The end of the economic world has been postponed. While challenges remain, continued slow recovery is immediate and real this time, and it is showing signs of sustainability.
Gold is retreating from its peak, the stock market is hitting new highs, and residential building is on the rise. With the new exploration and extraction of shale oil and gas coming on the market, energy prices are going down, and analysts are beginning to really discuss an American energy independence day coming in the next decade. Office, commercial, and lodging construction are even making a bit of a comeback, and for the first time since 2008, construction activity is expected to grow faster than the GNP.
While major indicators (i.e. still low interest rates, affordable mortgage rates/housing prices, higher wages, improving job numbers, corporate profits, and slow positive GDP growth) would suggest an economy that’s really heating up, there is a long way to go because of the length and depth of this recession.
According to research firm Trepp: “The delinquency rate for U.S. commercial real estate loans in CMBS fell 15 basis points to 9.42% in February. Overall, the Trepp CMBS Delinquency Rate has fallen 92 basis points since hitting a peak of 10.34% at the end of July 2012.” (U.S. CMBS Delinquency Report, Trepp, February 2013.) Homeowner foreclosure filings are also trending lower, according to Realty Trac and reported in CNN Money (2/14/13): “Notices of default, scheduled auctions, bank repossessions and other filings fell to 150,864 last month, a 7% decline from the previous month and a 28% drop from January 2012, according to RealtyTrac. New foreclosure filings fell to the lowest level since June 2006.”
All this is good news, but there are still a significant number of CRE loans maturing in the next four to five years, and homeowners and banks are not past the nightmares and underperforming loans. The opposite of a weight loss program, it takes no time for the markets to fall apart, or so it seems, but years for them to rebuild.
Another reason the economy isn’t heating up is the natural economic governors in place that will chill growth this year. Chief among those is material costs that continue to rise and will likely rise faster as the market starts to grow. Lumber prices are closing in on prices seen in 2007, with demand not quite at the same levels it was then. While producers of this material may have spending in place to boost supply, price pressure is going to continue.
The construction industry has lost thousands of employees that won’t return with the market, with 30 % of those who lost jobs having retired or moved onto another industry. Skilled trade labor shortages will also continue despite market growth in areas such as the energy sector and even the residential sector, in some regions of the country.
Regulation has also dampened a quick recovery in the construction industry. The recession was so long that many projects were mothballed or never began by developers. It takes around five years to get shopping malls, multiuse, multifamily, or large industrial plans off the drawing board and over the many government hurdles before breaking ground. Then there is the problem of who will make the first move. Government stimulus plans haven’t been as effective as hoped, making private capital the realistic hope. The problem is few are ready to take the “build it and they will come” approach.
In the Forecast
Although the strength of individual markets is shifting, the forecast for total construction put in place for 2013 continues to show an increase of 8% over 2012 levels. The forecast total for construction in 2013 is $918,897 million, a solid improvement, but we don’t expect to return to the days of annual construction above the trillion-dollar mark until 2015.
Residential’s Big Comeback
Despite the fact the residential sector was at the epicenter of the economic meltdown in 2007, six years later it is the star of the recovery show with a 23% increase in single-family buildings.
Single-family housing put in place grew 19% in 2012, and we expect another 23% growth to reach $161 million by the end of 2013. Multifamily construction improved a whopping 47% in 2012, and is anticipated to increase another 31% in 2013.
On the flip side of that coin as reported by the National Association of Home Builders (NAHB): “Multifamily Vacancy Index (MVI), which measures the multifamily housing industry's perception of vacancies, dropped two points to 31.” That translates into higher rents.
Generally, higher cost of rental housing would drive more building in multifamily and spark more home sales; but despite the job market improving and banks beginning to lend again, potential homeowners are still wary to buy and will continue to save for a larger down payment while the wait for job and economic security to stick around for a year or two.
The biggest challenge to the housing market may be to avoid the temptations of over-exuberance, while at the same time considering and readying for the challenges of markets in demand.
It will take time to work through the pre-existing backlog, but the residential construction market is slowly building steam and climbing towards another bull cycle.