Impact of COVID-19 on the U.S. Real Estate Developers
A new RealEstateBees.com survey of over 2,000 active real estate developers found that despite the negative impact on their business caused by the COVID-19 virus, 75% are seeing new opportunities opened by the pandemic.
The following segmented report provides results of a large scale survey—Impact of the Coronavirus on the U.S. Real Estate Businesses—conducted by the research team of Real Estate Bees, a leading platform for real estate professionals.
The following statistics reflect the situation among the US real estate developers. We reached out to over 2,000 active real estate developers from all the 50 U.S. states and Washington, D.C. to collect their insight on the impact of the COVID-19 pandemic on the industry in general and their businesses in particular.
The report is divided into the following two parts.
1. Multiple choice questions where the professionals had to choose one of the suggested answers to each question:
1.1 Is there a negative impact the pandemic is having on real estate developers?
1.2 Has the pandemic opened any unexpected opportunities for real estate developers?
1.3 How are you adjusting your marketing budget?
1.4 Are you transferring your business to a “work from home” basis?
1.5 Have you noticed any benefits of transferring your business processes to a “work from home” basis?
1.6 Have you noticed any drawbacks of transferring your business to a “work from home” basis?
1.7 Will you keep your business processes transferred to a “work from home” basis after the pandemic is over?
2. Open questions that allowed the experts to share their insights on various aspects of the impact of the coronavirus pandemic on the U.S. real estate developers:
2.1 What are the specific negative impacts the pandemic is having on real estate developers?
2.2 What unexpected opportunities have the pandemic opened for real estate developers?
2.3 If you knew the impact of this situation on your business in advance, how would you prepare your business to mitigate your losses or even profit from it?
2.4 What marketing channels do you prefer to use during the pandemic over the rest and why?
Is there a negative impact the pandemic is having on real estate developers?
Has the pandemic opened any unexpected opportunities for real estate developers?
How are you adjusting your marketing budget?
Are you transferring your business to a “work from home” basis?
Have you noticed any benefits of transferring your business processes to a “work from home” basis?
Have you noticed any drawbacks of transferring your business to a “work from home” basis?
Will you keep your business processes transferred to a “work from home” basis after the pandemic is over?
What are the specific negative impacts the pandemic is having on real estate developers?
Key takeaways from the real estate developers’ answers:
- Real estate development is classified as a nonessential business in some states, thus most developers who have to temporarily shut down their business have lost income. The abrupt stoppage of projects causes developers to not meet their financial obligations on time.
- With projects facing disruptions, developers were not able to meet their timelines, hindering them from accurately estimating profits and losses.
- Projects have also slowed down due to businesses being run from home and online, which developers aren’t used to doing yet. While online communication speeds up most processes, developers aren’t completely sold on the idea of working virtually.
- Lenders have become more strict, resulting in difficulty in funding real estate development projects. While most lenders offer loan forbearance, developers still have to pay other business expenses such as taxes, insurance, and utilities, payment of which had to be taken from their current projects’ budgets.
- Developers, as well as commercial lenders and investors, are becoming cautious in accepting new projects, especially that most title companies and banks have partially or fully shut down, causing delays in projects. As most government offices aren’t fully operational, this has also caused major delays in getting necessary permits.
- Developers’ commercial tenants are struggling which leads to rents not being paid on time. However, the bigger problem would be when tenants decide to downsize or not avail any space at all, as their employees will be more likely to work from home.
- Building materials are becoming more expensive and at times unavailable. This causes delays in construction.
- Some developers don’t feel negatively impacted by the pandemic as their projects are usually for the long term. It also helps that the government is able to stabilize markets and lower interest rates, which still makes real estate development a lucrative business.
- For some developers, the negative impact is mostly due to the safety protocols that have to be integrated within their process. Those who have easily adjusted continue to get more business, as customers remain seeking new homes to live in or getting their homes repaired.
- Overall, uncertainties surrounding the availability of vaccines, as well as the unstable political and economic climate, have slowed down the process of planning and organizing real estate development projects — from developing realistic appraisals and feasibility studies, to establishing design and construction estimates and schedules.
Alex Capozzolo, Co-Founder at Brotherly Love Real Estate
The thought that real estate could potentially shut down again is frightening. In Pennsylvania, where I run my real estate developing business, real estate construction was nonessential for a few weeks. That completely halted my business. Between extra holding costs and paying back our financial investors late, we lost money on certain projects.
Our bottom line for the projects we run is based on a particular timeline. The pandemic disrupted basically everyone’s timeline, and continues to do so. Lenders are slammed right now, and have more restrictions for giving out money because of the fear of the pandemic and economy. It’s more difficult for us to get funding for our projects.
At this point, we have doubts as well about the economy in the next 3-6 months. Our team is way less aggressive at taking on new projects, and the current projects we are running have slowed due to offices being shut down and people working from home.
Since real estate was considered nonessential during the first major breakout of the pandemic in most markets, developers were instantly hit hard. Our projects completely halted, but bills still needed to get paid.
