'As strong as ever': How COVID has affected construction clients
Insurance must step up to ensure the construction sector will thrive as contractors face new opportunities and challenges.
A casual observer might think the U.S. construction market during a global pandemic would be in a state of disrepair. This is far from the case. The past 18 months have certainly presented challenges — from COVID-19 restrictions to mass housing uncertainty — and it hasn’t been smooth sailing. But when assessing the emerging opportunities and risks arising from the transformation in consumer demand, it’s clear the construction market is not stagnating but is as strong as ever.
There was already a housing shortage prior to the pandemic, but what has evolved are the needs of the consumer. The pre-COVID workforce saw just 17% of the U.S. population working from home. Today it is 44%. This trend does not appear to be temporary, with many companies and their employees embracing this cultural shift, enjoying the benefits of a hybrid work-life balance. As such, no longer tethered to the confines of commuter areas, the millions sent to work from home are now considering their options. For many, this means leaving the big city.
For the past decade, the focus had been on building in downtown urban areas, predominantly apartments, high-rises and multifamily complexes. But as homes became offices, the space available in these properties became untenable for many. In assessing the needs of the family, up to 37% of those working from home are now looking to the suburbs and rural communities.
According to the National Association of Home Builders, construction in suburban areas and small cities experienced a 15% rise over the past year, and we are seeing a huge migration of people from areas like New York and California to Texas, Arizona, Colorado and Nashville, to name but a few. There’s now a competitive atmosphere in these areas, and construction is in overdrive to keep up, with a projected 1.1 million single-family homes being built this year.
This has given rise to single-home rental communities, with 200 to 400 units of standalone two- to three-bedroom homes built solely for rent. Concurrently, there has been an increase in the development of accessory dwelling units — colloquially referred to as “in-law suites.” This increasing trend of building a rentable secondary dwelling on one’s property is seen as another possible answer to the growing housing shortage.
However, in the face of growing demand, there are also delays and challenges. From the scarcity of shipping containers and a shortage of truckers to the pandemic restrictions placed on worksites, there has been a marked impact on the supply chain.
The inflation of basic materials costs brings its own set of challenges for clients and insurers. For instance, if there is an ongoing claim involving a building that requires significant repairs, it is likely the cost of material needed has increased drastically from the initial replacement value the insurance company reserved. With lumber prices up over 250%, this presents a new set of challenges for carriers from a claims perspective.
We are also seeing contractors deeming it more cost-effective to pay clients to get out of contracts, as the price they anticipated to complete a given project no longer reflects the current market rate. These developments are something our industry must monitor and respond to accordingly.
Turning to labor, we have seen a growing shortage of skilled workers. According to a recent report by Associated Builders and Contractors, construction businesses will need to hire 430,000 more workers in 2021 compared to 2020 and one million more over the next two years to meet the demand.
This causes concerns regarding not only construction interruptions but also the quality of work. With the majority of contractors looking to hire in a market struggling to find qualified tradespeople, there is a mounting concern that standards could slip as contractors may either complete jobs they would usually subcontract or hire less-skilled workers.
Permit processes are further impeding construction timelines. The city of Los Angeles, for example, was working at significantly reduced capacity — a reported near 50% drop in staff — leading to hold-ups in the issuance of permits and building sign-offs.
While construction is working to respond to the shift in consumer demographics and unrelenting demand, delays have been unavoidable. At Argo, we have embraced a flexible approach while receiving requests from brokers for extensions at three to four times the normal rate. The broker and insurer relationship is therefore paramount as we navigate a unique market landscape — agility has never been more essential when aiding our clients.
While the construction market hasn’t been left untouched by the ramifications of the global pandemic, contractors are faced with a thriving market with burgeoning opportunities. It’s up to the insurance market to support clients, develop relevant solutions and ensure the construction market continues to thrive.
The opinions expressed here are the author’s own. This article is printed here with permission.
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