For apartment developers in the Twin Cities, the past few years have been the best of times. But a government-ordered shutdown that takes effect Friday to thwart COVID-19 could slow inspections and shutter job sites has developers on edge and scrambling to keep projects on schedule.
“We have not seen a slowdown in construction yet,” said Kent Roers, co-founder of Roers Companies, which develops and manages apartment buildings in the Midwest.
“But I know it will come and I assume we will see it next week.”
The company now has nine projects under construction, most of them in the Twin Cities. Roers says he’s already expecting a decline in the number of projects that will break ground, and that the stay-at-home order will slow leasing and construction, most likely because of interruptions in the supply chain. “Workers can show up, but can they get the supplies they need to get their jobs done,” he said.
As developers speculate about how many planned projects won’t break ground, the focus is on keeping job sites open while implementing complex new job site practices aimed at protecting the health and safety of workers.
Putting projects on hold isn’t an option, said company co-founder, Brian Roers. By the time construction is underway, developers have already spent significant amounts of money and are committed to construction loans.
“We’ve been through this before, and what we’ve learned is that you keep going and figure it out as you go along,” he said. “If you put the brakes on a project, the wheels come off.”
The stakes are enormous, for developers and the broader economy. Apartment construction led the building industry out of the recession and has since remained the dominant sector. Last year, $4.8 billion in residential construction happened throughout the 13-county metro, according to Dodge Data and Analytics. That was $1.4 billion more than commercial construction (retail, hotels, etc.) and a 7% increase over the previous year.
Another 30,000 units are the development pipeline over the next three years in the Twin Cities, exceeding the 27,000 units that were built during the past seven years, according to Marquette Advisors. Most of those new units are earmarked for the suburbs, with several slated to be built in downtown Minneapolis and a handful of inner-ring suburbs.
The Roers brothers say they’re taking the situation day by day, and getting more involved with the general contractors they hired to build their projects.
Social distancing is reshaping worksites. At the Maven apartments in Burnsville, subcontractors are being asked to employ a raft of strategies aimed at eliminating contact with one another. Because parking is often limited at job sites, workers typically carpooled. Now, they’re being asked to drive to job sites on their own, and only a couple workers are now allowed in one room. Roers said additional portable toilets have been delivered and cleanings happen three times a day rather than every three days, and they’ve added more sanitary hand wash and washing stations. Group crew lunches are out; out-of-town workers are no longer allowed to share lodging.
“This won’t be a forever thing, we will keep building,” said Roers.
Developers are most worried about what happens if the dozens of mandatory inspections are curtailed, forcing them to stop construction. The stay-at-home order allows communities to determine which employees are considered essential, so it’s unclear how the situation will evolve.
Though inspections haven’t yet been an issue in the Twin Cities, the company has been unable to order final inspections for a project the company developed in Milwaukee, which is already subject to a statewide shutdown. The first three floors of the 117-unit building are already occupied, but the company has been unable to schedule walk-throughs for the remaining two floors and residents are waiting to move in. So in the Twin Cities, Roers is already studying ways of conducting virtual inspections.
With an economic contraction underway and the unemployment rising by the day, rental property owners are still trying to come to grips with its impact on demand for rentals. Before the COVID-19 crisis, the rental market in the Twin Cities was one of the healthiest in the nation with lower-than-average rental vacancy rates and steady increases in rents. With so many people out of a job, demand for rentals is expected to wane and rental delinquency rates are almost certainly going to increase.
Several apartment developers said leasing activity has remained strong, especially in suburbs like Burnsville where they’re been virtually no construction over the past decade. At the Maven, the building is still weeks from completion and is already 50% pre-leased.
Harry Melander, president of the Minnesota State Building and Trades Council, said he’s unaware of any job sites that have been shut down.
“We’re providing essential services,” he said. “But this is a moving target.”
The most vulnerable projects are those that haven’t started construction in places where vacancy rates are the highest. That includes downtown Minneapolis and a handful of inner-ring suburbs including St. Louis Park.
“At some point I assume it will happen,” said Kent Roers of an inevitable decline in construction. “Projects will be slowed down or hindered and developers have a lot of expenses and not a lot of revenue to pay for it.”
George Sherman, a Twin Cities-based developer who has projects under construction in four states, said some projects are already facing delays, but he’s optimistic that housing will be resilient.
“I’m uncertain about the immediate market, but long term the market is positive,” he said.
He said in St. Paul building plan reviews are already being done remotely, and in Minneapolis plans that aren’t close to being “building permit ready” are being delayed.
“But there is still a pipeline,” he said.
His company is adjusting its project timelines for residential projects by 60 to 90 days, but that could change in the coming weeks.
It’s completely reality, though, for hotel and retail projects. He’s scrapped plans for two hotel/commercial projects and has already gotten calls from other developers who want him to take over hotel projects they don’t want to pursue. For now, he’s taking a pass.
“No one will take on retail or hotel projects right now,” he said. “They were tough before, but if you walk in with a retail, restaurant or hotel project I think lenders will just plain off say we’re not doing them now.”