Introduction
Since the advent of the COVID-19 pandemic and our varied responses to it, it has become commonplace to hear people talk about an anticipated “post-COVID” world or, more frequently, the “new normal.” Both characterizations seem to imply that we’ll have made the transition from one status quo to another. But it is important to remember that change was constant before COVID. If anything, the pace of change is likely to accelerate once we move on from pandemic response mode. There will be no new normal. There won’t even be a “next normal.” There will only be change, at an ever-accelerating pace. This acceleration will demand new applied skills for success. Paramount among these will be agility, which we define as not just flexibility in terms of our response, but the ability to respond quickly.
The real estate and construction industries have proven more resilient than most. This article presents our evidence on this point, based largely on our survey of 107 industry professionals, complemented by more in-depth discussions with industry sector leaders. Although the focus was on real estate, design, construction, and buildings operations were each discussed extensively. The sample composition (detailed in the Appendix) included C-suite, executives/directors, and managers across companies of all sizes (defined by number of current and planned projects). Almost 60% were real estate owners with the remainder real estate developers. The majority were working in multifamily housing and commercial/office, but industrial, retail, senior living, and data centers were also represented.
Summary
The pandemic has imposed enormous costs on society; yet it’s also true that we have learned from this adversity. Our research results support the conclusion. The real estate industry has been forced to cope and, in turn, this has honed its ability to respond quickly, effectively, and creatively to changes necessitated by the pandemic.
There has been a fundamental shift in how human beings live, work, and play. The built environment must shift in response. The smartest and most adaptable in the real estate world are making this happen.
There has been a fundamental shift in how human beings live, work, and play. The built environment must shift in response.
Direct Impacts of COVID-19 on the World of Design and Construction
Shutdowns
Not surprisingly, 60% of survey participants have experienced short-term shutdowns of projects. What may be more salient is how many firms experienced scheduling delays due to supply chain disruptions, also 60%—a significant number. Less than 20% have seen long-term shutdowns or cancellations.
Heightened Personnel Safety
As the graph shows, heightened personnel safety concerns during construction prompted some different approaches:
- 7 in 10 survey participants have used personal temperature checks on-site in order to limit access to the jobsite by unhealthy people.
- To ensure that safe practices are maintained on-site, just over half have used more AI and 4 in 10 more wearables or IoT sensors.
- To help limit the damage in case of an infection, 45% make use of contract tracing.
With the growth in emphasis on safety and health, the trend toward limiting work on-site has gained momentum, with just over half employing industrialized construction procedures. This is a significant finding as there is early design and construction planning, and upfront costs to consider with making such an investment.
Increased Costs
Incremental costs triggered by COVID-19 have taken a significant bite out of budgets. Almost two-thirds of participants saw between 6% and 15% of their budgets go to unplanned increased design fees, construction fees, or contingencies caused by their response to the pandemic.
While unplanned construction costs due to disruptions were prevalent among our survey participants (54%), two types of design-related costs were also fairly widespread: unplanned design fees (49%) and unplanned construction costs related to design changes (46%). When we net the figures along construction and design-related lines, we find that 92% experienced incremental construction costs and 70% experienced incremental design costs due to COVID-19.
Need For Flexibility in Design
When changes are forced, what flexibility factor is most valued—speed, cost, or quality? Force rank responses differed between construction and design processes. For construction, quality was seen as most important by a 41% response. For design, the speed of incorporating changes was regarded as most important by a comparable 40% number. Costs are seen as most important least often, with less than 30% ranking cost flexibility in the top spot for either design or construction processes.
In fact, the most telling group of participants may be the 4 in 10 who’ve had to deal with design changes as a result of the pandemic. When a design change is forced on a project, it can be the spark that not only demands more agility, but also ignites some real creativity. And so next we’ll look at how some companies are viewing the need for changes in design as a result of COVID-19, and how some of the most creative are responding.
When a design change is forced on a project, it can be the spark that not only demands more agility, but it can ignite some real creativity.
Reversion to Pre-COVID Practices (or Not)?
Of survey participants, 8 in 10 anticipate that customers’ needs and behaviors will return to something resembling “normal” within two years. Only 1 in 10 sees changes lasting indefinitely.
A leading Chicago multifamily real estate development firm offers a “reversion to the mean” view. As an example, they explain that nothing has changed in terms of what people want from an apartment unit: more space, more outdoor space, and room to work. As a result, they are resisting becoming locked into what they see as designs that will not be relevant post-pandemic.
Preparing For the “or Not”?
Yet while the majority share expectations of a return to normal, they are preparing for something different. In fact, they are preparing for a world in which the possibility of a pandemic event is always just around the corner. Of our survey participants, 96% say they have either made, are in the process of making, or are considering at least one design change as a result of COVID-19. Agility (the ability to respond rapidly and flexibly) has become a virtue unto itself—incorporating the anticipated adjustment necessitated by potential future events into design, construction processes, or building operating needs. This appears to be a significant “lesson learned” from the pandemic.
The most widespread specific design changes include:
1) more generous spacing to allow for social distancing (76%); 2) wellness screening (67%); and 3) virus resistant or easy-to-clean surfaces (68%).
