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). Today we face increasing construction costs and materials shortages that may be temporary (caused by the enduring effects of Covid and fallout from the war in Ukraine, perhaps), or may be permanent (caused by the older housing stock we have, the strong economic engine in the Bay Area, and perennial forest fires destroying housing, all together leading to strong demand, perhaps). 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.

When we posted this article originally in March of 2020 we thought we might be headed for an economic downturn and potential stock market crash because of the Coronavirus pandemic. Today, in May of 2022 we see that the stock market is up quite a bit from March 2020, and the residential construction sector is still red hot, perhaps even heating up more during the pandemic as people schooled and worked from home. Costs in our industry have been increasing since about 2010 with no dips; contractors and A/E professionals who work on houses remain quite busy.

We don’t know what’s next, but it’s possible we’ll soon see an economic downturn. What if we do?

What Happens if the Economy 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 likewise received substantial cost savings on their builds.

During the Great Recession more people decided to wait out the downturn or even cancel their projects because of economic uncertainty. In retrospect those clients missed the opportunity to “buy low,” eventually building their projects at a much higher cost or cancelling them outright. Construction costs for residential work at the low point of the market were roughly $250 to $300 per square foot for our remodel projects, or about $450 to $500 per square foot for a new house. Compared to today’s prices, those numbers seems like quite a bargain!

The clients who continued their projects during the Great Recession benefitted from both lower material costs and construction costs while also supporting the local economy with their continued spending when people needed it most. 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?
In the Great Recession construction prices went down, but not right away. The behavior and timing of construction costs may vary given the difference between our current uncertain economic environment and the past, but in the Great Recession construction prices dropped about a year after the stock market crashed.

Then as now, contractors were busy right up to the crash and beyond, working on or finishing up their active projects for quite some time. They probably had some new project starts in the pipeline as well, some of which would continue to completion. There was plenty of work to keep them all busy even after the crash. Our interpretation of the Great Recession is that contractors and their subs continued to bid projects at the same levels for a while after the stock market crash. New projects probably slowed down for them or stopped all together, 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, we still saw their pricing remain at the previous high levels. It was only a few months after that when contractors became pretty frantic to secure work even for little to no profit, and finally dropped their prices significantly in order to keep their teams employed. Surely some contractors may read this and disagree with that interpretation, but whatever the reasoning, we saw project construction prices fall about a year after the market crash.

Should You Start a Project or Postpone?
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.

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. Starting a project now will likely mean one of two things:

• If the market is poised to go down because of an economic pullback, by the time your project plans are formalized and you’re ready to break ground 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. Or,
• It’s possible prices may rise between now and the start of your construction project. 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”). Should prices continue to rise indefinitely you’ll be glad you started earlier.

Klopf Architecture remains committed to our clients and interested in your project. We stayed active throughout the pandemic and are now working hybrid, both in person together at the office and creatively and remotely from home. We will be here through the next economic cycle, whatever it is, and would love to assist you with your project when you’re ready.