Local builders respond to the current—and potential—effects of COVID-19.
Just two months ago, industry leaders at the annual Builder Developer Luncheon (see BUILD, March 2020) predicted a strong year for the home construction market. As we wrote then, “Despite the unknown effect of events like the current coronavirus scare, [Dr. Frank] Nothaft says key factors are keeping the economy strong, especially in the Midwest. Low unemployment, low mortgage rates, and a strong market of potential buyers combine to lead Nothaft to predict continued growth in home prices for the Des Moines area.”
Yet here we are today, self-quarantined and waiting out the most bizarre medical, societal, and economic situation to face this country in a century.
Recently we spoke to several area builders and developers who all survived the economic downturn of 2008, to see how they’re weathering this crisis and to get their perspectives on what lies ahead.
For nearly 30 years, Accurate Development has been developing land and building custom homes and commercial buildings throughout Iowa.
The COVID-19 outbreak is hardly the first economic challenge the company has faced, but Kevin Johnson says it’s completely different than anything else he’s experienced.
“The last crisis, the housing crash in 2008, was nothing like this,” he says. “Then, no one was building or buying houses. There’s still a demand now. The change is in how we deliver the product.” During the crash of 2008, Accurate Development adapted by moving away from spec projects and focusing on built-to-order work. That transition served Accurate well then, and it continues to provide a strong base.
“In most ways, we haven’t changed the way we do business as a result of the quarantine situation,” Johnson says. “We have a small office, so we’re still operating on-site. The biggest change has been in the number of hours we spend wiping things down and sanitizing our design center so it’s still a safe place for our clients to meet and plan their projects.”
He says the local market for custom building has remained busy throughout the lockdown, with sales consistent and even higher than a year ago. “The biggest problem hasn’t hit us yet,” Johnson believes. “I don’t know what will happen with the supply chain. If it’s going to hit, that will happen later.” With so many materials and supplies purchased from foreign countries, including China, Johnson says consequences of potential new trade restrictions will be felt in the construction industry.
However, he adds that the market in Iowa typically benefits when bigger markets are slow.
“Because we all buy the same commodities, and commodity prices tend to follow the bigger national markets, when the bigger markets slow down, the inflation rate of commodities slows as well. We get the benefit of that even when our market has remained strong,” he explains.
“Everything really depends on how long we’re locked down,” Johnson adds. “If someone wants a house, though, it’s there. Builders are still building.”
For large-scale builders like Hubbell Homes, business has slowed significantly since the coronavirus outbreak.
“We’re probably 50% off our projections for this period,” says Hubbell President and CEO Rick Tollakson. “People are still buying houses, but fewer are out looking, and the health situation has made the buying process more difficult.”
Much like the situation during the economic downturn of 2008, Hubbell’s financial resources enable the company to withstand slowdowns in the market, Tollakson says. The real question is how the situation will play out in the long term. “We don’t know yet how layoffs and furloughs across the country will affect our industry, especially as it relates to home buying and apartment leasing. But we’ve got a business continuity committee that is already discussing the months ahead and how we at Hubbell will address those issues.”
He says that because Hubbell is involved in so many areas of the business, much of that discussion involves the transition as the quarantine ends. “Those decisions will likely be made on a case-by-case basis. We manage large apartment communities, and we can’t suddenly have every resident going in and out of those offices.”
Another factor the company is watching closely is the effect the lockdown has on the supply chain. “Some suppliers are already shutting down. We are seeing supply issues with aluminum systems used in our deck and railing applications,” he says. “Our industry is used to challenges. We see the same thing with natural disasters, so supply chain issues are something we monitor on a regular basis.”
Tollakson says he is also spending a good deal of time simply maintaining communication with his teams, including nearly 100 phone conversations a week. “Despite the fact that media hasn’t left us with any surprises, we don’t know how long the situation will continue or what its impact will be. Our field people and our trade contractors are still out in the field, but we’re working out how to bring the rest of our team back into the office to manage the day-to-day of normal operations again, whatever that looks like.”
In its 20+ years of business, K&V Homes has seen economic ups and downs. So far, Colin King has witnessed positives, even in the slowdowns.
“Prior to the 2008 downturn, we’d been focused on residential new construction and custom home building,” he says. “When the bottom dropped out, no one was buying custom homes, and we had to refocus to get through that crisis. We diversified instead of specializing. And we approached the remodel market the same way we did our custom work—offering new-home quality and features to remodel clients.”
