What complications is the virus crisis causing in London? Can you build?
It’s very hard to put the various scenarios on paper, which is what we’re often being requested to do. When you try to go into some granular detail on Scenario A or Scenario B, you can’t even get past the first level, because nothing holds. We have a permit to begin, we have the money and we a contract with the contractor that’s good for two months. So we try to run Scenario A, which is: We just start. Once we pull the trigger, there is a payment to the council that’s millions of pounds. But then the question is, if the contractors are on site, what happens if a couple days later the government suddenly forbids construction workers to be on site for health reasons? Would we be able to restructure the contract? It would be hard to figure that out. You’d have to get some legal clarity and with people working from home, who could actually put that into play? That’s already so many uncertainties in Scenario A alone. I think we’re lucky we didn’t begin construction a couple of weeks ago. If we had, we’d just be firefighting now.
Can’t you just wait a couple of months and see what happens?
Maybe it will be resolved quickly.
Why does that matter?
One reason is cost and another is the development timeline. The contractor can’t hold the cost because the supply chain is busted. It’s impossible to get clarity on what would be the change in cost. It doesn’t matter that we have a fixed price with the contractor who would just have to swallow it. You don’t want an adversarial relationship with your contractor. That never ends up well. It’s not like we’re deciding whether to take a risk on just one thing. We don’t have a clue on multiple levels. Even if we had control of costs and control of the contractor and the team that was lined up, we don’t know if there will be a government directive that shuts them down.
Could the lack of work bring down construction prices at last?
It might. Or it might increase prices because there are so few contractors functioning. Normal economics of supply and demand don’t apply now because it’s a problem of both demand and supply. You have supply chain issues, health issues. We have lots of people who are really smart and very experienced who say they have no clue what’s happening next. There are lots of emails and lots of updates, but when we try to consolidate it all it just looks like some Kandinsky painting, just a splatter of paint all over the place. It doesn’t make any sense.
Because it’s hard to know what this shock will do to markets?
Even if things miraculously get better in three weeks, how do you underwrite the impact of what’s going to happen in Q2? There’s going to be a dip, so how far up will it come afterwards? I don’t think anyone is going to be obnoxious enough to say “I’ve got it figured out”right away. To say what are rent free periods will be. What are the requirements going to be going forward? What will the rental levels be? What will the new space requirements for occupiers be? Will there be a push towards automation now because machines don’t get sick? There are so many things that go into the spreadsheet of the underwrite that it would be very hard to quantify it. When will investors start to believe they’ve seen enough data points to judge where we are? It’s going to be more than just a couple of months. Until they do, I think they’ll be sitting on the sidelines.
