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VOL. 44 | NO. 13 | Friday, March 27, 2020

Little virus that can topple skyscrapers

Supply chain interruptions threaten Middle Tennessee building boom

By Tom Wood

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Imagine building a big, brand-new house without hardwood floors for the dining room and den. Or no carpet for the bedrooms. Without ceramic tile in the kitchen or foyer.

That’s one small example of how the global COVID-19 pandemic is affecting the Tennessee construction industry’s supply chain from China and other parts of the world. Every aspect of building a home or office is disrupted – from materials to workforce to selling that real estate.

And while it’s impossible to forecast the full extent of Covid-19’s impact on the local construction industry, two things appear certain:

• Supply chain disruptions will persist for several months

• Consumers will pay more – perhaps as much as 10% more – for the finished product.

“The storm we’re in right now, supply is being limited by a lot of forces that are in the marketplace right now,” says David McGowan, president and owner of Regent Homes, builders of townhomes, single-family homes and condominiums. “And so when supply gets short, demand is still high – prices go up.

“What’s happening in the greater Nashville market right now is that we have a critical shortage of a supply of houses coming in for the amount of people that are moving here and the amount of people that want to move. So, prices are going up. And I do not see anything that’s going to change that anytime in the future. It’s gotten to be a very tight supply.”

McGowan suggests prices for higher-end homes – $600,000-plus – likely won’t rise as much as others.

Building materials are stacked and ready at Nashville Yards, where Amazon is building its Center of Excellence for 5,000 employees.

-- Photo By Michelle Morrow | The Ledger

“It’s kind of hit a ceiling. I don’t see those home prices going up that much,” he says. “However, I will say that in Metro areas like Nashville and the urban core, so many people want to be closer to work where the jobs are being created I think the prices are in the $350,000 to $450,000 (range) will see a 10% increase because those are more attainable.”

Trey Lewis, vice president of sales for Ole South Properties, Inc., says other factors beyond the coronavirus – from materials to impact fees – will impact any new construction price increases.

“I wish I did have a crystal ball and could guess that (anticipated 10% increase). It’s anyone’s guess. No one knows how the factories in China, how much of our stuff really comes from there or not, what domestic equivalent is here to take the place of that. It’s too early in the game to answer those questions,” Lewis explains.

“The longer the coronavirus epidemic is present, then the longer a delay or a potential delay could become. There will be some pricing fluctuations up and down and the market will have to absorb that. I think that the best thing that people can do right now is go about their life.”

UT experts weigh in

The University of Tennessee’s Haslam College of Business is ranked No. 2 nationally among supply chain management graduate programs.

Paul Dittmann, assistant department head of supply chain management, and Bill Fox, director of the Boyd Center for Business and Economic Research, both say disruptions are imminent but have differing opinions on how long they will last.

Construction projects across the area could be put on hold by materials shortages.

-- Photo By Michelle Morrow | The Ledger

“In general, of course, supply chains are going to be impacted,” Dittman says. “However, I will say this: I’ve heard of very few entire factories shutting down. That said, there are some being impacted, particularly in China.

Fox says a U.S. recession that will affect the state’s “big-ticket” construction industry is “likely for the rest of this year. Much more severe, in all likelihood, in this quarter.

“So from there, the question is how does everybody respond to this,” he adds. “So car sales (and) housing sales are the kind that of things where you see a significant reduction from a recession.

“And so we have this really important and impactful health issue and, separately, how it’s impacting the economy. We don’t have experiences that would in any way give us a parallel to what’s going on right now. But if we just think about how people as consumers are going to behave, they are going to likely spend less on big ticket items.”

We will overcome

Fox says Chinese problems offer clues as to how long we are affected.

“We do know that the Chinese supply chain was slowed dramatically over several months,” he says. “They were not producing some of the things they would otherwise be producing. Having the supply chain that involves China when China is significantly slowed down is much more problematic than it would have been in 2000 or something like that.

“Other parts of the world are also being slowed down by the coronavirus. It’s not a great time to be finding suppliers. But hopefully that all gets solved in a relatively short time period.”

Nashville’s building boom might finally have met its match with the COVID-19 virus.

