Insight

COVID's Lasting Impacts on Construction and Real Estate Trends

COVID's Lasting Impacts on Construction and Real Estate Trends

Camden Betz

Camden C. Betz

August 26, 2020 10:04 AM

Co-written by H. Arthur Bolick

The COVID-19 pandemic is impacting every facet of the economy, including commercial construction and real estate. While the depth of some of the impacts may not be known for months, if not years, there are several emerging trends shaping these industries now.

Construction Financing Issues

In the early days of the COVID-19 pandemic this spring, many companies looked at stopping, or at least pausing, construction projects due to the uncertainty about the economy. Many projects remain paused as owners continue to worry about their long-term viability or if there is demand for office or retail space when so many businesses are closed or people are working remotely.

A survey conducted by the Associated General Contractors of America (AGC) in June found that 68% of contractors had seen a project canceled as a result of the COVID-19 pandemic; 48% saw a project that had begun before the pandemic halted.

While some projects were paused to meet with shelter-in-place orders in states and cities where construction was not deemed essential, financial considerations also were a major concern. More than one-third of projects were stopped because of a loss of revenue to pay for the project, whether that be from lenders, investors or government revenue such as taxes.

Under many contracts, if an owner decides to pause construction, it will ultimately be responsible to pay the contractor for the delay. Similarly, if an owner cancels a project, under the standard American Institute of Architects (AIA) contract documents, the owner will be responsible for a termination fee or the contractor’s lost profit on the project. With project financing also drying up, however, it may be uncertain where that funding will be coming from.

With projects on pause, banks are also seeing an increase in defaults on construction loans. Construction loan delinquencies at U.S. banks climbed 23.8% during the first quarter according to the Standard & Poor’s Global Market Intelligence Report. Anticipating this, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES) passed by Congress made it easier to modify construction loans. Under the CARES Act, an owner may qualify for a forbearance arrangement, an interest rate modification, or a revised repayment plan. The CARES Act also provides that any loan modification does not constitute a reportable troubled debt restructuring (TDR) or a default, and therefore will not negatively impact the credit of the borrower.

Construction Supply Chain Issues

One major challenge impacting still ongoing construction projects is difficulty in getting the needed materials on time. During the peak of COVID-19 shut downs this spring, many producers of building supplies either closed completely as they were not deemed “essential businesses” by their local governments or reduced their staffing and capacity to help support social distancing efforts among employees. This has led to a shortage in numerous supplies and ongoing supply chain issues.

In June, the ACG found that 25% of contractors were experiencing project delays or disruptions due to a shortage of construction materials, equipment or parts. Additionally, 38% of respondents said suppliers had notified them or their subcontractors that material deliveries would be late or cancelled.

Depending on the materials being delayed, supply chain disruptions can impact the timing of a construction project by days, weeks, even months—time that in many cases cannot afford to be lost as contractors often face tight deadlines for delivering projects.

To help minimize disruption, contractors should request weekly updates from suppliers on the availability of necessary materials. A contingency plan for obtaining materials that may face shortages or delays should be developed. Contractors should also provide updates, in writing, to their clients both on potential supply chain issues and the steps that are being taken proactively to mitigate those risks and, if needed, look to renegotiate potential changes to the project completion schedule.

While it is generally the responsibility of the contractor to ensure a project is completed on time, there may be some contractual remedies for unexpected supply chain delays caused by the COVID-19 pandemic. For example, many contracts contain force majeure clauses or other language around impacts arising from circumstances that could not be foreseen or outside of the control of either party involved in the contract. Often these clauses call for an extension of time to complete the project but may not change the payment terms.

Lease Issues

The pandemic is also triggering force majeure clauses in commercial leases. A June bankruptcy court ruling in In re: Hitz Restaurant Group offers some guidance to landlords and tenants seeking to enforce force majeure language in their leases.

Hitz Restaurant Group, which operates a number of restaurants around Chicago, filed for bankruptcy on Feb. 24, 2020. One of its landlords, Kass Management Services, Inc., asked the court to require Hitz to pay rent due under the lease even after filing for bankruptcy. Citing force majeure language in the lease, Hitz argued that it was excused from the rent obligation as a result of the executive order prohibiting on-premises consumption of food and beverages in restaurants issued by Illinois Governor J.B. Pritzker on March 16, 2020.

