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Meeting the Challenges of Building during the Pandemic

By May 11, 2021No Comments

Four developers based in the Washington, D.C./Baltimore area discussed the “invisible threat” that the COVID-19 pandemic posed to real estate, recounting a volatile year and how it has affected the industry.

Taking part in the 2021 ULI Virtual Spring Meeting session, “Battling to Build against the Invisible Threat,” were Hilary Goldfarb, senior managing director and regional development officer leading the Mid-Atlantic region for the Rockefeller Group; Kamilah McAfee, vice president for real estate development at Wesley Housing Development Corp.; Mark Weisner, president of Bozzuto Construction Co.; and Mike Goodwin, managing principal and COO at Design Collective. They were joined in the discussion by moderator Chad Cooley, managing director at Bozzuto Management Co.

Cooley began by noting that construction costs make up “an average of 70 percent” of expenses, and that “there’s more pressure than ever for costs to go down.” With the combined influences of the pandemic, a volatile lumber market, and a strained labor force, increased collaboration and strategizing are needed to take a deal across the finish line.

COVID-19 hit the industry hard, and the aftereffects are still being felt. “Our 2020 costs were relatively flat outside of lumber,” said Weisner. “In 2021, there are a lot of material increases: HVAC is up 15 to 17 percent, steel is up 25 percent, and lumber is up 240 percent. There is extreme pressure on the market.”

Both McAfee and Goldfarb cited favorable interest rates, which helped offset volatile markets. “It’s better to be lucky than good,” noted McAfee. She added that they are diversifying their business in 2021 and beyond, concentrating on more rehab projects than new construction to reduce their exposure to volatility.

Another affected area is the development process itself, which Goodwin said has been slowed by the pandemic. “COVID hasn’t impacted the costs of our services, it has impacted the time it takes for projects to go through the cycle,” he said. “Our biggest impact is essentially design, documentation, and technical coordination—all processes and cycles that are best done in person.”

While these have been slowed by remote work, McAfee did note that community participation in zoning meetings has been bolstered because of the pandemic. “Zoom helps with more civic participation. . . . We hear opinions earlier in the process rather than later.”

Though development still faces difficulties, the panelists agreed that the outlook for urban real estate remains positive. Goldfarb acknowledged that the data show an urban exodus, but said, “I reject the idea the suburban rally and urban recovery have to be mutually exclusive. . . . We were at the top of a cost cycle before the pandemic.” Goodwin concurred, noting that history shows that “innovation thrives in cities; there will always be an attraction to collaboration and innovation.”

As for what it will take to bring costs down? Weisner has a simple answer: “We need less demand.

“Unlike 2008, there’s been no immediate decrease in demand. I don’t think we’ve reached the greatest downward pressure—there are still backlogs,” said Weisner. He pointed to homebuilding and renovations as the driving factor with price pressures.

Weisner also pointed out the need for more labor and advocated for more apprenticeship programs and legislation to solve the labor-supply issue. “Schedules are slower not because of COVID, but because of labor. We don’t have the skilled labor we need,” he said.

Although the pandemic has caused challenges for the real estate industry that are still being felt, each panelist was quick to cite a silver lining they have experienced. McAfee, who develops public housing in the Washington area, was appreciative of the spotlight that COVID put on the need for more public housing. “Never before has the epidemic of the lack of housing in America been highlighted like this. . . . We are moving in the right direction.”

Goodwin noted two positive aspects focusing on sustainability and work/life balance. He noted that the pandemic accelerated the work-from-home conversation “by 10 years.” Pre-pandemic, some clients “wouldn’t think twice about flying somewhere for a two-hour meeting,” Goodwin said, whereas now people are “scrutinizing which meetings need to be in person and which don’t.” Ideas like these both reduce carbon emissions and create a better work/life balance.

For Goldfarb, the pandemic has “forced innovation” in an industry that sometimes lags behind. She also said that the “reaffirmation of core and collective values” over the past year has been very important and is something she will take with her “over the long haul.”

Finally, Weisner said that this period allowed his firm “to focus on our people . . . it allowed us to engage more with our employees and our teams.” It also improved the acceptance of safety practices at job sites, noting teams were much more open to accepting safety protocols to keep jobs going.