Industry Views

Construction and Real Estate

Key Issues for the Industry Currently Reflected in the Risk Selection

The past 18 months have been difficult for the construction and real estate industry, which has historically been highly sensitive to economic cycles. The economic slowdown caused by the COVID-19 pandemic has led to the delay, suspension and cancellation of projects around the globe. Initially, it disrupted all types of construction, but 18 months in, the impact is diverging. Commercial construction activity in industries that have thrived during the pandemic, including technology, distribution, life sciences and healthcare, has rebounded — and even accelerated. Meanwhile, construction activity in more discretionary sectors including retail, hospitality, office leasing and travel has yet to return to pre-pandemic levels.

The industry is confronting substantial risk from a shortage of materials and talent due to mobility restrictions caused by the pandemic. This risk is compounded by the uncertain pace of recovery. Evidence that the pandemic is under control — for example, proof of high vaccination rates with high-efficacy vaccines — is needed to gain support and accelerate deployment of investments. The top 10 risks chosen by survey respondents in the industry closely mirror the current situation.

Surprises in the Top 10 Risks Selected

The COVID-19 pandemic is a defining event, and most of the real estate and construction industry’s top risks, including scarcity of supplies, liquidity risk and workforce shortages, flow from it. For example, increased cyber risk exposure caused by knowledge workers accessing less secure home networks has had a major impact, requiring companies to increase investment in security infrastructure.

The overall order of the top 10 risks in 2021 compared with 2019 is as expected; however, perception of risk varies slightly from region to region. For example, in Asia the local skilled workforce and available materials align well with the type of projects undertaken, although this may not be the case in other regions. Meanwhile, major project failures dropped off the top 10 risk list this year.

In an industry that is perceived to have a high-risk profile due to the inherent physical risks of construction work, it is somewhat surprising that five of the top 10 risks in construction are financial. Additionally, we would have expected regulatory and legislative risk to be included in the top 10 risk list for the construction industry globally due to the fact that emerging countries need considerable government-led investment in infrastructure.

Most Underrated Risks

Arguably, pandemic risk and health crisis should be the number one risk affecting the industry given that many other top 10 risks flow directly from it, including scarcity of supplies, liquidity risk and workforce shortages. Although we hope it will be a short-term risk consideration, its current impact is paramount.

Climate change seems to be an underrated risk given that large infrastructure projects — for example, building power plants, ports, roadways and railways — could be hugely affected by extreme weather events.

Workforce shortage ranks high (number seven) but arguably could rank even higher. Companies are embarking on more mega-projects (projects valued at more than $1 billion), which is significantly straining skilled labor capacity. This is especially true when construction locations are far from large population centers. Growing project complexity and increased volatility as a result of extreme weather further exacerbate workforce risk.

Finally, considering the global expansion of real estate and construction, as well as the growing political instability in countries where infrastructure projects with a high level of invested capital are most common, we would have expected respondents in the industry to rank political risk higher than they did.

Challenges the Industry Will Face in the Next 3 Years and What Organizations Can Do to Address Them

This sector will continue to fluctuate as changes to the economy create new risks. The trend toward telecommuting and contract working is driving demand for shorter leases and smaller offices, which is affecting core revenue streams. Companies will continue to explore new ways to diversify revenue, including financial lending and technology services including data and analytics.

E-commerce will continue to disrupt commercial real estate. With diminishing demand for brick-and-mortar stores, real estate companies and developers are finding new uses for conventional retail spaces, such as using them as entertainment venues, restaurants, healthcare facilities and more.

In response to the “K-shaped” recovery to the pandemic, with different parts of the economy recovering at different rates, multiple governments around the world are planning large stimulus investments in infrastructure.

Industries benefiting from economic trends spurred by the pandemic — for example, technology, healthcare, pharmaceuticals and logistics — are also seeking to invest in capital expenditures to lock in success achieved over the past 18 months.

Both trends will increase construction opportunities, but the challenge will come in selecting profitable projects, securing compensation based on value created, and managing a more complicated risk environment throughout this process.

Construction industry risk managers should consider acquiring insurance protection; complete or partial solutions are available for some of the industry’s most highly ranked risks, including cyber attacks, business interruption and political risk. For example, parametric insurance covers the risk of construction interruption due to unexpected weather.

Top risks such as material and talent shortages will continue to create challenges for the construction industry, forcing companies to take actions to mitigate them.

How New Challenges Will Require Companies to Change Their Approaches to Risk Management and Mitigation

Construction and real estate organizations will need to have better processes and systems to accommodate future workloads with respect to materials, workforce and financing and will have to be highly skilled at managing risk to scale their activities.

Amid growing global complexity, the convergence of risk factors and increasing integration among coverage lines, participants in the construction industry will need to consider risk in a multidimensional fashion rather than by line of coverage. Leading firms have already adopted this approach and have seen better outcomes as a result. By combining traditional and more innovative risk mitigation strategies, including risk arbitrage, companies can improve performance.

Protection against cyber attacks and protection of intellectual property will be particularly challenging as the industry increases its adoption of disruptive digital technologies, including, for example, building information modeling and drones.

Last, access to investment capital may hinge on companies’ ability to articulate and execute environmental, social and governance agendas.

Current Top 10 Risks

Predicted Future Risks

By 2024

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