One real estate investment firm is systematically investigating the most effective wellness practices through partnerships with institutions like the Mayo Clinic, Well Living Lab, and the University of Minnesota. The firm and its partners are also studying the role of HVAC systems in transmitting the virus. The findings will likely be meaningful to the 64% of participants who say they’re implementing better air filtration as a response to COVID-19. A leading construction firm is recommending increased use of outside air in building HVAC systems.
The Future of Office
In the office space sector, meanwhile, it is uncertain in which direction demand will be pushed in the aftermath of the pandemic. There are competing forces at play. One point of view holds that demand will increase as each employee requires more space per person. As one interviewee told us, if work culture is really based on collaboration, that will be the magnet that will keep demand intact long-term.
Another view maintains that remote work will become more prevalent, reducing the demand for office space. No matter which scenario becomes reality, all agree that flexibility is key for the future. And of course, the importance of agility is elevated by uncertainty. By their very nature, co-working spaces offer one flexible solution, as remote workers see the occasional need for true office space.
One interviewee involved in co-working told us that construction never slowed down, and that there are good tailwinds for flexible office space. But even if there is a return to the office, flexibility will be required. One office developer described their approach of using less permanent infrastructure (e.g., fewer fixed glass walls versus movable partitions; modular designs). And of equal importance to flexible office design are health and wellness-centric designs—including a focus on biophilic designs and touchless technologies.
Adapting to Changes in Our Homes
In order to obtain greater insight into how the pandemic is affecting multifamily developers, that group was asked about three additional design changes. Among the features shown in the graph, high-speed Internet easily dominates, as the backbone for work from home, online shopping, social media, entertainment, and—increasingly—much of day-to-day activity.
The Ripple Effect on the Data Center Market
Yet while the demand for high-speed Internet is rising, the industry faces challenges to build data centers fast enough to keep up. Not only is data center expansion driven by technology adoption, by almost forcing a virtual work environment, COVID has accelerated the growth. It can be a challenge for builders to normalize design changes triggered by COVID (such as data halls with more dividers, enhanced air filtration, and automation and technology to allow for a lower body load). This growth has also created procurement issues for landlords. Firms like Microsoft, Google, and IBM are chasing Amazon Web Services in this space and many in the sector suggest they will have to triple capacity in coming years.
Paying for Agility
Firms in our survey were asked about whether they would be willing to pay a premium for a designer capable of implementing substantial design changes. Not surprisingly, the degree of openness to such an investment changes when projects get to crunch time. (See the graph below.) 80% of participants would be willing to pay a premium of 5% or less for such a designer during schematic design or construction documentation. Less than 30% would pay 10% or more. Yet during actual construction, willingness rises to almost 50% who are willing to pay 10% or more for such a designer.
Conclusions
What will be really important moving forward will be agility—the ability to react to change quickly and effectively.
It is very clear that COVID has resulted in disruptions to both construction and design in the real estate and construction industries. In some cases, these disruptions have led to an acceleration of already established trends, such as the growth in data centers, or industrial growth driven by e-commerce. Several firms have demonstrated some unprecedented creativity in response. Yet what will be really important moving forward will be agility—the ability to react to change quickly and effectively.
Danielle Dy Buncio is the co-founder and CEO of VIATechnik, a consulting and implementation firm transforming the real estate and construction industry through the digitization of design, construction, and operations of buildings and infrastructure. Danielle and the VIATechnik team are spearheading advancement of digital twins, BIM, Virtual Design & Construction (VDC), Virtual Reality, Augmented Reality, and Artificial Intelligence. Danielle serves on the Board of Directors for Ryan Companies US, a $2B Integrated Real Estate Development, Construction, and Design firm and J.F. Brennan, a 100 year-old firm specializing in marine and heavy civil construction. Prior to founding VIATechnik, Danielle worked for general contractors in Silicon Valley, Sydney, and Chicago. As a civil engineer and a LEED Accredited Professional, she has extensive commercial building, heavy civil, and marine construction experience. She holds a bachelor's degree in Civil Engineering from Stanford University and an MBA from the Kellogg School of Management at Northwestern University.
Gregg Young began his real estate career in the Dallas office building division of Trammell Crow Company. As a principal partner, he helped design and oversee 7 million square feet of new office development. The TCC Board later asked him to found Corporate Services, a separate business line which offered TCC’s development, management, and financing services to Fortune 500 corporations. After leaving TCC, he co-founded and served as chief executive officer of a privately held investment and asset management firm overseeing a three million square foot portfolio. Most recently, Gregg served as the Chief Investment Officer and Chief Operating Officer of a large private developer in Los Angeles. Gregg earned a bachelor’s degree magna cum laude with an emphasis in urban economics from Dartmouth College and an MBA degree from the Stanford Graduate School of Business. He serves on the Stanford Real Estate Council.
Denise Akason is a faculty member of the real estate program at Northwestern University’s Kellogg School of Management, which she began 12 years ago, after over 20 years of practical experience in the commercial real estate industry. Her teaching includes sustainable real estate development, real estate technology, finance, development, and investment. From her industry experience, she has deep knowledge of real estate finance, leasing, lending, and distressed properties, and litigation. Denise has authored case studies in real estate finance, development, and investment housed in both the Kellogg and Harvard case collections; recruited and maintained a 23-person Advisory Board of C-level real estate industry professionals; raised significant funding for the Kellogg real estate center, and developed and executed an international Real Estate Venture Competition from 2014 to 2019.
