Thoughts About the State of the California Construction Industry (As of April 17, 2020!)

The coronavirus pandemic has hit the real estate and construction industries hard, leaving many deals in limbo, construction sites on lockdown, and, unfortunately, forcing many companies to close. Many developers have postponed new construction for the time being and it is proving difficult to find financing as banks take a wait-and-see approach. For projects that were under construction before mid-March, almost all have been impacted from the top down. 

Some projects have been completely shut down by a particular jurisdiction’s public health order or because one or more workers have tested positive for COVID-19. Other projects have suffered from supply chain disruptions which have delayed deliveries of essential building materials or components. Still other projects have ground to a halt because building inspectors will not show up to inspect projects other than essential public infrastructure or low-income housing. And even those projects which are still ongoing have all been significantly hampered by social distancing requirements that make carrying out some trade work difficult or virtually impossible. Even when work can continue and workers are willing to show up, precautionary measures (such as allowing only one worker per residential unit or designating staircases unidirectional so workers are not crossing paths of other workers) have taken a toll on the means and methods of construction. Of course, even proceeding with any work whatsoever assumes that contractors can get their hands on protective gear like masks and hand sanitizer which are often required by public health orders as a precondition of continuing work. 

There is some good news on the horizon as stocks rallied today to close a second straight week of gains as investors take heart on a U.S. economic reopening plan. Many developers are cautiously optimistic that stalled construction projects will resume during the early summer. Some lenders are moving forward with construction loans even though timelines for breaking ground may be a moving target. It was recently announced that Hony Capital would pay $1.2 billion for the incomplete, highly-anticipated mixed-used Oceanwide Center project in San Francisco. It was also announced earlier this week that Uline, a major distributor of shipping, industrial, and packaging materials, signed a lease with REDA and Clarion Partners to occupy an under-construction 1 ? million square-foot industrial facility in Ontario. There are many more stories like this which show that owners and developers are looking to the future. 

Notwithstanding some of the “good news,” some developers and lenders recognize that some projects might benefit from a contractual suspension and that others may require a termination, perhaps to restructure the deal when the market turns positive (and perhaps construction costs decline).  And many major lessees/tenants are reexamining construction budgets, tenant improvement allowances and expense caps since pre-COVID-19 construction budget pricing and the parties’ allocation of costs will invariably be influenced by the current crisis. A tenant responsible for all costs associated with its new premises buildout over a stated dollar amount per square foot, for example, does not want to be caught with its pants down given likely budget increases.

Safeguarding Against Risk and Protecting Position

Given the various shelter-in-place order still in force and the ever-increasing list of issues between construction lenders, owners, lessees, direct contractors, subcontractors, and suppliers, many are trying to find real-world business solutions (rather than legal solutions) to move projects forward --- both in terms of physical construction and project financing from the top down. 

Of course, that does not mean that all parties in the chain of construction are not proactively taking steps to manage risk and safeguard their legal positions. In fact, you have likely received the many newsletters and webinar invitations from the leading industry groups about, for example: building a delay claim (or defend against a delay claim, as the case may be); passing along price escalations; using force majeure provisions in your contract to defend against breach; steps to safely suspend a project; handling a positive COVID-19 test on your project; demanding assurances regarding project financing; the law of impossibility and impracticability; preparing construction inefficiency and productivity claims; securing payment claims with liens, stop payment notices, and bond claims; mitigation of damages; and proper project termination.  

When the dust settles, those that have taken proactive steps to mitigate risk will find themselves in a better position than those that didn’t.  Sharpening elbows? Maybe. Ensuring survival through the COVID-19 pandemic? Absolutely.

California Public Health Orders (as of April 17, 2020)

Hot off the press, here are some new public health order updates at the County level throughout California:

• Colusa County: While Colusa County’s updated order (issued 4/10) follows similar ones in the Bay Area that provide a detailed list of what types of construction are “Essential Businesses” that are exempt from the business operations cessation requirements, they are the first to include the broader “carve out” that “construction of new housing” is one the exempt construction activities.
• Imperial County: Followed Riverside and San Bernardino by making face masks REQUIRED when leaving a residence.
•  Mono County: though it has never issued its own Shelter in Place Order, and thus defaults to the State Order, Mono County did order effective April 13, 2020 that all essential workers wear face masks while working.
• Placer County: Updated order on April 10, 2020, added the requirement that Essential Businesses Comply with the Social Distancing Protocols outlined in the Order and provided in Appendix A.
• San Joaquin: Updated order on April 14, 2020, added the requirement that Essential Businesses Comply with the Social Distancing Protocols outlined in the Order and provided in Appendix A.
• Sonoma County: Effective April 17, 2020, all persons shall wear facial coverings before they enter any indoor facility besides their residence, any enclosed open space, or while outdoors when the person is unable to maintain a six-foot distance from another person at all times.
• Sacramento’s Recent Order (while it already previously included construction as “Essential Infrastructure”) also now lists “Construction” --with no carve outs-- as an “Essential Business.” It also requires Essential Businesses to implement Social Distancing Protocols.
• San Bernardino followed Riverside’s footsteps and is REQUIRING masks when leaving your residence.
• Ventura County issued an updated order on 4/9 that added real estate as an “Essential Business.” Also requires Essential Businesses to implement Social Distancing Protocols per the Order.

“Service providers that enable residential real estate transactions (including rentals, leases and home sales), including, but not limited to, real estate agents, escrow agents, notaries, and title companies, provided that appointments and other residential viewings must only occur virtually or, if virtual viewing is not feasible, by appointment with no more than two visitors at a time, both whom must reside within the same household or living unit, and one individual showing the unit (except in-person visits are not allowed when the occupant is present in the residence).”

•  Los Angeles County: On April 10, 2020 the County extended its shelter in place orders through May 15, 2020.

1. Importantly, the Order also added the REQUIREMENT that an owner, manager, or operator of any facility that is subject to this Order MUST consult the Los Angeles County Department of Public Health’s website DAILY to identify any modifications to the Order, and is required to comply with any updates until the Order is terminated. It provides this link: https://www.publichealth.lacounty.gov/
2.  It also added the requirements that as of April 16, 2020, Essential Businesses Comply with the Social Distancing Protocols outlined in the Order, and they must be substantially in the form attached to the order (Appendix A to the Order).
3. The LA County Order also includes as an exempt Essential Business "construction, which includes the operation, inspection, and maintenance of construction sites and construction projects for construction of commercial, office and institutional buildings, residential and housing construction.”
4. Face coverings are now REQUIRED when out of your residence. Note: the introduction to the order says face coverings are required when visiting essential businesses, but the actual language of the order is that persons are ordered to practice social distancing, which is now defined to include “wearing a cloth face covering while out in public when in contact with others, not including members of a single household or living unit.”

Final Thoughts

To varying degrees, each of us are experiencing anxiety and uncertainty as we deal with the trials and tribulations of the current business and legal environment. Remember to keep perspective as many have fought (or are currently fighting) a life or death battle. Although many of us will not be taking our planned spring break vacations or spending time with loved ones, I hope you all have a restful and peaceful weekend, finding ways to spend quality time with family and friends in this new virtual world. 

Let us hope to find the deeper meaning of this challenge that is facing each of us, our families, our friends, our colleagues, and the whole of humanity.

Be well and stay healthy.

---CN