The court ruled that Hitz had to pay its full March rent, since it was due before the executive order was issued, but the obligation to pay rent thereafter was reduced in proportion to the ability of Hitz to generate revenue. Based on Hitz’s estimate that 75% of the restaurant was unusable due to the executive order, Hitz only owed 25% of its rent obligations for April, May and June. The court also rejected the landlord’s argument that Hitz could not enforce the force majeure clause because it did not apply for a Small Business Administration loan to meet its rent obligations.

In reaching its decision, the court found the force majeure clause in Hitz’s lease unambiguously applied to rental payments and the executive order was the cause, at least in part, of Hitz’s inability to pay rent because it restricted the restaurant to take-out, curbside pick-up, and delivery.

Although the Hitz decision is not binding in other jurisdictions, other courts may use a similar analysis for businesses required by law to shut down or reduce operations during the pandemic. Tenants should review their leases to see if the force majeure clause specifically references governmental orders and allows for excused performance of lease obligations, including payment of rent. For landlords, the Hitz case is a reminder to carefully draft force majeure clauses to allow for more time to pay rent, instead of excusing payment altogether or to include express language that force majeure does not apply to rent.

Regardless of how long the COVID-19 pandemic lasts, or how long the residual economic effects linger, it is likely this pandemic will create a lasting impact on the commercial construction and real estate market. What those changes are remains to be seen, but it will be vitally important that contractors, building owners and tenants more carefully consider things like force majeure clauses and their potential impact on contracts long into the future.

Related Articles

Sharpening the Sword: What You Need to Know About CASPA


by Eric B. Smith

How the Contractor and Subcontractor Payment Act (CASPA) can radically change the stakes of how you build. Learn what CASPA means for your construction projects and contract disputes.

How CASPA Impacts Commercial Real Estate

Building a Greener Future on Unsolid Ground


by William S. Thomas

As climate change only intensifies, natural disasters are becoming more frequent and shifting how construction legal professionals conduct litigation.

Mutli-level house in the process of being built

4 Essential Steps for Commercial Real Estate Due Diligence


by Best Lawyers

Due diligence in real estate is essential for all parties. Best Lawyers walks through the key steps of effective due diligence in commercial real estate.

Animated magnify glass in front of building and checklist

IN PARTNERSHIP

Heroes Among Men: How Adam Leitman Bailey, P.C. Saved Lives of the Lifesaving


by Rebecca Blackwell

When a 911 Center in New York City was put in danger, Adam Leitman Bailey, P.C. went to work against the unlawful and hazardous actions of a developer whose construction threatened the peace and safety of all who worked for the Fortune 500 company.

Danger construction site no trespassing sign on fence

A Look Ahead


by Jarred Boyer

The future of U.S. rental markets may seem uncertain as we continue to grapple with the after-effects of COVID-19, but renters and landlords alike can look toward a more hopeful few years as inflation already begins to recede and the promise of stabilization is on the horizon.

Paper houses and money sitting amongst coins and money

Under Pressure


by Antonios Roustopoulos and Sara T. Wagner

Capital markets commercial real estate is under pressure, and creativity is needed to make deals in 2023.

Two corporate employees standing near window with cityscape

The Commercial Conundrum


by Brion J. Kirsch

Even prior to 2020, commercial real estate was experiencing setbacks. Coupled with the challenges of new working environments and less need for commercial spaces, landlords are left with increasingly vacant buildings to fill. Below is a primer on how to move forward.

Pile of old chairs and office equipment with blue backdrop

Big Updates in the Big Apple


by Thomas D. Kearns and Nina M. Roket

A Post-COVID-19 update on the commercial market for landlords, building investors and retail developers in New York.

Abstract skyscrapers and buildings in multi-color

Out of the Sky: What Construction Workers Can Do if Injured on the Job


by Justin Smulison

Construction zones with unsafe working conditions have long been the sites of injuries for workers. The Perecman Firm, P.L.L.C. fights for victims in New York City and Long Island.

Advice for Injured Construction Workers

Property Rights...and Wrongs


by Steven S. Kaufman and Chad Cooper

Winning a legal battle often boils down to finding and targeting the weakest part of an opponent’s case. Four recent real estate disputes in northeast Ohio are good examples.

