Leveraging collective wisdom to forge the puzzle pieces of recovery

Posted by: JZMK Admin | 03/24/2020

By Eric Zuziak

President at JZMK Partners, International Planning and Architecture firm

We at JZMK Partners are fortunate to enjoy professional relationships with many home builder and developer clients all across the US. Relationships forged over 58 years in practice in the profession of residential architecture and urban planning. We have survived and thrived through many recessions and subsequent recoveries. Along the way we have learned valuable lessons. This disruption is unique. There is no proven playbook. So during this Covid-19 pandemic we have been tapping the collective minds of many of the leaders of our public and private builder clientele. Although this Covid-19 pandemic is a tragedy that we are all coping with in one way or another, we are using this time to stay safe, socially distance, work remotely, and endeavor to understand what lies before us all as a cohesive industry. An industry that provides the most basic need necessary for human survival and growth. Homes for individuals, couples, and families.

By taking the long view of this crisis and the inevitable and eventual recovery ahead, strategic opportunities come into focus for those that understand the big picture. Everyone is watching the upcoming unemployment rates in the coming weeks and months in order to determine their strategy for moving forward. No matter what those unemployment rates portend, there are opportunities ahead. Hidden in the dark clouds of economic uncertainty reside the puzzle pieces of recovery. These are some of the areas of opportunity that we are hearing from our clients and allied consultants, as they piece these puzzle pieces together…

1.   Government Assistance – Creating a floor for stability

This weekend the Trump administration announced a moratorium on foreclosures and evictions for federally backed mortgages on single-family homes. This is reassuring for the homebuilding industry, as it relates to existing conforming mortgages. A vacation from mortgage payments affords the much needed pause that the potentially unemployed homeowner will need to get back on their feet, and find employment in the inevitable rebound ahead. In the coming hours and days, we will hear of other government programs that will be targeted toward stability and recovery. Staying plugged into opportunity is critical now. Housing will inevitably be part of the stimulus package.

2.   Building Materials – Timing is everything

Approximately 30% of building materials for US homebuilding are manufactured in China. China is and will be exiting this Covid-19 crisis well before the U.S. will. There are already reports of China’s workforce returning to the factories in areas that were hard hit by the early outbreak. Including factories that produce building materials. The LAST thing that either China or the US wants right now is a continuation of a trade war. “China is now trying to repair its severely damaged international image due to its mishandling of the outbreak in Wuhan in early January,” Minxin Pei, a professor of government at Claremont McKenna College in California stated in an email to the New York Times last week. On top of that…What a lot of builders may not realize is that China has been increasing the production of steel just leading up to the Coronavirus outbreak. Steel in China translates into the manufacture of many building materials.  China is now in an oversupply position in steel. With a 45% increase in year over year inventory of Chinese steel, ships carrying some of this oversupply will be looking to offload their inventory in the US in the coming months. Deals on steel may be ahead.

3.   Construction Workforce – Hospitality shift to Multifamily?

What we are hearing is a “wait and see” position on the availability of construction labor for upcoming projects, beyond those already under construction. We believe that new hospitality construction will slow considerably as a result of evaporating hotel occupancy rates. Former hospitality sector construction workers may transition into the residential construction sector to keep food on the table. Residential construction, especially Multi-Family, will benefit from this potential shift of a very skilled workforce.

4.   Housing Crisis in California – Entitlement Tailwinds Coming?

We were in a Housing Crisis in California long before the Coronavirus appeared on the scene. Same for many other states. In the last 18 months the State government in California has been creating and implementing legislation focusing on streamlining project entitlement in order to increase the supply of much needed housing. Even among the current shelter in place order, California Governor Gavin Newsom has already amended his emergency order to designate housing construction as an “essential business” because of the state’s ongoing housing shortage. That pressure on local governments to approve housing projects will only increase in the coming months, in an effort to create the much needed housing supply and move the needle of affordability in the right direction, while providing jobs in the process.

5.   Lower Interest Rates- Good for Builders and Buyers

All builders understand this, but it bears repeating. This recession is different for the construction industry than the Great Recessions. We are not overbuilt. This time the building industry is the clear beneficiary of the Fed’s interest rate slashing moves rather than the victim of unregulated lending practices. Employed buyers will benefit from new lower mortgage rates as well. Conditions are set for rates to stay low through 2020 at the very least, fueling first time buyer purchases.

6.   Project Pipeline – Be ready for recovery

This is a relatively short term crisis, maybe 60-90 days from now. Then a recovery will begin. Keep your projects in the design and construction document phases moving forward. Many architecture and engineering firms have adopted a WFH (Work From Home) model and are moving projects forward to Bldg Dept Submittal status. If you do, AND you are focusing on the more affordable price ranges of your markets, you will be well positioned to leverage more affordable construction costs on the backside of this crisis, AND you will be able to deliver homes to a market that will undoubtedly want to capitalize on historically low interest rates. It’s a win-win. Opportunity exists in all crisis. Buyers know this. Building and Planning Departments are open for business. Be ready to pull permits when the crisis is over.

7.   Leverage Sales Technology – Now more than ever

Huge advancements in tech are now allowing builders to market their homes to buyers online, in full immersive VR. Ask your architects to convert their digital 3D models into presentation level VR experiences NOW, and get those up on your websites quickly. Also consider pivoting to VR models for current projects in the pre construction pipeline. Potential buyers have lots of time in their houses to virtually walk your models, and they will more likely be doing this for quite some time before they will consider walking actual models again. This is especially important in the tech savvy First Time Buyer market.

8.   What to build in the New Reality? – Smaller is better (and more affordable)

Historically speaking, in all recession recoveries that have impacted residential sales, smaller more affordable homes led the recovery in sales. First time buyers will be looking for small homes they can afford. Small homes they can start a family in. Small homes that create a strong sense of community. Small homes that don’t feel small. Move down buyers who have had their retirement savings hammered by this Covid-19 Recession will also be looking for smaller more affordable but well designed homes they can retire in. Apartment renters will be looking for affordability. That affordability translates into smaller yet better designed apartment floor plans. Social distancing will have an impact on renter attitudes in the future. Buildings that have fewer units per circulation core will be perceived as favorable. All three of these market segments will be well served by smaller, better designed homes that create a healthy sense of community without the perception of density. Focusing on healthy living environments, edible gardens as amenities, and access to community open space and activities. These types of communities will not only be economically sustainable for their residents, but will be economically sustainable for their home and community builders as well.

9.   Paradigm Shift in How We Work

The Work from Home Model (WFH) will undoubtedly encourage new home technologies related to Virtual Connectivity, Live/Work, Consultancies and Sole proprietorships. Most of us have already seen the stronger reliance on digital technologies and remote communication systems that keep our businesses going. This will inevitably provide for new housing design adaption and a new market buyer segment related to a more independent work from home lifestyle. A resultant WFH reduction in traffic impact may also provide for a significant improvement in traffic congestion, vehicle trip reduction, improved air quality and help alleviate the project approval issues related to transportation impacts. Even a modest 1%-2% reduction in traffic use is substantial as it relates to our highway congestion and flow of traffic. The WFH model will open many new opportunities for future lifestyle improvement. We are currently developing new housing prototypes that will address this future need.

Remember that calm analysis of the days ahead, combined with insightful market research, and robust communication among our industry members will lead to discovering the correct path ahead. A path that will lead to creative solutions for tomorrow’s homebuyers and renters. How we respond now will be critical to our success. Please share your thoughts with us as we all move down this path to recovery together. We are here to listen. We are here to collaborate. We are here to create solutions.

Stay safe, stay healthy, and stay connected.

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