Certain lenders were flexible, offering loan forbearance. That helped, but there were still holding costs involved like taxes, insurance, and utilities that were not as forgiving. We ate into our budget on most projects because of that.
The entire real estate process is still not fully back to normal. Many city-run offices, such as the Department of Licenses and Inspections, are working from home which is causing major delays in pulling permits. Same goes for title companies and banks, which has been slowing the process, too.
As real estate developers, we estimate our profits and losses from a project based on the timeline, which has been completely skewed the past few months.
Lou Cassise, Owner/CEO at CM National
The current COVID-19 virus uncertainties about when effective therapeutics and vaccines will be approved for use by the FDA and available to the public is slowing down the planning of real estate development projects. It is difficult to obtain:
- Realistic and useful appraisals and feasibility studies (which in turn affects prospective debt and equity financing).
- Firm design and construction estimates and schedules. Without being confident about these two fundamental development components, project planning and economic viability cannot be satisfactorily established.
Furthermore, this current untenable political climate that has persisted in this election year has slowed (if not undermined) the progress, development, and use of therapeutics that can effectively treat the COVID-19 virus (while vaccines are completing their trial stages). In turn, this adversely affects the planning and organizing of real estate development projects.
Kaitlyn Willette, Business Development Manager at 4 Points
Things could be much worse, but there are definitely some challenges. These challenges include an understandable hesitancy to dive into any new projects, as well as pauses or slowdowns due to permitting, approvals, or just communication in general being all online.
In some areas, this has expedited matters. For example, two video calls can occur back-to-back, whereas two meetings would need to have travel time. However, the more virtual world we are learning to live in now still does pose its dilemmas.
Michael Sarabia, CEO at DSW Commercial Real Estate
Tenants were closed down if they were not “essential”, and many of them needed rent assistance in the form of abatements and deferrals. Construction timelines were extended out for ground up and tenant improvements and, in some cases, the pandemic factor was not allowed as force majeure. The perfect storm was occurring where tenants could not pay their rents.
Tia Cannon, Founder at ANC Real Estate
I think for some, COVID-19 has taken a very negative toll on businesses overall, which in the beginning it did for us as well. But as we started to learn more about COVID-19, and people had to spend more time at home, it seems to have, and continued to, pick up. And when I say learn, it’s more about the precautions. So fortunately, we have customers constantly looking for homes, getting repairs completed, etc.
Stuart MacMillan, Owner at MacMillan Development, LLC
Although many of us have tenants that are struggling financially, the true impact of the pandemic has not hit us yet. When our leases are renewed, I believe that many tenants will “right size” and adjust their occupied square footage downward. Some of our office tenants’ employees will likely work from home.
Randy Jenkins, Chief Financial Officer at Partners Development
While the pandemic has impacted some of the projects we had in development due to tenant business impact, the quick action of the government to stabilize the markets and lower interest rates have provided an attractive environment for real estate development.
Jack Pinard, Managing Partner at Summit Buys Houses
The availability and cost of building materials is causing production delays and sometimes unpredictable cost increases.
Les Bick, President at First West Realty, Inc.
Commercial real estate lenders and investors are avoiding new projects.
Paul Warshauer, Chairman/Managing Member at Grande Venues, Inc.
Not much impact because we are involved for a long period for each project.
What unexpected opportunities has the pandemic opened for real estate developers?
Key takeaways from the real estate developers’ answers:
- New ways to serve clients more effectively have opened up for developers. Big or small, they treat every business as an opportunity to serve clients better.
- Low interest rates have given developers the chance to have their properties sold. They are able to get offers from buyers 5 to 10% more than the original asking price.
- Special lending programs have launched, allowing developers to take advantage of lower rates and get fresh funding for their projects.
- Developers are able to take advantage of projects that others have overlooked.
Kaitlyn Willette, Business Development Manager at 4 Points
It has helped us to open our eyes to how we can serve our clients better. We always want to help our customers, as well as their customers, and in a world where needs are changing, we have the option of staying static, or changing to meet the people we get to serve where they are.
That might no longer be a whole new building. Maybe that’s just a renovation, or a reexamination of their space. Either way, the pandemic has pushed us to move in new ways that we probably wouldn’t have considered previously.
Michael Sarabia, CEO at DSW Commercial Real Estate
Landlords were called on to do more work to keep the centers pristine for a smaller group of tenants, and lenders were digging in their heels for the outstanding loans and debt service that they were demanding.
Kirk Bent, CEO at Greenbee Investments
Due to new low interest rates, the housing market is booming which is a good thing for us. We’re now getting 5 to 10% over the asking price on our properties.
Randy Jenkins, Chief Financial Officer at Partners Development
New funding and lower rates on specialty lending programs have opened doors to projects which previously might have been difficult.
Paul Warshauer, Chairman/Managing Member at Grande Venues, Inc.
There were many projects overlooked by others, so developers can see opportunities others cannot or will not.
If you knew the impact of this situation on your business in advance, how would you prepare your business to mitigate your losses or even profit from it?
