Covid-19 and its Impact on the Construction and Real Estate Industry

The spread of coronavirus has significantly impacted the construction and real estate sectors and the global economy. Current figures indicate a sharp economic downturn, with Germany’s Ifo Business Climate Index hitting a historic low at the end of April 2020. The reasons include widespread production interruptions across various industries, revenue losses due to contact bans and lockdowns, and declining purchasing power caused by rising unemployment. This downturn is also reflected in the Real Estate Climate Index, which shows a declining trend. It was only in December 2020 that the index saw a slight recovery compared to previous months. Early in the pandemic, immediate measures were taken to quickly manage risks in ongoing projects. Simultaneously, the current situation presents an opportunity to rethink existing workflows and processes to proactively respond to medium- and long-term developments in the industry. Here, we have analysed the current state and summarised five key theses:

• A Look Back at 2008: The Financial Crisis and the Real Estate Industry
• Status Quo 2020: The Pandemic and the Real Estate Industry
• 5 Theses for the Real Estate Industry
• Conclusion: Digitally-Oriented Companies Emerge Stronger from the Crisis

A Look Back at 2008: The Financial Crisis and the Real Estate Industry

Uncertainties about the overall economic development evoke memories of the post-2008 financial crisis in the construction and real estate industry. But what similarities and differences exist? Can we draw conclusions about the current situation?

Experts caution that drawing direct predictions from past events is limited. The crucial difference lies in the crisis’s origin: while the 2008 crisis originated in the financial sector, the current supply and demand shock was triggered by political regulations to contain the pandemic. The aftermath of the 2008 real estate bubble had a less severe impact on the German construction and real estate industry compared to other countries. As a robust economic hub, Germany benefited from extensive monetary and fiscal policy measures, maintaining and even expanding its position as an attractive real estate market.

Status Quo 2020: The Pandemic and the Real Estate Industry

Today’s real estate market situation differs from that of 2008. Index values are not dropping as quickly or sharply as they did then. Banks are more stable, central bank support is more intensive, and political intervention is more active. The European Central Bank’s bond-buying programme suggests that interest rates will remain low, supporting the attractiveness of real estate investments and cushioning the downturn.

The construction industry faced the coronavirus from a boom phase, providing a solid buffer. Nonetheless, the upswing in the German real estate market appears to have ended, and growth has slowed. Experts do not foresee a bubble bursting in the German real estate market, as it is less volatile internationally.

Reflecting on the Covid-affected months of 2020, the real estate market has proven relatively stable. At the end of December, the Corona Real Estate Index captured the current status of construction sites in Germany during the second lockdown. In December, half of the construction sites in Germany reported no restrictions, with stable material supply and personnel situations.

5 Theses for the Real Estate Industry

1. Low Interest Rates Continue to Stimulate Real Estate Investments

The European Central Bank’s massive bond-buying programmes have reduced the attractiveness of bonds. Meanwhile, low interest rates provide a valuable stimulus for real estate investments. High liquidity is further supported by fiscal policy measures, bolstering investment after a period of investor caution and analysis. Compared to Europe and globally, Germany has proven to be an attractive and stable market for real estate investments since the 2008 financial crisis. The German real estate market benefits from these developments during and beyond the coronavirus crisis.

2. Residential and Logistics Asset Classes Will Remain the Most Stable Medium- to Long-Term

The full economic impact of COVID-19 is currently only partially foreseeable. This uncertainty leads to short-term market caution and increased interest in core properties, despite fiscal and monetary measures. Medium- to long-term, a shift in investor interest and risk assessment of selected asset classes is expected. Hotels and retail are anticipated to struggle the most with pandemic-related restrictions. Residential properties, due to consistent demand, once again prove to be stable investments. Logistics is gaining new attention, with positive influences expected in the medium- to long-term due to the pandemic.

3. Interest in Innovative Usage Concepts Will Increase

Intense discussions are ongoing about the long-term impacts of COVID-19 on societal behaviour. The current situation has initiated changes in living patterns that will shape the future urban landscape. New developments will be measured against new standards: awareness of sustainable and flexible concepts that allow for short-term use changes will rise. Promising prospects exist for the development of innovative and mixed-use neighbourhoods. Neighbourhoods with adaptable and mixed-use functions will gain importance due to the pandemic.

Digital Infrastructure and Innovative Project Work

4. Modern Infrastructure as a Foundation for Project Success

Die Homeoffice-Regelung stellte die Arbeitsprozesse und -tools vieler Unternehmen der Bau- und Immobilienbranche auf den Prüfstand: Wie gelingt dezentrale Zusammenarbeit in Projekten? Welche Tools und digitalen Kenntnisse sind erforderlich? Wie fortschrittlich ist die technologische Infrastruktur? Unternehmen, die bereits im Vorfeld auf eine moderne digitale Infrastruktur gesetzt hatten, konnten problemlos innerhalb weniger Stunden produktiv aus dem Homeoffice arbeiten. Andernorts kam es zu weitreichenden Beeinträchtigungen aufgrund zwingend notwendiger organisatorischer und technischer Vorbereitungen. Bedingt durch die äußeren Faktoren wurden flächendeckend moderne Tools und Prozesse für die Aufrechterhaltung der Arbeitsleistung eingesetzt. Das gesteigerte Bewusstsein für die Vorteile moderner Kommunikation und Tools wird über das Homeoffice hinaus Bestand haben.

5. Project Teams Will Increasingly Rely on Agile Work Methods

Just as technological infrastructure was tested, COVID-19 challenged project team collaboration. The pandemic introduced another external risk factor, causing project delays. Those clients who quickly analysed and adjusted contract conditions were able to mitigate extreme impacts on schedules, quality, and costs. Key to this swift response was access to all project data for analysis and team flexibility. Projects employing modern work methods such as BIM, Lean Construction, or other advanced solutions could quickly retrieve and analyse ongoing project data, adapting to risk factors promptly.

In times of high uncertainty, which cause stagnation and hesitation among investors, transparent data can significantly contribute to timely, cost-effective, and quality project completion. Recording, planning, and monitoring project data in Alasco allows for reliable decision-making even in crisis-ridden times. Replacing vague estimates and complex spreadsheets, Alasco’s financial management for construction and real estate projects provides a transparent and up-to-date cost overview, illustrates the financial impacts of risks, and offers real-time reporting for decision-makers and financiers. Thus, real estate finances can be managed reliably even during crises.

Benjamin Günther, Founder Alasco

“The changed project conditions during the coronavirus period served as a measure of a company’s degree of digitalisation. Already, it’s clear that digitally-oriented companies are emerging stronger from the crisis.”

Digitally-Oriented Companies Emerge Stronger from the Crisis

Following the 2008 financial crisis, the real estate market proved its robustness and attractiveness, with many positive developments still resonating today. Current figures show that the economic impact will pose significant challenges across all industries. The situation requires making the right decisions now to set the course for continued business success. The first step is to analyse the current situation, identify opportunities, and seize them.

In 2020, one factor has come to the forefront: while innovative digital solutions have been slowly adopted in recent years, the coronavirus has now provided a significant digital push.