THE OUTBREAK HAS ISSUED A STARK WARNING TO US COMPANIES TO RETHINK AND REVAMP AGE-OLD POLICIES THAT ARE VULNERABLE TO LARGE-SCALE EMERGENCIES
The explosive spread of the novel coronavirus (COVID-19) caught the world by surprise at the turn of the decade. The World Health Organization (WHO) has declared the outbreak an international health emergency.
The outbreak is forcing industries to rethink the way they do business. Companies have been pushing new policies for increased security, business continuity and teleworking. The commercial real estate industry is far from sanitized to these impacts, but will these effects endure the epidemic?
CONSTRUCTION: THIS IS NOT A DRILL
Wuhan, China, although now infamous for being the city where the outbreak began, is a prominent producer of metal products, mechanical equipment, solar panels and electrical manufacturing. According to Cheri Hanes, a construction risk engineer with AXA XL, there are 164 manufacturing facilities in Wuhan servicing the global construction industry, including 13 plants that specifically manufacture construction materials.
The threat to the construction industry may not be detrimental since companies have been forced to source materials outside of China after President Donald Trump announced the increased tariffs on Chinese goods last year. However, as the outbreak reaches other countries, the risk of project delays are inevitable as factories shut down and supplies are shipped late or not at all. Even respirator masks are in short supply as the general public wipes the market clean of any face masks they can find.
To effectively limit these effects, companies should look to build a more resilient supply chain that can sustain more frequent disruptions by establishing alternate suppliers utilizing the interconnectivity of the world markets.
Another solution to minimize the economic impact of these project disruptions may be lie within the construction contract. A force majeure clause is a contract provision that excuses a party’s performance of its obligations under the contract when performance is impossible or impractical due to circumstances arising that are outside of the parties’ control. These clauses are common in construction contracts and offer an opportunity for the parties to plan ahead for catastrophe. Although it is still unclear whether a court would interpret the COVID-19 outbreak to be an event within the scope of the clause, some contracts explicitly list “disease” as a force majeure.
As the virus begins to slow in China, some Chinese workers are starting to return to their jobs. But even as factories reopen, they are unlikely to be fully staffed, according to the American Chamber of Commerce in Shanghai. Moving forward, the full extent of these construction impacts will be determined by the availability of alternate suppliers and the success of COVID-19 containment efforts.
HOSPITALITY: WILL THE SHOW GO ON?
Since the first case of the COVID-19 was reported in December 2019, the hospitality industry has likely had the most immediate economic impact within the real estate industry. Several conferences, sporting events, music festivals and other large-scale industry gatherings scheduled to take place in the upcoming months have been cancelled or postponed until further notice.
This has caused a pandemic within the hospitality industry. According to an Events Industry Council report, $381 billion was spent on business events in 2017, including funds to plan and produce the events and related travel, in North America alone. Often booked years in advance, convention centers and hotels rely on these events for survival.
Since airports support the ecosystems of hospitality markets, the impact goes even deeper with major companies issuing domestic and international travel bans for employees and other personal travel cancellations due to fear of exposure to COVID-19. As of March 5, 2020, the International Air Transport Association (IATA) estimates between $63 billion (in a scenario where COVID-19 is contained in current markets with over 100 cases as of March 2, 2020) and $113 billion (in a scenario with a broader spreading of COVID-19) lost in worldwide airline revenues this year.
According to the CEO Christopher Nassetta, Hilton has estimated that the coronavirus epidemic will hurt its full-year adjusted earnings by $25 million to $50 million, assuming the epidemic lasts approximately three to six months.
On the other hand, several hotels around the world have had the opposite problem. They can’t get rid of their guests! Hotels in countries such as Spain, China, Italy, UAE and the Philippines have been ordered to keep guests in quarantine.
Who pays for these extended stays? According to an article in TIME, each circumstance is unique, but in most cases, the individual traveler may be on the hook for the total costs. Although the government has the right to quarantine citizens when a public health threat exists, the laws do not stipulate who is responsible for costs incurred, and because quarantines have been so rare, there’s no standard practice to follow. However, there are legal provisions that authorize the US Centers for Disease Control and Prevention (CDC) to pay for medical expenses associated with quarantine, but only after payers such as insurers, employers and the government have contributed however much they are obligated to the total bill.
Even if the COVID-19 virus is contained soon, the damage to the hospitality business may take two to three years to make up for the losses, based on similar disruptions in the past like SARS and the September 11th terrorist attacks.
OFFICE SPACE: COMING TO A COUCH NEAR YOU
While the stock market has seen some significant market declines in the wake of COVID-19 these past few weeks, a handful of companies that offer collaborative or teleconferencing tools, have hit record highs.
This is tied to the CDC’s effort to protect the global workforce by encouraging companies to create and test flexible contingency plans that permit employees to work from home. The early implementation of these teleworking policies have proven to reduce the community spread of infectious pathogens like COVID-19. One study by the National Institutes of Health found that the nationwide 18-day school closure in Mexico during the 2009 H1N1 influenza (Swine Flu), pandemic was associated with a 29% to 37% reduction in influenza transmission rates. These policies are vital to ensuring business continuity by protecting employees’ health and jobs while the world waits to see how COVID-19 plays out.
These contingency plans have encouraged companies to retool themselves with infrastructure that supports remote work and collaboration. Some see this shift as an accelerator to the evolution of work and office space.
Will the upward trend of teleworking replace the workforce as we know it?
Many tech companies have encouraged their employees to work from home as COVID-19 continues to spread in the US and are amenable to continue the practice in the future. “We’ll never probably be the same,” said Jennifer Christie, Twitter’s head of human resources, discussing the company’s new workplace practices to BuzzFeed News. “People who were reticent to work remotely will find that they really thrive that way. Managers who didn’t think they could manage teams that were remote will have a different perspective. I do think we won’t go back.”
Even prior to the outbreak, developers have been receptive to this trend. As millennials filled the workforce and the gig economy exploded, the industry saw a shift to open office and coworking spaces. This means less office space per employee. According to Cushman & Wakefield, the average square feet of office per employee was 193.8 in 2017, down 8.3% from the previous decade.
The new flexibility also offers companies a way to shrink their carbon footprints. In 2016, Dell, Inc. published a report estimating that the US workforce avoids 2.7 billion round-trips per year by telecommuting, which is equivalent to a reduction of 30 million metric tonnes of CO2e per year.
At this point, the long-term effects of the outbreak on the commercial real estate industry are impossible to forecast, but it is clear the shift in office space has gained traction outside of COVID-19. Nonetheless, the outbreak has issued a stark warning to US companies to rethink and revamp age-old policies that are vulnerable to large-scale emergencies.
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ABOUT THE AUTHOR
Alexis Montano is an associate in the Phoenix office of Squire Patton Boggs. Her practice focuses on commercial real estate transactions, such as leasing, purchase and sale agreements and due diligence, for national clients in a broad range of industries.
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