Key takeaways from the real estate developers’ answers:
- Diversifying their portfolio could help developers to get business from a variety of markets.
- A slowdown in land deals could be beneficial in securing better terms and pricing.
- Despite lumber prices increasing that resulted in higher construction costs, developers should ride this out, as once mills operate normally again, development companies would be facing less pressure in terms of lumber expenses.
- Developers should exert more effort in establishing more personal client relationships, which they can do so via traditional channels like phone calls or via digital means like websites and other online platforms.
- Websites should be overhauled to include technologies that allow faster and more convenient communication with target customers.
- Developers should maintain stronger cash positions and handle debts more effectively to cushion the effect on financial stability.
- Preparing financially and technologically ahead of time could have helped developers adjust to changing situations smoothly and execute projects more efficiently without any downtime.
Michael Sarabia, CEO at DSW Commercial Real Estate
We have pivoted to include more asset classes as we have a mix in our portfolio of office, retail and a little bit of industrial now that has moved into the residential rental market as well. While there was not a ton of volume on raw land during the pandemic, our group made seven offers and has been successful going into contract on five properties.
During the downturn, development services for many municipalities have had less activity, and it is helping expedite the entitlement process in some cases. Additionally, the breakneck speed of land deals has slowed to a level for the infill sites that has allowed us some latitude in negotiating pricing and terms.
Construction costs are also hovering at an area that should be beneficial over the next 24-36 months, we believe. Our team believes that the lumber market sharp increases are due in large part to mills closing, and that the sector should feel less pressure in the coming year as more people go back to work at the mills.
Kaitlyn Willette, Business Development Manager at 4 Points
I would try to prepare us all to move in advance. Like for most of us, we didn’t really see this coming. One day things were pretty normal and in what seemed like a week’s time, everything was different.
I would try to get us ready to pivot ahead of time, so that when the shutdown happened, we would have been ready to execute immediately with no downtime of figuring out the next step.
Alex Capozzolo, Co-Founder at Brotherly Love Real Estate
Nothing has completely fallen apart yet. I don’t regret the current projects we are still working on, now that we have lost part of our budgets due to the pandemic. I may have a different answer in a few months when we go to sell and the tides have changed! For now, we are smooth sailing and pushing through.
Randy Jenkins, Chief Financial Officer at Partners Development
We would have released a new version of our website sooner with built-in technology links for easy communication and more options to click through to specifically targeted information.
Kirk Bent, CEO at Greenbee Investments
Had I known the impact in advance, I would definitely increase my inventory. Yes, the market is booming, but inventory sucks.
Jack Pinard, Managing Partner at Summit Buys Houses
I would have worked to have stronger cash positions and lower debt where possible.
Paul Warshauer, Chairman/Managing Member at Grande Venues, Inc.
I would have exerted more effort into making more phone calls and maintaining more personal contacts.
Les Bick, President at First West Realty, Inc.
I was marketing before the pandemic and continued to market our new projects the same way during the pandemic.
What marketing channels do you prefer to use during the pandemic over the rest and why?
Key takeaways from the real estate developers’ answers:
- Online marketing channels and other remote marketing endeavors allow developers to reach a wider number of audiences without putting health and safety at risk, while doing away with costly and time-consuming personal interactions. Virtual technology is the way to attract new clients in a pandemic setting.
- Facebook is a good launchpad for online marketing, as it is easy to use even for those who aren’t familiar with web-based marketing.
- Traditional marketing efforts, such as referrals, word of mouth, telephone calls, and local affiliations, remain effective in winning new clients. Radio can also be used to reach potential clients without worrying about distance restrictions.
Michael Sarabia, CEO at DSW Commercial Real Estate
We do not advertise a bunch, as most of our deals are word of mouth and through local affiliations. DSW does advertise quarterly in a local business magazine and has done so for about two years. Since March of last year, we have continued to work as “essential” business, and we have picked up a few new property management accounts via referrals.
Kirk Bent, CEO at Greenbee Investments
I always and still prefer to market online. I can reach an unlimited audience from the comfort of my living room. I do like to interact with people, but with COVID-19 fully active, remote marketing is definitely the way to go.
Randy Jenkins, Chief Financial Officer at Partners Development
The pandemic has already caused the cancellation of many in-person events and the change to virtual events for many conferences. Our social media platforms and the ability to utilize technology will be key to our success in continuing to attract new customers.
Jack Pinard, Managing Partner at Summit Buys Houses
Online presence is best as it allows everyone involved to stay safe and eliminates costly and time-consuming personal interactions.
Kaitlyn Willette, Business Development Manager at 4 Points
We use Facebook. They make their ads process very user-friendly. We have also used radio as it has a widespread reach.
Paul Warshauer, Chairman/Managing Member at Grande Venues, Inc.
We use standard websites and old-fashioned telephone calls.
Stuart MacMillan, Owner at MacMillan Development, LLC
For me, it is word of mouth and referrals.
___
If you too want to contribute your expert advice on a topic of your expertise, feel free to apply to our Expert Contributor Program.