'General Economic Malaise' Upends Many Construction Projects

This year was supposed to have set a record in real estate construction, particularly in the apartment sector, until the onslaught of COVID-19 stalled construction projects as the economy shut down, according to Moody’s Analytics.

But while a number of developments have stalled, and some have been canceled,  many not-yet-completed real estate construction projects will still go forward, although likely at a slower pace than during the Great Recession, senior economist Thomas LaSalvia predicted in a new report by Moody’s Real Estate Solutions. 

“We do expect this decline to increase in pace and ferocity over the next two quarters, with regional centers feeling more of the pain than neighborhood and community shopping centers,” he said.

The completion of commercial real estate construction projects  was delayed by approximately 6 months during the Great Recession, he said.  Second quarter data indicate that may happen again this year, and that some delays could last as long as 24 months, according to the report.

Real estate construction typically faces delays because of funding, cost saving reductions to labor, and what LaSalvia labeled as “general economic malaise” — all of which are currently in play. 

Those influences have been compounded by the mandated cessation of construction directed at curbing COVID-19′s spread and laborers with COVID symptoms who are unable to work, he said.

Developers whose unfinished projects remain in the early stages may also have to rethink the ultimate success of a commercial development given potential, and possibly dramatic, changes in how the nation lives, works, and plays in the face of a debilitating, often deadly and still spreading virus, the report said.

During second quarter of 2020,  the apartment market registered 24,409 new units —  a 55% decrease from the second quarter of 2019 —  while the office sector reported construction of  3.3 million square feet — a 67% decline,  LaSalvia reported.  The retail sector registered 365,000 square feet of new space —  just 20% of last year’s second quarter figure and the smallest on record for more than 20 years, he reported.

But fewer completed development projects proved welcome for some developers and owners as absorption was equally weak, LaSalvia suggested in his report.  The apartment and retail national vacancy rates remained  flat at 4.8% and 10.2% respectively, and the office sector’s vacancy rate increased just 10 basis points to 17.1%., he reported. That gave the commercial real estate market some relief from downward pressure, he said.