties also negotiated regarding city-enforced shutdowns and what responsibilities a company has toward contractors under those circumstances.

What Will the Future Bring?

The final question for the panelists was about the future. What will the industry look like a year from now? What can developers and contractors expect?

Likely, people will gradually return to urban environments, with the proviso that the spaces in which they work are high-quality and equipped to provide ample protection of workers’ health. The demand for commercial space will gradually grow, but people will return to the office only if they feel safe. Both remodels and new construction will have to incorporate new designs and technology in order to do this.

Future building design will be informed by both the pandemic and climate change. Multistory buildings will have access to each floor via well-designed, public-access stairwells so as to avoid the confinement of elevators. HVAC systems will be upgraded for better air circulation and filtration, and in California, carbon filtration will be used to filter wildfire smoke.

The return to offices will likely continue through the first quarter of 2022, but the work-from-home dynamic will remain in a hybrid format. Because of this, there will probably be a general trend towards larger residential units with space for a home office.

In Conclusion

The designs and technology required in a post-COVID environment have actually been under development for a few years. It’s simply up to developers and contractors to implement them and bring them to reality. Contracts and negotiations will be informed by the past 18 months; no one wants to be caught unprepared if something similar happens again. Even so, all of the panelists are bullish about the future. A more cautious building environment is ahead, but that will ultimately lead to benefits for everyone involved.