COVID-19 pandemic’s impact on US businesses and real estate

Zoltan Karpathy
Operations Manager, BSRIA Worldwide Market Intelligence

Nobody can predict with a high degree of certainty how long the current COVID-19 pandemic will last and what will be the full impact on the economy. We are witnessing US states, including Florida, opening up and having to tighten measures again as the virus flares up.

To contain the pandemic regulations started to push businesses towards investments to increase health safety and prevent spreading the COVID-19 virus. While necessary to fight the pandemic and speed up the recovery, businesses sometimes suffer temporary loss of productivity when the measures are implemented.

Another hike of investment as the direct consequence of the economic shock triggered by the pandemic is often related to the need of diversifying suppliers; and purchases from a variety of suppliers are often done with less favourable prices. Increasing inventory levels of critical raw materials/components/products are also becoming an issue.

Verticals served by the HVAC&R sector have been hit at various levels of degree by the COVID-19 pandemic. Venues, such as live entertainment, sports, restaurants and travel-related establishments are likely to struggle due to concerns over contracting the virus, even when they become fully open. It is expected that consumer will shift away from these types of spending to alternatives such as durable goods, which in turn can have a positive effect on housing in the future.

Nevertheless, on the residential side, housing starts plummeted by 43% in the three months from February to April, even though several US states allowed construction sites to operate. Sales of existing homes also declined, with April’s transaction level at three-quarters of the February level. Residential construction is expected to slow down in the medium term, as consumers are unable or unwilling to purchase new houses, even though mortgage rates are very low.

Economists are drawing up various scenarios and assess likelihoods of these potential outcomes. According to Deloitte the most probable scenario is that the US economic recovery will not take place at least until the middle of 2021; growth can return to the pre-COVID level by the end of 2023, but the economy will not be able to achieve full employment again until 2025.

In the context of such uncertainty, manufacturers active in the HVAC&R and Building Controls sector are facing a wide range of unknown factors:

  • customers building up stock for an eventual second COVID-19 wave;
  • concerns over debt payments;
  • increasing payment periods;
  • increasing raw material prices;
  • pressure to maintain the price of their final products/solutions.

In terms of the product mix, HVAC companies started to receive more enquires for certain types of filters, more emphasis on increasing volume of fresh air and generally an increasing focus on Indoor Air Quality.

This goes hand in hand with the fact that the current situation is also encouraging building owners and businesses to offer a safe working environment, in which employees trust and feel comfortable. Therefore, increasing investment levels can be expected to make commercial buildings ‘smarter’ and more efficient to use, with the uptake of solutions such as contactless access control, occupancy analytics, employee tracking services, proximity sensing and analytics (using indoor location mapping solutions) and Indoor Air Quality (IAQ) sensing and monitoring, alongside air purification and disinfection solutions.

The COVID-19 pandemic has a significant impact on the real estate market, challenging the building owners and operators at unprecedented levels. According to JLL, the effects in the short term, will be the accelerated large-scale uptake of home working, leading to problems for traditional offices, but also co-working centres and flexible offices, putting a strain on the sustainability of certain flexible space business models. Social distancing considerably increase the space allocated for individuals which means that many flexible offices will record very low space utilisation rates and could even remain nearly empty.

The COVID-19 pandemic has challenged the role of the traditional office and it reinforced the need for the office to act as a communal space which encourages innovation and collaboration, while nurturing company culture. A future solution seems to be an increased focus on technology enabled workplaces which can be used for collaborative meetings and hosting clients.

To assess the full impact of COVID-19 on the US HVAC&R sector, BSRIA will publish an update of its market studies at the end of September 2020.

To find out more about BSRIA HVACR & Controls market studies contact us at:

• America sales enquiries: BSRIA USA: sales@bsria.com ¦ +1 312 753 6803, http://www.bsria.com/us/
• China sales enquiries: BSRIA China: bsria@bsria.com.cn ¦ +86 10 6465 7707, http://www.bsria.com.cn
• All other sales enquiries: BSRIA UK: wmi@bsria.co.uk ¦ +44 (0) 1344 465 540, http://www.bsria.com/uk/

Thoughts on the COVID-19 impact on China’s HVAC industry

by Martin Li, BSRIA APAC

Some economic background data

After carrying out many conservative policies like Complete City Lock-down, China has started to recover from the COVID-19 related downturn. The economy has been opening since late March 2020 and is in wider re-opening stage by May 2020.

