Despite Being “Essential,” Construction Industry Experiencing Major Delays

Although real estate construction has been deemed “essential” under the Safer at Home order from Governor Tony Evers, many projects in the Milwaukee area are experiencing delays according to a new industry survey.

Approximately 65 percent of respondents said construction projects they’re working on are experiencing delays in excess of 90 days.

The 286 survey respondents include developers, attorneys, brokers, property managers, lenders and construction professionals. The commercial real estate industry survey was conducted as a follow-up to one first circulated in late March. Professional associations promoted the survey to their members.

The results paint a mixed picture with respondents reporting relatively strong rent collections from tenants and borrowers needing loan adjustments in line with expectations, but the industry is also bracing for declining rent payments and a long-term decline in office space demand. Their expectations for how long the impact will be felt have grown.

“We’ve definitely seen a shift in sentiment over the last three weeks as developers prepare for what is going to be a much longer than first expected impact of the virus on our economy. Finding safe and practical ways to get Wisconsin back to work is going to be key in protecting the physical health and economic welfare of Wisconsinites moving forward,” said Jim Villa, CEO of NAIOP Wisconsin, one of the organizations that distributed the survey.

“Everyone agrees that we are all going to be looking at a much altered way of doing business in the future and I’m encouraged by how the real estate community has coalesced around creating solutions for their clients,” said CARW CEO Tracy Johnson.

Approximately 74 percent expected more than 10 percent of their tenants to approach them about rent reduction or relief, but only 55 percent reported that occurred. The leading rent relief responses continue to be adjusting the lease term, requesting proof of distress and adjusting the rent.

Some property owners reported declines in rent collection in April, but the bigger concern is what comes over the next three months and beyond. Over 44 percent of property owners reported collecting 90 percent or more of their typical rent collections in April and 87 percent collected over 70 percent. But almost 53 percent of respondents expect things to get worse in May.

Almost 62 percent of lenders predicted that more than 10 percent of their borrowers would approach them for loan modifications, and 73 percent reported more than 10 percent of borrowers actually did. The most common strategies being offered are interest-only payment periods and delaying payments with the balance being amortized over the length of the loan.

The pipeline of future deals is also being impacted. Just under 12 percent of respondents said no transactions in their pipeline had been impacted. Over 25 percent reported that more than half of their prospective deals had been put on indefinite hold or canceled.

Part of that uncertainty could be due to the dramatic shift to working from home. Over 70 percent of respondents said they believe the experience people are having working from home for an extended period of time will negatively impact future office space demand.

“Following how office demand changes is going to be fascinating. In one sense asking real estate people how they think working from home is going to impact office is like asking the typewriter industry how they through the computer would impact their business. But these responses show that everyone expects some change – just how much? No one really knows,” said Andy Hunt, director for the Center for Real Estate at Marquette University.

And while just over half the respondents think stimulus programs are having a positive impact, respondents are more pessimistic now when it comes to how long the impact of the pandemic will be felt. The percent of respondents expecting the impact to be longer than a year more than doubled from 9 percent to 19 percent.

The first survey showed that 42 percent of respondents expected the impact to only last from three to six months and 77 percent estimated an impact of three months or more. That’s grown to 87 percent expecting a greater than three month impact, with only 30 percent predicting a three-to-six month impact.

Based on written comments submitted, those involved in the industrial real estate market are predicting a better bounce back. “Logistics likely to remain strong while some manufacturing and assembly operations will have reduced employee counts and less need to expand operations in the near term. This also may be a positive for companies domesticating more of their operations,” wrote one respondent. “We feel very fortunate to be in Industrial real estate – likely a sector that will continue to expand on the other side of this,” wrote another.

One respondent offered advice to their peers about how to spend their time. “Netflix or making deals? Your immediate success rate will be reduced, but no question pressing forward is the only successful strategy.”

The survey was circulated by the Building Owners and Managers Association (BOMA), Commercial Association of Realtors Wisconsin (CARW), Institute of Real Estate Management (IREM), Marquette University Center for Real Estate, Commercial Real Estate Development Association (NAIOP Wisconsin) and Wisconsin Commercial Real Estate Women (WCREW).

A complete report and links to the raw data are available in a PDF report from the partners.