How the Coronavirus is affecting construction in Cleveland

There are always rays of hope during a crisis. There are more
than a few available in this Coronavirus emergency (KJP).
CLICK IMAGES TO ENLARGE THEM

UPDATED MARCH 16, 2020

As successful investor Warren Buffet says, "Be greedy when others are fearful."

So are Greater Cleveland's real estate developers fearful or greedy as Ohio and the country goes into Coronavirus emergency? And what might be the long-term implications of the pandemic on pending real estate developments?

Real estate developers didn't want to go on the record to share their thoughts regarding the Coronavirus pandemic, as they could be misconstrued as being insensitive or opportunistic.

But they welcomed the states of emergency declared by Gov. Mike DeWine and later, by President Donald Trump. The goal is to give health care workers a shot at containing and fighting the spread of infection and keep the number of infected persons from overwhelming health care facilities.

"You want a short recession or a great depression?" said the president of a real estate company who asked not to be named. "Governor DeWine did the right thing by getting ahead of this."

It is also apparent that no real estate companies plan to halt or even delay their development projects. Pre-development planning and coordination meetings are continuing without delay, although they are increasingly being held by teleconferences or by video such as Skype, according to several real estate firm representatives.

Construction is due to start within weeks on Intro, the project
formerly known as Market Square, in Ohio City (Harbor Bay).

All of them appear to be viewing this emergency as a short-term disruption that won't change or halt their plans -- if the economic downturn can be kept as short as possible.

To developers, major Cleveland projects that are due to get underway this year, such as the Sherwin-Williams headquarters and research facilities, the new City Club Apartments downtown, the Circle Square development in University Circle or Intro in Ohio City won't be finished for two years or more. Even some new projects are being put on the drawing board.

Developers aren't building for the economic conditions of today, but for what they anticipate will be conditions two years from now and continuing for years thereafter, they said. But there could be some long-term implications, however.

Existing office leases and new office projects may be scaled back as companies realize they can still be productive when employees work from home. But some companies ultimately like the interactions, idea-sharing and creativity that can best be achieved with sociable office settings. Other companies may still fear losing control of employees by allowing them to work from home.

James Bond (yes, that really is his name), a director at the law firm Fennemore Craig, wrote today that there will be a significant number of people who try online shopping for the first time as a result of Coronavirus fears.

"This could be a tipping point that forever alters some brick-and-mortar stores and how they accommodate the online consumer," Bond wrote. "As at-home and curbside deliveries increase in popularity, retailers will need to consider store sizes, layouts, and pick-up points when they design stores."

A massing of the proposed Sherwin-Williams headquarters in
downtown Cleveland, showing phasing of the project (Vocon).

He also noted that if online shopping becomes more prevalent as a result of the Coronavirus, more industrial space will be required to house inventory at distribution centers. It could also spur the construction of more distribution centers, making hotter an already hot market, as Cleveland's WEWS-TV reporter Kevin Barry reported recently.

On the down side, some Greater Cleveland-area projects might be slowed by the disruption of supply chains. Those disruptions depend on the construction materials and where in the world they are sourced.

Some real estate firms are looking at sourcing their materials from different countries and regions or increasing their cost projections for delays in deliveries and U.S. Customs screening. Lenders are monitoring the situation as well.

According to Bisnow, officials at Avana Capital which provides construction financing for Marriott International's AC Hotels around the country expect that development projects will be impacted by supply disruptions.

“We do anticipate it coming down the line," said Avana Capital co-founder Sanat Patel. "Our concern is really delivery times. If projects are already in production, there is nothing you can do. But if I were starting a project today, as a lender, I would advise them to get ahead on the lead time because of this.”

But softening the blow from these concerns -- if not creating an outright opportunity to "buy the dip" -- are the historic lows in interest rates and low oil prices that directly impact construction costs.

Construction is due to start this summer on the City Club
Apartments (at right), located at 720 Euclid Ave. (Vocon).

The Coronavirus outbreak has led to a sharp decline in U.S. Treasury rates, which has driven down the interest rates on real estate loans. The housing market has responded with its best year since before the 2008-10 Great Recession.

"There's lots of things going on behind the scenes," said the vice president at another real estate company. "With interest rates going down, money just got a lot cheaper. We're in the trenches working on social distancing right now. Our project delivery schedules are delayed maybe a week."

The Greater Cleveland area ranked third in the United States in Nationwide Insurance's Fourth Quarter 2019 Leading Index of Healthy Housing Markets (LIHHM). But that data was from before the Coronavirus outbreak reached the U.S.

"While the risk that the Coronavirus outbreak will disrupt economic activity has increased significantly, the national LIHHM projects that the housing sector will remain a source of growth for the economy in 2020," Nationwide's report noted. "The key to this positive outlook is strong underlying housing demand factors — including above trend household growth, solid job gains and low mortgage rates."

Similarly, low oil prices can be a construction stimulus. The benchmark West Texas Intermediate crude oil price has stayed between $50-64 over the past year. It began falling from $53 on Feb. 17 to the low $30s on March 13. Oil prices haven't been this low in four years. Nearly all construction costs are oil-based to varying degrees.

There is every reason to believe that the world will return to normal when this emergency fades. From SARS to Bird Flu to Ebola, there is always another health scare around the corner. As Abraham Lincoln once remarked in much darker times of the Civil War, "And this too shall pass."

END