As mid-2020 approaches, it has been about three months since governments implemented shelter-in-place initiatives to control the spread of COVID-19. In a matter of days, environmental consultants in the hardest-hit areas like New York City were forced to cope with dramatic changes in their business practices. Based on conversations I’ve been having with principals of environmental consulting firms across the U.S., it was not an easy feat to transition their staff quickly to remote work environments. Some managers were forced to direct their due diligence teams away from Phase I environmental site assessment project work into other work areas less reliant on commercial property transactions. For some consultants, Phase I ESA work was complicated by the closure of libraries and government agencies, which limited access to public property records. Site visits also became challenging in the face of extreme travel restrictions and access limitations at certain types of commercial properties. With little warning and no manual to follow during this unprecedented time, companies scrambled to put new protocols in place to complete Phase I environmental site assessments for their clients under less-than-ideal conditions. It has been a challenging second quarter, to say the least.

On June 22-23, for the first time in its history, the Environmental Bankers Association hosted its summer conference as a virtual event. To address the market’s need for real-time data on how consulting firms were adjusting to the abrupt changes to the Phase I ESA market brought about by the pandemic, we collaborated with GeoSearch and ERIS to conduct an industry-wide survey of Phase I ESA consultants. The results were featured in the EBA virtual conference panel titled Environmental Due Diligence Re-engineered: Yesterday, Today and Tomorrow.

The five key findings below reflect the resiliency that the consulting sector has shown over the past few months, a look at how COVID-19 impacted staffing, and signs of hope as the industry realigns to chart a path toward recovery. (A link to the full set of results can be found at the end of this brief.)

1. The immediate staffing impacts of the COVID-19 shutdown are starting to reverse.  

In response to the financial challenges presented by the dramatic drop in Phase I ESA volume in late March, companies implemented a series of staffing adjustments that include:

  • Employees voluntarily taking vacations, a leave of absence or a reduction in hours (36%)
  • Reducing the salaries of some or all staff (25%)
  • Temporarily laying off some full-time employees (22%)
  • Moving some full-time employees to part-time (17%)
  • Permanently letting some full-time employees go (16%)

There are a few positive signs worth noting that may suggest the worst is behind us. Twenty-one percent of respondents work at companies that are now hiring staff for new positions, 19% are rehiring employees that were furloughed back in March/April and 16% that implemented salary reductions are now returning employees to full-pay levels.

“We are rehiring employees and increasing hours as work becomes available that can safely be completed.” ~survey respondent

2. Difficulties accessing properties and records led to data gaps, and atypical agreements with Phase I ESA users to address gaps post-closing.

The immediate closure of libraries and government agencies as the result of COVID-19 left 88% of respondents to obtain property records from database companies and placed new importance on access to electronic property data. Sixty percent selected FOIA requests as an option and 54% looked to previous Phase I ESA reports to research records on a target property given the closure of libraries and government offices. If a Phase I ESA report contained a data gap related to limited access to property records or a lack of a complete site visit, 85% of respondents responded by adding language that outlined the scope deviations, and 22% would work with clients on agreements to fill the data gaps after deal closing.

“We have added limitations into the report and made clear that some records are not reasonably ascertainable per the ASTM Standard due to the Covid-19 regulatory agency closures and processing times. If the records are absolutely pertinent to the conclusion of the report, we discuss with the client to determine whether to move forward conservatively with a Phase II, dig up previous reports that may mitigate concerns, or wait until the records requests can be fulfilled.” ~survey respondent

3. Phase I ESA best practices for site visits will likely include physical distancing and the use of PPE from now on.

At the onset of the economic shutdown in response to the pandemic, immediate changes to Phase I site visit practices that were nearly universal included physical distancing (98%) and the use of PPE (91%). Not surprisingly, respondents expect these practices to be maintained from now on, or at least until a COVID-19 vaccine is available. To a lesser extent, the challenges of the past few months accelerated the use of virtual technology options like zoom to interview site contacts (34%) and drones (8%), especially to inspect the exterior of properties. Other practices noted by respondents included having local teams take separate cars to drive to a target property and conducting visits during off-peak/evening hours.

“We are still not conducting interior site visits in occupied high-risk facilities (assisted living, multi-family residential), but we are observing common areas, vacant areas, and requesting photos of occupied spaces.” ~ survey respondent

4. First-stage recovery will be with pre-COVID-19 deals getting back underway.

The survey respondents predict that the types of projects recovering first are:

  • Re-initiation of some deals stalled by the pandemic (68%)
  • Refinancing of existing deals (40%)
  • Distressed assets by opportunistic investors (39%)

As consultants report that some projects that had been stalled by the pandemic are getting back underway, LightBox is also starting to see activity on a steady stream of refinancings given the low interest rates. As investors with dry powder look for new opportunities and properties get repriced, we will likely start seeing distressed asset projects increase.  

5.The majority expects a long-game recovery back to pre-pandemic Phase I ESA levels.

Asked to predict how long it will take their firm’s Phase I ESA activity to return to its pre-pandemic levels, 45% share the expectation that volume will not return until 4Q2020, next year, or even longer. As recovery takes hold, we can expect to see significant variations in recovery rates by state and metro given the extreme differences in pandemic impacts across the U.S.

EBA Environmental Due Diligence Survey May 2020

During the EBA panel, LightBox’s Alan Agadoni observed that

“The crisis brought on a whole set of unknowns. Commercial real estate, and lenders in particular, don’t like unknowns so the market is going to have to go through a period of repricing risk. This will be a very difficult time because we are facing a recovery with unknown timing and a long tail of impacts to work through. The good news, however, is that lenders are even better set up today than they were in the previous downtown to explore loan extensions with their borrowers versus going right to foreclosures.”

ABOUT THE SURVEY

As preparation for a track at the Environmental Bankers Association’s Virtual Summer Conference on June 22-23, 2020, LightBox, ERIS, and GeoSearch collaborated on an industry survey of environmental due diligence consultants across the U.S. to collect data on how the industry was responding to challenges related to the COVID-19 pandemic. The results were featured in the track titled Environmental Due Diligence Re-engineered: Yesterday, Today and Tomorrow featuring Carol LeNoury, ERIS; Alan Agadoni, LightBox; and Scott Davis, GeoSearch.

The survey was open from May 26 to June 5 and the sample included 562 consultants from across the U.S., ranging from those working at small local firms (39%), regional firms (29%), national firms with multiple offices across many regions (21%) and global companies with offices outside North America (12%).

The full results containing the latest statistics on site visit practices in place during the pandemic, revenue expectations for the second and third quarters are available for download here.

Category Environmental Consulting