DC’s Construction Industry Feels Only Mild Impact From COVID, JLL Says

“D.C. was one of the few markets that never had a moratorium on construction amid COVID,” Hartnett told Commercial Observer. “We never saw construction projects that were active stop. It has not harmed the timelines for those projects, like we’ve seen in Seattle or Boston or New York.”

Since the pandemic, D.C.’s worst week saw just a 15 percent drop in construction activity, recorded on April 28. Meanwhile other big cities saw far more drastic declines, with New York experiencing an 86 percent decrease, Seattle seeing a 71 percent dip, and Boston registering a 56 percent drop.

Overall, D.C. is showing a 42 percent decrease in starts for 2020 compared to last year, but Hartnett noted that that number is misleading due to the high numbers achieved in 2019, and this year’s numbers are more in line with historical averages.

“We didn’t see any projects stop,” Hartnett said. “D.C. in general has seen a decline in general deliveries over the last 10 years, and we are at our lowest point now. We’ve got about 2.5 million square feet under construction now.”

In terms of what is under construction now, about 1 million square feet is availableThat means only 60 percent of new product has been preleased. That’s one area that COVID has had an impact.

“If you take the economic conditions we have and the abundance of available space that’s still under construction, that’s good quality space but we do believe starts in the short term will be more limited than they have in D.C. over the last few years,” Hartnett said.

Currently, there are quite a few shovel-level projects—over 4.4 million square feet of them in D.C. which could start at any time, and that is positive news going forward.

“These will be part of the next wave of construction, though they are more than likely waiting for a tenant prelease than to go spec and start in this environment,” Hartnett said.

Material prices, even though they’ve dropped 3.5 percent overall, remain a challenge for the commercial real estate industry. Lumber prices, for instance, have skyrocketed due to demand outpacing mill supply.

“We’ve already had some of the higher construction costs in the U.S., I believe we’re No. 3 already, so we were already at a high benchmark of costs pre-COVID,” Hartnett said. “We have seen about a 4 percent increase year over year. We do know that costs will decline ahead, but we don’t think that’s a long-term outcome.”

D.C. construction companies are seeing prices down primarily due to aggressive bidding and lower general contractor profit margins.

“D.C. metro office fit-out costs are forecast to be down 10 percent in 2020, a larger decline than the 3 to 6 percent drop in national average fit out costs,” Hartnett said. “Lower costs are temporary, not a new normal, and will begin to rise again in 2021 as construction volume starts to stabilize again.”

Another challenge to the industry was construction employment, as the industry in April faced its largest ever one-month increase in unemployment, per JLL’s report. “The national construction unemployment rate jumped more than 16 percent that month, spread across all sectors and job types in the industry,” according to the report. D.C.’s numbers were not as low.

The most notable impact for most construction projects in D.C. “has been the schedule changes required to comply with physical distancing rules, which are expected to remain a concern through the rest of 2020,” per the report.

An interesting thing to come out of the COVID challenges is a more widespread utilization of technology to help with health monitoring, contact tracing and parts of the construction job itself. For instance, digital collaboration tools, construction wearables and offsite construction methods are all anticipated to offer benefits in the coronavirus environment and consistent payoffs in the pandemic’s aftermath, JLL said.

According to JLL’s report, “staffing limits and distancing requirements expanded demand for cloud-based technology to ease sharing of plans and schedules.”

“This immediate impact has been termed technology forcing, or the move by firms to adopt technology because it is a necessity during this pandemic, rather than an optional investment in future efficiencies,” the report noted. “The technology forcing in construction will translate to a permanent increase in adoption as construction firms, forced to quickly push through the challenges of integration, will also benefit from the efficiencies of the new tools over the long term.”

Looking ahead through 2025 and the next wave of construction, D.C. is forecast to have high construction costs again and close to record highs in costs.

Nationwide, JLL now forecasts that the construction industry’s recovery will be uneven across sectors until the pandemic’s health problems are resolved, and nonresidential construction is expected to decrease up to 15 percent in 2020.

However, the D.C. area’s long-term construction outlook is positive for the first time since 2014, while there’s greater optimism for growth between 2022 and 2025 than prior to the coronavirus recession, the brokerage said.

“Clearly, there are a lot of short-term challenges ahead, but we feel strongly this market will recover and outperform others long-term,” Hartnett said. “There are great opportunities ahead.”

Update: This story originally misattributed source material. This has been corrected. We apologize for the error.