Coronavirus delivers first blow against Bay Area construction, economy could knock it out

Neighbors sheltering in place inside their new homes along Centre Point Drive in Milpitas sent angry emails to city officials early last week, complaining about the cacophony of construction noise across the street where a large mixed-use development was going up.

“Please drive by and hear it for yourself,” one resident wrote. “The constant, simultaneous sounds of hammering, drilling, rapid stapling, and heavy pounding!”

On Wednesday morning, the neighbors’ wishes seemingly were granted. The job site — where SummerHill Apartment Communities had started building hundreds of planned apartments and more than 10,000 square feet of retail across multiple five-story buildings — was silent, other than the occasional sound of a few shooting nail guns and swinging hammers.

But it wasn’t because city officials heeded the neighbors’ requests.

Several hours earlier at the stroke of midnight, the Bay Area’s latest shelter-in-place order kicked in, halting most construction in its tracks and sending thousands of workers home until at least May 3 in an effort to contain the rapid spread of coronavirus.

In the tech-driven economy of Silicon Valley, where over the last decade record job growth has spurred billions of dollars’ worth of new housing and commercial construction, officials say the COVID-19 pandemic could wreak a huge economic toll on the development scene.

“I believe that the development, the construction and the leasing activity will be delayed, and in some cases canceled, due to the heightened sense of uncertainty over the economic and business outlooks,” Larry Stone, Santa Clara County’s longtime assessor, said Thursday.

While the shelter order is in effect until May 3, the work stoppages could be extended well beyond that date and the ripple effects may alter the area’s landscape, he suggested.

Half-finished buildings may languish indefinitely if the financial constraints become too much for builders to bear. In other cases, parcels may remain vacant as the demand for homes and offices vanishes in an economy that’s tanking.

“At the height of the Great Recession, we had between 10 to 12 percent unemployment, we’re going to be over 15 percent if this thing lasts another three months,” Stone said.

“Some developers may very well conclude that they’re not going to proceed even when the pandemic goes away because the market has been impacted so much by unemployment and those kinds of things,” he said.

Developers say they understand the importance of social distancing, which is driving the shelter-in-place order, but argue that construction could be safely done.

“I certainly believe in the shelter-in-place and the necessary steps we’re trying to take as a community to flatten the curve, but construction of this type, I thought was a place that we could control the risks and minimize the risks,” said Robert Freed,  CEO of major Bay Area developer SummerHill Homes.

“We’ve also heard from the hundreds of people we employ on these jobs that they want to keep working, and they want to be safe,” Freed said.

SummerHill isn’t the only big developer in the Bay Area left in the lurch.

In San Jose, for example, Bayview Development Group’s Miro project — two 28-story towers with more than 600 housing units and 18,000 square feet of commercial space at 167 E. Santa Clara St. — has ground to a halt.

So has the Serif Condominiums project in San Francisco by L37 Partners, a 242-unit complex at 950 Market St. that was expected to be completed in February 2021.

And back in Milpitas, The Fields project by Lyon Living is another victim — 1,185 market-rate apartments off McCandless Drive planned to include almost 150,000 square feet of retail and a hotel across from The Great Mall. The 370 apartments in the first phases of the four-phase project are up, but only a little more than half of the 200 planned for the second phase are done.

With few other exceptions, about the only kind of construction that health officials said Tuesday would be allowed to continue involves housing projects with “at least 10% income-restricted units.”

Although the public risks in building all homes are the same, they reasoned that affordable housing would be in even more dire need long after the pandemic has passed, according to spokespersons for Alameda and Santa Clara counties.

Exceptions aside, Freed said the shelter order will hurt developers as deeply as did the Great Recession.

“I think developers and individual projects that are overleveraged, or have debt structures that are onerous, are going to fail if this goes on for any significant length of time,” he said.

“Time is never a friend of a construction project. There will be a financial hit all the way around. The clock is still ticking on the debt, the clock is still ticking on a return on equity, and the longer it goes without producing the housing, the revenue is being pushed out further into the future,” he said.

“None of that bodes well for us,” he added.

A few miles north in Fremont, SiliconSage Builders CEO Sanjeev Acharya also is wary, though hopeful, of the future.

The development company had to halt work at the Osgood Residences, a 93-unit condominium complex near a planned future BART stop.

The structure, already coated in white paint with copper, California Poppy orange and deep-red accents around the windows, is more than three-quarters finished, Acharya said.

Crews were about to install some wooden siding and other portions of the building’s facades.

“We’re hoping it’ll open up on May 3rd and we’ll be back to business to push the production through,” Acharya said.

“People want to see things built and done, they don’t want to see vacant properties, especially when there’s also a possibility of more vandalism and theft,” he added.

“We are hoping that we get past this soon and we are able to at least open up construction in a prudent manner where we keep people safe, but at the same time, get things going,” he added.

Stone, the assessor, said some financially stable developers will manage to weather the storm, but as unemployment spikes and major industries are hamstrung, there may no longer be a demand for new homes, and mortgage companies are not going to be as willing to provide loans.

“People were building and financing … because the market indicated that they could do that,” Stone said.

The value of new commercial and residential construction totaled an unprecedented nearly $6 billion of Santa Clara County’s assessment roll last year, he said.

“Go or no-go in real estate development is always based upon the market, whether it’s residential or commercial. And if the market is changing because of this accelerated crisis, then the decision making on real estate development could be altered as well,” he said.

“We’re in two crises: We have a pandemic crisis, and then we have a financial crisis, and they’re not entirely lateral. The pandemic crisis is going to end before the financial crisis,” Stone said.

“And the question is, how do you get out of that?”

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