COVID-19 and Economic Uncertainty
What Does Economic Uncertainty Mean for Your Project?
Klopf Architecture has worked through two major market crashes (the “dot-bomb” in the early 2000s and the Great Recession of 2008). We recognize that today’s current economic situation is different from either of those two because this time with the Coronavirus, people are simply not allowed to work, consume, or produce many goods and services despite the demand that would otherwise be there, and no one knows for how long. Admittedly at Klopf we are architects by trade, not economists and don’t claim to be experts in this area; we also realize that the lessons of the past may not apply to today’s situation, but if you’re considering a project you may want to read on and discuss the following with your financial advisor for their professional opinion.
Looking at the economy today there appears to be two possible scenarios as of March 26. The one we are all hoping for is that economic uncertainty will clear up shortly as we all learn what COVID-19 will mean and not mean for the future of work and the global economy. The other possible scenario is an economic downturn. This article addresses the second scenario.
Will Construction Prices Go Down?
If the past serves as an example, large-scale economic pull-backs have shown to be an opportune time to consider a large project like a new home or home remodel. Large institutions often take advantage of lower costs to initiate large-scale and costly projects; during the “Great Recession” a handful of our clients who moved ahead with their projects received substantial cost savings on their builds.
On the other hand, during the same time many people decided to wait out the downturn or even cancel their projects. In retrospect those clients missed the opportunity to “buy low” eventually building their projects at a higher cost or cancelling them outright. There were a handful of fairly affluent clients who had the resources available and could well have continued their projects right through the downturn… but didn’t want to be seen as spending conspicuously. Several also suspended or canceled their projects, despite two important factors – they would’ve realized lower material and construction costs and also missed an opportunity to support the local economy with their continued spending. Although we can’t predict the future, this is our case for proceeding in the face of economic uncertainty
When Could the Lower Costs Set in, if at all?
The behavior and timing of construction costs may vary given the difference between our fast-changing current environment and the past, but in the Great Recession construction prices were slow to drop. Then as now, contractors were working on or finishing up their active projects and might even have some new project starts. Our interpretation of the Great Recession is that contractors and their subs continued to bid projects at the same levels they had been for a while after the start of the crash. They probably didn’t get any new projects, but it didn’t matter because they were already so busy. After several months passed with their workloads dwindling and no new projects to start, prices were slower to react and remained at their previous high levels. A few months after that contractors became pretty frantic to secure work even for little to no profit, dropping their prices significantly in order to keep their teams employed. Surely some contractors may read this and disagree with that interpretation, but prices did eventually fall about 12-18 months after the market crash.
Should You Continue Your Project?
Every client should make an individual decision based on their unique situation; again we recommend talking to your financial advisor as part of that decision-making process. Based on what we experienced during the Great Recession, clients may be able to take advantage of some savings by timing their build. Even if prices fail to drop it seems unlikely there are people sitting home today thinking about raising their prices. The take-away from the Great Recession was that clients who were able to move forward during the lull realized significant cost reductions. Of course past performance is no guarantee of future results.
Should You Start a New Project?
If you’re planning a new project bear in mind the timeline from hiring your architect to the start of construction can be several months to a year (or more) depending on the project scope, location, and how quickly it progresses. Continuing or even starting a project during the beginning of a downturn could mean that by the time your project plans are formalized 12-18 months may have passed and you may potentially realize lower project costs. Please see How Long will Your Project Take for more schedule information. It’s possible prices may rise between now and the start of your construction project, but for the first time in a long time there’s a possibility they could go down. As detailed in What do You Need to Know about Your Budget, construction itself is by far the largest expense for your project, dwarfing all other the costs combined (the “soft costs”). Planning ahead by spending a little now to be able to build in the not-too-distant future could work in your favor.
Klopf Architecture remains committed to our clients and are interested in your project as our employees engage in social distancing, working creatively and remotely from home. We hope to continue working with you, or if you’re looking for an architect, to be considered for your team.