That diversification kept K&V and its trade contractors busy during the housing crisis, and it transformed the business for the long term.
“In a lot of ways, the current situation is similar to what we faced in ’08. The trend recently had already been toward working with what you have,” he explains. “The uncertain economic situation is causing people to opt for staying where they are and upgrading their current home or buying an existing home and fixing it up.”
He adds that in some ways homeowners benefit from the unexpected free time because they now can take the time to do their research and make their plan without rushing.
K&V is following the Centers for Disease Control and Prevention and World Health Organization guidelines for sanitizing the jobsites and providing necessary supplies to maintain those standards.
“Construction work tends to be a social-distance sort of business already,” King says. “Our trade partners have their own practices, like not sharing any tools. So it’s really just a matter of reemphasizing those existing practices rather than having to create new policies.”
Although the current remodel and custom home building activity has slowed noticeably compared to expectations for the year, King says he still sees a predominantly optimistic outlook.
“We know this is temporary, but ‘normal’ after this might not be the same normal we’re used to. Still, there’s more optimism in the industry and in the public than there was in ’08.”
When quarantine guidelines were announced in March, Kimberley Development responded immediately and arranged for all office staff to work from home.
“Work is still getting done, and jobsites are moving along. Sales are at least as good as last year if not better,” says owner Bill Kimberley of Kimberley Development.
He says much of the company’s work has remained steady, with adaptations to meet new safety guidelines. However, the development side of the business is definitely off pace.
“We are probably going to be six months behind our projected schedule in that area. We are still doing engineering planning, but we are being cautious before pulling the trigger on projects until we see where we stand.”
He says that despite that the effects of the coronavirus are “nothing as bad as what we saw in 2008. That was like nothing we’d seen before: Banks quit loaning money; nobody was building or buying anything.”
Kimberley says the one similarity between the 2008 housing downturn and the COVID-19 situation is that both have been unprecedented.
“Back then, there were signs of a coming recession, but no one expected what happened. It was like the whole industry fell off a cliff and no one even saw the cliff. No one saw this coronavirus thing having such an effect either. We’re just figuring it out as we go.”
Although it’s impossible to predict the long-term economic effects of the virus, Kimberley says the lower end of the market will most certainly slow because buyers at that level are less likely to have a comfortable financial cushion.
“There may be some pent-up demand when things first open up,” says Kimberley, “if buyers are waiting out the quarantine.
“At the same time, buyers who maybe can afford to move will opt to stay put because they don’t feel as secure as before,” he says.
Ultimately, Kimberley believes the outbreak will result in permanent changes in the way we live day to day.
“Just like after 9/11, this crisis will change how we operate. We’re not going back to the old normal.”
As it was in the downturn of 2008, Ted Grob says the key to Savannah Homes’ current outlook is financial liquidity.
“That’s what got us through then, and it’s what will get us through now. When a financial crisis hits fast like this one and like the one in ’08, if you’re not liquid, it can break you. If you’re liquid, it can still hurt.”
He says Savannah had a good first quarter this year, but the possible fallout from the virus has caused him to be even more cautious.
“We have a new 25-lot development on hold right now. Every day, I sit down and think about whether to pull the plug on that project. It’s impossible to plan ahead without knowing from one day to the next what’s changing.”
Depending on how long the shutdown continues, Grob says the pace of new construction might actually return to normal fairly quickly.
“We currently have a backlog of closed sales to complete because the closing process takes much longer now with offices closed. If people are allowed to go back to work again soon, I don’t see a major slowdown in home sales.”
In fact, Grob says, the timing of the shutdown—and the eventual return to work—will be key.
“As of today, the downturn is only troubling. The 2008 crisis was disastrous. It was a bloodbath for builders—nearly half of builders in the U.S. went bankrupt.”
Grob says if the shutdown extends too long, “the cure could be worse than the disease. Those making stimulus decisions may have overreacted,” creating policies from projections based on worst-case scenarios that didn’t happen.
Grob may be pessimistic about political decisions based on fear and not common sense. However, he’s hopeful that other recent economic predictions hold true.
During Peoples Company’s recent economic conference call, economist Eric O’Keefe offered some encouragement. “He said he expects the financial effect to be like a check mark—short downward drop followed by a bigger, longer rise,” Grob says. “I hope he’s right.”