In the first two months of 2020, China’s total import and export value of goods trade reached 4.12 trillion RMB, a decrease of 9.6% comparing with the same period last year, with export, experiencing a particularly bad fall by 15.9%.

According to the latest statistics, both Manufacturing and non-Manufacturing PMIs slid down to the range far below 50% in February 2020, with 35.7% for manufacturing sector and 29.6% for non-manufacturing one. Manufacturing sector has been hit hard, and the central government is mobilizing companies returning to production to catch up with delays as soon as possible.

Construction industry represents a more mixed picture. According to Xinhua Finance, the total sales of residential housing by Top 100 developers dropped by 20.7% under the influence of the pandemic, but 24 among them, have achieved over 10 billion RMB sales, indicating that the competitive environment is going to become more concentrated in the coming months.. Another set of data from KERUIRC in its research on 27 Key Cities showed a decline of sales by 80%, and half of the cities in the sample pool supplied no new housing in February 2020.

2020 Prospects for China’s HVAC industry

Different impact in residential and commercial segment

Both global and domestic demand have fallen significantly in the first quarter of the year. Under severe lockdown rules, sales, installation, or integration work were not allowed and according to CICC, in January 2020, the entire domestic and overseas sales of AC fell by 34% and 28% respectively. The situation worsened in February and March, but the visible recovery has been noted in May.

Similar situation has been recorded in the domestic boiler market where during the first quarter 2020, sales remained heavily subdued with slow recovery noted from the April. Overall Chinese domestic heating sector shrank by 60% in the first quarter of the year.

HVAC products, like RAC-CAC or wall-hung boilers, belong to the “must have” category of products, hence market demand for those has mostly shifted and is expected to “make up”, in the coming months, for lost sales in the first quarter of the year. The whole year performance is expected to come close to the 2019’s sales levels, with the caveat, that there will be no second wave of the virus outbreak.

Commercial AC and Commercial/Industrial heating sectors have not been so severely affected by the pandemic, with many companies reporting successful achievement of their Q1 budget.

Strategic changes related to the offering and distribution business models

This pandemic seems to have forced transformation of conventional business activities. Owners of physical stores and off-line distributors have become acutely aware of the weakness of their business model. Many are now in the process of moving their operation to on-line platforms, which is likely to also accelerate their embrace of the global e-commerce.

From a product mix point of view, companies have become more aware of the importance of the variety of product offer and disadvantages of concentrating on sales of one product family type. An integrated shop/store, selling the idea of Comfort Home with a bunch of products delivering what is ultimately needed by the end user is expected to become a mainstream ideology. Integrating sales of Water, Air, Heating, Automation and Smart systems is where the industrial consensus is heading after the pandemic.

In summary, assuming the outbreak of COVID-19 can be contained and will not reappear in China, its impact on sales levels will possibly be limited in the overall year perspective. However, when debt, assets holding costs and opportunity costs will be considered, HVAC business owners will be looking for more options to mitigate unforeseeable risks in the future. In the short term some distribution and offering trends that have started to emerge before the pandemic will accelerate. In the longer-term higher market integration is likely.

Note to editors:

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Proving the future – how to keep up with Building Regulations

"From a standing start in 2006 to today, the builders have grasped the importance of air tightness testing as a proxy for quality of construction and the contribution good airtightness makes to energy efficiency" Mike Smith, Engineering Director

“From a standing start in 2006 to today, the builders have grasped the importance of air tightness testing as a proxy for quality of construction and the contribution good airtightness makes to energy efficiency” Mike Smith, Engineering Director

The rapid adoption of airtightness testing and the ability of the industry to achieve the right result first time in 89% of tests is one of the success stories of the UK construction industry over the past decade. The BSRIA Compliance team tested over 10,000 dwellings and 720 non-dwellings in 2012 and found the average dwelling airtightness value was 4.89 m3/(hr.m2) envelope area at 50 Pa (against a maximum regulatory value of 10 m3/(hr.m2)).

From a standing start in 2006 to today, the builders have grasped the importance of airtightness testing as a proxy for quality of construction and the contribution good airtightness makes to energy efficiency. The testing itself is rigorous, robust and, arguably, now at a very low economic price. It has respectability provided by UKAS accreditation for non-dwellings testing, the training of testers and, in the case of dwelling testing, registered testers through the Airtightness Testing and Measurement Association (part of the British Institute for Non-Destructive Testing).