Strategies for Real Estate Litigation

Wearing a Hard Hat Significantly Reduces Risk of Injury, Death on NYC Construction Sites


by Michele Mirman

Construction Injury Prevention From Hard Hats

Changing for the Better


by Justin Smulison

Joseph Brophy’s Austin-based boutique firm comprises some of the most talented and experienced civil litigators in Texas.

Betting on Finance, Civil Litigation Success

Teamwork and Strategy


by Justin Smulison

In 2018, Block O'Toole & Murphy continued to secure multimillion-dollar results for injured victims and workers.

Block O'Toole & Murphy Gets Results

When the Levy Breaks


by Warren Friedman

Tariffs against China on construction materials are capricious, unpredictable, and often spectacularly ill-timed. How can the industry prepare?

How Tariffs on China Hurt U.S. Construction

In the News: Georgia


by Nicole Ortiz

A summary of newsworthy content from Colorado lawyers and law firms.

In the News Georgia 2018

Trending Articles

Introducing the 2026 Best Lawyers Awards in Australia, Japan, New Zealand and Singapore


by Jennifer Verta

This year’s awards reflect the strength of the Best Lawyers network and its role in elevating legal talent worldwide.

2026 Best Lawyers Awards in Australia, Japan, New Zealand and Singapore

Revealing the 2026 Best Lawyers Awards in Germany, France, Switzerland and Austria


by Jamilla Tabbara

These honors underscore the reach of the Best Lawyers network and its focus on top legal talent.

map of Germany, France, Switzerland and Austria

Effective Communication: A Conversation with Jefferson Fisher


by Jamilla Tabbara

The power of effective communication beyond the law.

 Image of Jefferson Fisher and Phillip Greer engaged in a conversation about effective communication

The 2025 Legal Outlook Survey Results Are In


by Jennifer Verta

Discover what Best Lawyers honorees see ahead for the legal industry.

Person standing at a crossroads with multiple intersecting paths and a signpost.

The Best Lawyers Network: Global Recognition with Long-term Value


by Jamilla Tabbara

Learn how Best Lawyers' peer-review process helps recognized lawyers attract more clients and referral opportunities.

Lawyers networking

Jefferson Fisher: The Secrets to Influential Legal Marketing


by Jennifer Verta

How lawyers can apply Jefferson Fisher’s communication and marketing strategies to build trust, attract clients and grow their practice.

Portrait of Jefferson Fisher a legal marketing expert

Is Your Law Firm’s Website Driving Clients Away?


by Jamilla Tabbara

Identify key website issues that may be affecting client engagement and retention.

Phone displaying 'This site cannot be reached' message

A Guide to Workers' Compensation Law for 2025 and Beyond


by Bryan Driscoll

A woman with a laptop screen reflected in her glasses

Medical Malpractice Reform Trends in Texas, Utah, Georgia and SC


by Bryan Driscoll

A fresh wave of medical malpractice reform is reshaping the law.

Medical Malpractice Reform Trends hed

Why Jack Dorsey and Elon Musk Want to 'Delete All IP Law'


by Bryan Driscoll

This Isn’t Just a Debate Over How to Pay Creators. It’s a Direct Challenge to Legal Infrastructure.

Elon Musk and Jack Dorsey standing together Infront of the X logo

Best Lawyers Launches CMO Advisory Board


by Jamilla Tabbara

Strategic counsel from legal marketing’s most experienced voices.

Group photo of Best Lawyers CMO Advisory Board members

Changes in California Employment Law for 2025


by Laurie Villanueva

What employers need to know to ensure compliance in the coming year and beyond

A pair of hands holding a checklist featuring a generic profile picture and the state of California

Key Issues to Tackle on Law Firm Landing Pages


by Jamilla Tabbara

Identify key issues on law firm landing pages to improve client engagement and conversion.

Laptop showing law firm landing page analytics

New Employment Law Recognizes Extraordinary Stress Is Everyday Reality for NY Lawyers


by Bryan Driscoll

A stressed woman has her head resting on her hands above a laptop

Best Lawyers Introduces Smithy AI


by Jamilla Tabbara

Transforming legal content creation for attorneys and firms.

Start using Smithy AI, a content tool by Best Lawyers

As Fla. Pushes to Repeal Controversial 'Free Kill' Law, DeSantis Signals Veto


by Bryan Driscoll

The fight to transform state accountability standards may be in trouble

free kill law hed