-- Photo By Michelle Morrow | The Ledger

Dittman says American ingenuity in the private sector is key to minimizing the COVID-19 effects on all industries, including construction. Indeed, companies that build engines or alcohol or clothes are shifting gears to manufacture ventilators or hand sanitizers or masks.

“When people in the private sector are faced with a crisis, they are unbelievable in terms of their creativity and their inventiveness and working around the problem,” Dittman adds. “I do think that there’s reason for optimism regardless of which product or which part of the supply chain, whichever area of industry you’re in.”

Dittman says business leaders are fighting back rather than giving into fears. Business and life go on, albeit with proper precautions.

“They feel threatened, they’re getting very creative and I think the kinds of things they’re going to do to recover our supply chains very quickly – the ones that are damaged – it’s going to be much faster than people think. Again, I’m just amazed at the creativity and ingenuity.

“Right now, they’re all scrambling. So nobody is sitting back on their hands saying, ‘Oh, the world’s coming to an end and there’s nothing we can do.’ The way people in private industry talk about and look at this is, ‘Just one more challenge that we’re gonna overcome. And there are no excuses not to overcome it,” Dittmann says.

“That’s the way they look at it: ‘Yeah, we always face impossible challenges and we always find a way to overcome them.’ And that’s just another one of those.

“I think most people are looking at it that way. The shocks come every hour and every day, it seems like anymore on this, but it seems like … all I can say is there’s room for optimism and you know as well as I do that creativity of the people in the private sector.”

Shortages are coming

Back to the flooring issues that McGowan used as an example of hardships the construction industry faces. He’s talked to several suppliers about a lack of available stock.

“Now a lot of the materials that we do bulk buy for homes through major vendors here in the Metro area are all being affected by the virus,” McGowan states.

“Metro Carpets has put us on notice that the hardwood that we only use on the floor that comes in from different parts of the world is being quarantined and that they don’t know how long it’s going to be before that hardwood actually hits the ground.

“But they are putting us on notice now that it could be as much as a 30-day delay for that hardwood. And a lot of materials we use, a lot of suppliers … don’t keep big bulk supply of inventory.

“So the inventory of materials that is made in other parts of the world has been affected. A lot of it has to do with things like hardwood, laminated wood flooring, some ceramic tiles, things of that nature. We’ve been told we’ve got delays in that.”

Tim Raley, sales manager at Metro Carpets, says the coronavirus disruption of the construction supply chain could have long-term ripple effects.

“From a supply standpoint, we’re not short yet but we’re having some issues and the concerns are what’s coming down the pipeline. We’ve got some that we get from our supplier who imports from China. It’s directly affecting them and they’re running out of stock and inventory, waiting on China,” Raley says, noting how other factors like the Chinese New Year impacts the supply chain.

“There’s just a lot of moving parts right now in our industry. The coronavirus is obviously the latest and it’s affecting everyone.”

Raley says they’ll look for other U.S. suppliers, not necessarily to Mexico, Brazil or Canada for lumber and other products.

“In this case, we’re just looking at a different manufacturer where they’re still operational. We haven’t had this issue from any of our manufacturers yet. But, of course, it all depends on the state.”

Nashville Mayor John Cooper’s “safer at home” order includes the construction industry among essential businesses that will be allowed to operate as mostly normal in abnormal times. That’s good news to Lewis and Raley.

“At the present time, we have not experienced any supply disruptions. We anticipated materials shortages, not from coronavirus or tornadoes but from increased demand earlier in the year,” Lewis explains. “We’ve been gearing up for needing excess materials to increase business for the first part of the year.

“The demand for new homes is skyrocketing – especially those in the workforce housing sector that are buying their first home. The demand is unprecedented. And so we’ve been gearing up for that and ordering supplies ahead. Now that said, will the coronavirus affect future deliveries? We have not identified any major disruptions as of this time.”

Adds Raley: “It’s one of those things where you prepare for the worst, hope for the best. We’re not waiting around. Obviously, nobody wants a shutdown now. It too shall pass. We’ll come out on the other side one way or another. I feel like it’s a short-term thing.”

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