The mantra should be “Build tight, ventilate right”. As fabric standards improve, driven on further by the 2013 Building Regulations, the role of passive and mechanical ventilation systems increases in importance. Unfortunately in the world of unintended consequences, we are seeing dwellings achieving better airtightness values than the designer intended which of course means less air leakage (and associated energy waste), but this is only useful if the designed-in ventilation systems can cope with these outcomes. In a nutshell the infrastructure supporting domestic ventilation engineering has not developed at the same pace as the improvement in building airtightness.

There is of course significant current activity to help remedy this problem but, as is so often the case, we are now on the back foot with increasing numbers of examples of poor installations and the inevitable questioning of the value of mechanical ventilation solutions.

The systems we are talking about are not complex but they are sensitive to errors. What is missing is not so much the technology or science but the widespread creation and adoption of proper codes of practice. Mechanical ventilation (MV) systems and the more complex MV heat recovery (MVHR) systems have to be site tested to ensure they are extracting and supplying appropriate amounts of ventilation. In the course of its compliance testing BSRIA is seeing two main kinds of problems.

The first is the performance of the specified equipment in a given situation, i.e. that the fan is correctly selected to match both the actual application and the inherent system losses that the system components will introduce. In simple terms this comes down to understanding the resistance characteristics of ductwork and its routing and the resistance of terminal units both inside and out. There is a widespread misunderstanding that ventilation fan outputs are usually quoted with outputs measured in “free air”. In reality they have to overcome backpressures from fittings. Even where kits are bought we see alternative terminal units used, usually to meet architects demands for aesthetics.

The second is the actual installation of the associated ductwork where there is a very poor understanding of the dramatic effect on performance that can arise from bad workmanship.

In a recent case BSRIA found approximately one metre of flexible ductwork that had been stuffed into the cavity wall for a straight through the wall installation that is approximately 300 mm thick. An additional 100 mm dogleg had been introduced on site to match the actual positioning of a porch structure. The result was a lot of fan noise with almost zero movement. The fan, when bench tested with zero back pressure, had a performance of 22 l/s, the designed performance including the ducting was 20 l/s however the actual performance was 5 l/s.

As part of the “catch up” in dealing with the rapid rise in the use of domestic ventilation we have identified that the act of measuring MVHR performance using published guidelines will give false results if the correct equipment or correction factors are not used. There is an easy remedy but not widely used at present. The automatic volume flow meter with pressure compensation – more commonly known as a “powered diff” will provide an instantaneous and accurate value. A more common hooded anemometer will impose a back pressure on the terminal, ducting and fan under test and the readings must be corrected (post use) specifically for both the anemometer model and the actual fan under test. More detail on this can be found in BSRIA’s “Domestic Ventilation Systems – a guide to measuring airflow rates – BG46/2013”.

And all of this is compounded by a lack of thinking regarding operational needs, limited controls, and poor instructions to the user, especially on what maintenance is required to keep performance at its peak.

So, airtightness demands have led to unforeseen consequences and something of a reaction against the use of mechanical ventilation. What then can be done to avoid making the same mistakes on other systems and concepts?

With fabric issues now largely dealt with in the Building Regulations it is likely that new focus will fall on the efficiency and operation of the MEP services in dwellings. If modelling and measuring the thermodynamics of a brick wall is difficult imagine how complex a multivalent heating system is going to be! And before being put into use, these complex integrated systems will need commissioning and possibly proving as well.

The Zero Carbon Hub has recognised that we will need to devise new test methods and regimes that, for example, will evaluate how the solar thermal collector performance meets expectations when linked with the ground source heat pump system that serves hot water generation, underfloor heating and thermal storage, in concert with a biomass boiler or room heater. Before regulation stimulates the market we need to have good practice guidance and proven on-site commissioning and test processes in place. This work is urgent and needs significant central support. With the next revision of Part L expected for 2016 – this time aimed at achieving zero (or nearly) carbon homes, time is not available to embark on a protracted negotiation with innumerable and varied industrial interests. Certainly industry’s support will be available but only for a properly directed and centrally funded programme.

If we fail to put into place a mechanism to improve the on-site verification of performance of new systems we will only have ourselves to blame for the next set of well publicised “failures to launch” and the consequent set back of achieving national aims.

BSRIA provides a range of Compliance Testing services for stress-free compliance to Building Regulations including airtightness (Part L), sound insulation (Part E) and ventilation testing (Part F).

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