In response to the pandemic in early March of this year, Florida, like most states, issued a stay-at-home order. Construction sites, however, were deemed an essential service and were allowed to remain open.
By George Bruer, Daily Business Reivew | December 29, 2020
It seems the entire world is eager to turn the page on 2020. As COVID-19 continues to spike and a vaccine not expected to be widely available to the general public until the second quarter of next year, how quickly that page turns remains anyone’s guess. One thing is for certain though—the lingering effects of the global pandemic will continue to plague South Florida’s construction market. In particular, we can expect a continued downturn in commercial office construction deep into 2021.
In response to the pandemic in early March of this year, Florida, like most states, issued a stay-at-home order. Construction sites, however, were deemed an essential service and were allowed to remain open. Seizing on the shutdown, as traffic slowed, Florida transportation construction projects sped up. According to Gov. Ron DeSantis, this aggressive approach saved an aggregate of 650 calendar day of construction.
Keeping construction sites open benefited the residential market as well. In fact, residential construction in Miami shrunk by less than 2% compared to 2019. With ultra-low residential mortgage interest rates, a hot seller’s market and millions of people continuing to work remotely from home, we expect the residential construction market to regain strength and carry the construction industry into 2021.
By contrast, new transportation and roadway construction projects are likely to lag in 2021. State and local governments across the nation have collectively lost over $150 billion in government revenues and that number will increase in 2021. Florida is no exception. Without a state income tax, and tourism and hospitality industries not yielding anything close to the same sales tax revenues of years past, funding for state sponsored infrastructure construction projects will be limited or nonexistent.
Likewise, federal funding for construction projects will be scarce as well. Although the federal government has allocated funding through the CARES Act to certain sectors that have historically engaged in capital improvement projects, those funds are being used to maintain staffing instead of new construction projects. The incoming administration has promised to invest trillions in infrastructure and construction jobs, but that will take significant time to materialize, if ever.
The short-term commercial real estate market will not fare any better. The commercial construction market volume in Miami took a massive hit in 2020, falling by more than 20%. Until people can safely return to working in a central office space and start traveling again, commercial construction—especially construction of urban high-rise offices and hotels—will remain stagnant. Additionally, with the downfall of traditional enclosed shopping malls and the rise of e-commerce and online shopping, we do not expect the depressed commercial construction market to regain much strength in 2021. When the commercial construction market does eventually return, it will be fueled by the construction of pandemic-proof brick-and-mortar stores that thrived during this past year, such as big-box retailers (Walmart), home improvement outlets (Home Depot), pharmacies (CVS) and grocery stores (Publix).
Assuming a construction uptick does eventually begin in the second half of 2021, the early post-pandemic construction landscape will be challenging for both developers and contractors alike. Supply chain issues, labor shortages and social distancing requirements on job sites are likely to cause delay and spur litigation.
To facilitate timely completion of projects and minimize the financial consequences of delay, developers should insist that their construction contracts establish a substantial completion date, include a “time-of-the-essence” clause and provide for liquidated damages in the event of delay. It has become standard practice for general contractors to include a waiver of consequential damages in their construction contracts that limit their liability for delay and exclude categories of damages like lost rent and loss of profits. As such, developers should require a liquidated damages provision in the contract, assigning a specific dollar amount for each day of delay caused by the contractor. This will provide some recourse to a developer whose project is delayed while at the same time protecting a contractor from an unlimited judgment amount due to lost profits.
Further, as construction projects resume globally, increasing demand for construction materials will keep costs rising and supplies will be limited. Most construction materials have already experienced increased pricing, including steel, lumber and glass. Shortages of crucial materials during an ongoing project would have an immediate adverse critical path impact and cause delay. To offset these effects, contractors should identify weak spots in the supply chain ahead of time, expand their network of suppliers and add suppliers in different geographic locations to keep materials flowing and costs manageable. Contractors should also look to purchase materials on longer payment terms and increase their lines of credit where possible.
Competition for scarce work will drive costs of construction projects down and contractor profit margins will be razor thin. When working on projects with shaky funding and slow paying owners, contractors should not hesitate to leverage their lien rights early to prompt payment. Even before the global pandemic, construction contractors often had some of the longest waits and greatest difficulty getting paid compared to those in other industries. The post-pandemic economic environment will only exacerbate payment delays.
Finally, contractors must also be mindful of their contractual notice obligations. Generally, construction contracts require contractors to provide notice within a very short window when seeking change orders for pricing or time. Courts will strictly construe and enforce these notice requirements. If a contractor fails to timely make a claim for extra time or cost, they risk waiving the same. Even the slightest payment mishap or waiver could mean the difference in making a profit or going out of business.
Accordingly, contractors should have dedicated personnel to ensure that its contractual notice obligations are being met timely.
In short, even with vaccine development and distribution proceeding at warp speed, the construction industry as a whole will take some time to recover. But with some forethought and fortitude, developers and contractors can overcome the new hurdles and demands precipitated by the events of the last year and be successful as the construction industry gradually moves toward recovery.
George Bruer, is a partner at Mark Migdal & Hayden. He focuses his practice on construction litigation and bank and mortgage fraud recovery on behalf of the FDIC and national banking institutions in federal court where he has developed a result-oriented approach designed to efficiently achieve maximum recoveries for his clients.
