Backorders and low supplies: Contractors look for workarounds to supply-chain issues
The coronavirus has hampered the flow of building supplies around the globe
Barry LePatner, founder of construction law firm LePatner & Associates, had an important task for workers at a major downtown residential project last week. The project was missing half of the stone it needed for its floors — stone sourced in Italy, which is under a nationwide lockdown to slow a major outbreak of the coronavirus.
“I instructed the construction managers, ‘Hook or crook, get that stone out of there and get it over here before it becomes really bad,’” LePatner said.
Contractors around the country are already seeing the impacts of the coronavirus on supply chains for building material — from shipping delays to a need to re-source products domestically. And weighing on the minds of those in the construction industry are uncertainties over how long countries will be on lockdown, how their crews might be impacted and whether project deadlines will have to be pushed out.
“You can’t have any certainty about that, and it’s going to affect schedules,” LePatner said.
Two previous similar situations — the H1N1 pandemic flu in 2009 and the SARS outbreak in the early 2000s — did not appear to have major impacts on construction sites, said Richard Branch, chief economist at Dodge Data & Analytics, which tracks the construction industry.
Still, about 30 percent of building materials imported to the U.S. come from China, making the country the biggest single supplier, according to Dodge Data. And though the share of materials coming from the country had already declined in 2019, possibly as a result of tariffs imposed by the U.S. government, a lot of raw material used to make products in other countries also originates in China, Branch said.
This means that it could be more likely that projects will see delays towards the end of their development timelines, as products like lighting fixtures or elevator controls become more difficult to source, Branch said.
“We could see a secondary impact,” Branch said.
The COVID-19 virus outbreak, which was declared a pandemic by the World Health Organization this week, originated in China in December. While new cases of the virus have slowed in that country, the flu-like illness has spread globally, infecting nearly 125,000 people. As of Wednesday, there have been almost 4,300 deaths.
China’s manufacturing sector has been hampered by efforts to contain the spread of the illness, and earlier this week the Italian prime minister instituted a nationwide lockdown of that country, where there are 10,000 cases. Wednesday evening, President Trump said he was prohibiting most travel from Europe — initially saying the ban included trade and cargo but later clarifying that it only applied to people.
“Already some lighting fixture components like LED strips and drivers sourced from China that were ordered prior to the outbreak are back-ordered,” said Leo Martin, director of construction for New York-based contractor J.T. Magen & Company Inc. He added that his firm is also seeing longer lead times on finishing materials like glass office fronts and stone coming from Italy.
“You know that when you go to Pisa for stone … you may not be able to get into the country or get their workers available to cut stone,” said LePatner.
Clay Edwards, executive vice president and partner at Chicago-based construction firm Skender, said he has a couple of commercial projects where he had to re-select flooring that had been sourced out of China. Edwards said his clients were understanding, and he was able to source the products domestically and at the same costs.
But Edwards said he can see a time in the not-so-distant future when supplies dwindle further or clients aren’t as accommodating.
“I don’t think we’ve seen the worst of it by any means,” he said.
So far, the construction experts interviewed by The Real Deal said they have not seen any immediate impacts on pricing. Shlomi Ronen, principal of Los Angeles-based Dekel Capital, said price increases are something his firm, which focuses on projects on the West Coast, is watching closely.
“That’s definitely the potential,” he said. “As things become scarce, all of a sudden [prices] begin to move.”
LePatner, the construction attorney, said the uncertainties could also mean new projects might be put on hold for one or more months — slowing the flow of work for contractors. For instance, this week a person LePatner is working with, who received four multi-million-dollar bids from contractors to build a new luxury home in Pennsylvania, put his project on hold.
“If we come back and re-open this in a month or so, we’ll be able to negotiate a significant discount,” he said. “Because that uncertainty means contractors are going to lower their prices to keep their workers busy.”
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