Robinson+Cole’s Construction Group hosted its fourth— but first ever virtual — Construction Industry Roundtable on July 14, 2020. Representatives of major design and construction industry organizations and stakeholders in the Northeast were in attendance to discuss the state of the regional market and to look ahead for trends to watch for 2021.
The Roundtable opened with observations on the regional economy and the state of construction markets from Connecticut Business & Industry Association (CBIA) economist, Peter Gioia, and Associated General Counsel of America’s (AGC) chief economist, Ken Simonson. They noted that the current numbers are undeniably poor, especially for the months of April and May. Connecticut is the best performing state economically east of the Mississippi River, which is likely due to fewer restrictions on economic activities the state has imposed. Still, Connecticut continues to lag behind other states in the Northeast in construction. Gioia and Simonson foresee a long road to full economic recovery throughout the region, especially for small businesses and restaurants.
The economic discussion also focused on the probable lasting effects of the current conditions. The commercial real estate market, for example, is expected to experience drastic changes as work forces have discovered the viability of a “work from home” structure, which will inevitably decrease the demand for commercial space. The same is likely true for elder care facilities; as the industry shifts towards home-based care for elders, the pace of new development will likely slow. Demand for all sorts of large gathering spaces, such as convention centers, banquet halls, and movie theatres, also will, at least in the short term, decrease. These impacts on economic behavior will undoubtedly result in lost opportunities for the design and construction industry.
At the same time, areas of potential growth were noted. As economic activity shifts towards the population’s home base, we will likely see more demand for infrastructure projects that improve local internet and network capability from home. Traditional transportation infrastructure projects also will be discussed, both because of their political popularity and the low cost of borrowing, although they will be a challenge to undertake with already strained public coffers. In the educational sphere, the Roundtable participants observed that the demand to evaluate and assess air quality and other building systems, particularly with infection control in mind, is on the rise. Increased construction demand from private schools is also anticipated, as private school enrollment swells. The group discussed the potential re-focus on growth of suburban communities, potentially moving away from years of focus on urban development. However, similar speculation followed the 9/11 attacks, but such a shift toward a suburban focus never occurred.
Despite the recognized opportunities for potential new growth in certain sectors of the construction industry, the group noted the slowdown in new design work and shared a grim outlook that much of the industry does not expect to see a return to “business as usual” in the next six months. According to surveys by the AGC, 44 percent of responding contractors reported a stop in work, while 32 percent had experienced canceled scheduled projects.
In addition to the economic discussion and forecast, the Roundtable discussed the challenges presented by the labor market and employment regulations. Several noted with concern that states, including New York and Connecticut, are considering legislation that would create a presumption that an employee who tests positive for the coronavirus contracted it on the job, thus giving the employee a presumptive claim to workers compensation coverage. Vermont has already adopted a version of this, and the group discussed how the enactment of such a policy in other states would be costly to contractors struggling to regain footing in the current economy. Design and construction firms are already dealing with weakened markets, higher costs of doing business safely, and a mobile workforce, and most of the industry is re-thinking how business will be conducted going forward.
There also was discussion of the process of allocating the additional unique costs that the industry faces in the current climate. Contractors are being required to adapt to new OSHA rules regarding safe workplace measures, which has created various increased costs for compliance. In addition to added safety costs, they are seeing increases due to demobilization and remobilization, insurance-related costs, lost efficiencies and extended schedules. Contractors in New York are facing fines for noncompliance with OSHA regulations, which the Department of Buildings is enforcing. Other states have reported that OSHA staffing is stretched too thin to effectively impose fines and penalties. In general, there is tremendous uncertainty as to who must absorb the escalating costs of doing business, which will likely lead to increased dispute resolution activity later this year and into 2021.
On the dispute resolution front, the group noted that many project teams are currently negotiating cost allocations. Most noted a willingness to discuss some level of sharing, although some had experienced a refusal to discuss any prospective sharing of increased costs. Those that are not able to reach agreements will likely proceed before judges and arbitrators in the coming months and years, although currently even the courts have limited operations. Representatives from the American Arbitration Association reported an increase in the use of virtual mediations and arbitrations, eliminating travel-related costs, reducing scheduling conflicts, and producing speedier resolutions.
The Roundtable concluded by revisiting the status of efforts to promote diversity and inclusion within the design and construction industry. The group recognized that the current social climate has brought social justice issues to the forefront and serves as a call to action to bring about measurable change. A New York City Comptroller’s Office survey concluded that 85 percent of Minority Business Enterprises will not be able to survive a six-month slowdown in business, while 35 percent of small businesses have insufficient working capital to survive more than one month. There is a recognized need to provide greater access to economic opportunities, project opportunities, and working capital opportunities to people of diverse backgrounds within the construction industry. The federal Paycheck Protection Program has not been robust enough to sustain small and minority-owned businesses. The participants also agreed on the necessity of recruiting, developing and promoting diverse candidates within design and construction firms. AGC has advanced a “Culture of Care” initiative that challenges industry leaders to take a bold and visible step towards ensuring their workplaces are welcoming, safe, and inclusive for an increasingly diverse and talented pool of workers. The Roundtable ended by committing to return to this important conversation on diversity soon and to take affirmative steps to achieve progress on a market and regional basis to facilitate real change.
Robinson+Cole would like to thank all those who attended for joining us and sharing their valuable insights. We hope to continue to grow these discussions in the future.