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S.F. Developers Struggle With Construction Suspensions, 20% Slowdowns

In the Bay Area, construction projects are either completely stopped or significantly slowed by efforts to contain the coronavirus pandemic.

San Francisco

Even before Bay Area governments tightened existing shelter-in-place orders last week, social-distancing precautions made construction sites tricky, DM Development CEO Mark MacDonald said during a Bisnow webinar Wednesday afternoon.

 “On the projects where we are still able to move forward, construction is being hampered because manpower is diminished,” MacDonald said.

At one such development still underway in San Francisco's Hayes Valley neighborhood, DM Development contends with a number of workers unwilling to show up over fears of COVID-19, the disease caused by the coronavirus, and supplies sometimes not arriving.

Also slowing things are social-distancing measures implemented at the S.F.-based developer's sites, like only allowing one worker per residential unit and designating staircases unidirectional, so workers aren't crossing paths as often.

“We’re just trying to plow through and get as many workers on site as we can,” MacDonald said. “It’s really an hour-to-hour type of thing managing these projects and keeping them on the rails.” 

Oz Erickson, CEO and chairman of Emerald Fund, has heard of similar struggles in conversations with heads of general contractor giants Swinerton, Webcor and Build Group

Projects allowed to go ahead under the more stringent shelter-in-place rules — e.g. residential developments with 10% or more affordable units and certain healthcare projects — are seeing 20% slowdowns for reasons listed by MacDonald, Erickson said during the webinar. 

More important, Erickson said, are barriers to new projects getting off the ground, which may extend beyond whenever Bay Area governments lift shelter-in-place ordinances. Projects once on the verge of a groundbreaking, like Pinterest's new offices being developed by TMG Partners and Alexandria Real Estate Equities, have to wait, he said.

Bisnow Reporter Dean Boerner, DM Development CEO Mark MacDonald, Emerald Fund CEO and Chairman Oz Erickson and Bisnow West Coast Vice President Michael Guimond.

“The more important thing down the road is that a lot of the big developers are postponing starting any new construction until they find out what’s going on,” he said.

“[TMG Partners Chairman and CEO Michael Covarrubias] told me they’re certainly postponing the tennis club, which could have started as early as June, but now is postponed, perhaps to September or something like that.”

Investor and lender trepidation around most CRE property types means financing is a burden on top of government-enforced construction suspensions and slowdowns. 

“It’s very, very difficult to get financing. All the banks are taking a wait-and-see attitude,” Erickson said. “They want to see what’s going to happen before they start making significant loans for new construction projects.”

Erickson and MacDonald both expressed optimism that, thanks to shelter-in-place orders instituted relatively quickly by Mayor London Breed and Gov. Gavin Newsom, construction will resume by the summer. They said Bay Area office and residential owners are in decent positions to weather the fallout of a recession.

“Residential rents in San Francisco are being paid,” Erickson said. “We have 1,600 units, and everybody’s paying.”

Tech is also expected to buoy the Bay Area's economy. 

There may be some opportunity in the recession economists predict has begun.  

“We were buyers in 2009, '10 and '11, and a lot of people thought we were frankly crazy to be buying,” MacDonald said. “But I think there is opportunity if you can find good, well-priced deals perhaps with some distress on them, to take projects through the development process.

“Once the planning department opens up for business again, there may be fewer projects going through the pipeline, so maybe it takes a little less time to get through.”