That hissing sound you hear is the air coming out of the U. S. real estate market. While the decline will not be comparable to the 2008-2010 debacle, the downturn will have a negative effect on the rest of the economy.
Let’s examine some of the telltale signs.
The real estate market is driven by real job and real income growth. In the last seven years, the number of total employed people is 8 million fewer persons. From 2005 to 2014, real income growth declined by 4.28 percent.
Due to the economic woes of the global economy, we are in the “ninth inning” of this current upturn. After a few years of reasonably calm markets and stable growth around the world, Citigroup Inc. says the chances of a global recession are already high and only going to go up.
Currently, 141,000 people have jobs in U. S. commercial real estate, which is now an eight-year peak. However, Select Leaders job barometer indicates a 2016 correction looms. Blackrock, a major investor in real estate, recently announced plans to cut about 400 jobs in the coming weeks.
With another condo bust looming in Miami and several other markets, developers have started canceling projects, slashing prices and offering incentives.
While the Southern California industrial market is on fire, with one of the lowest vacancy rates in the country, it could be facing a slowdown. Following the port disruption last year, Johnson & Johnson is looking for alternative ports for its imports. Majestic Realty, one of the largest industrial developers in the country, indicates that 90 % of its industrial development is now outside of California.
The retail sector is experiencing the following:
- Core retail sales advanced 4.3% in the past year.
- An increase in e-commerce.
- Declining consumer income
- Consolidation of various categories (i.e. sporting goods, department stores)
- Tenant location decisions are often based upon rental rate
In January, U. S. home prices climbed at more than double the rate of incomes, a trend that could ultimately create affordability challenges for buyers and extend the time that homes stay on the market. The Standard & Poor’s/Case-Shiller 20 city home price index rose 5.7% from a year earlier. In Los Angeles and Orange counties, home prices jumped 6.9% from a year earlier.
Nationally, monthly rent growth for apartment REITs have slowed to 4.1% year over year in March from 4.2% in February. Markets that are showing signs of deceleration include Boston, Dallas, Orlando, San Diego and Silver Spring, Maryland. At the same time, MPF Research, a national apartment research firm reports that 55.1% of renters chose to renew their lease, which is the highest renewal rate in ten years. In 111 markets, apartment rents reached a new peak in February, climbing an average of $7 to $1,175.
Given these factors, homebuilders and apartment developers have cut multifamily and single-family construction more than expected in March, declining 8.8% overall from February. In February, the West entirely powered the sales numbers.
In the non-residential investment market, the year over year decline in investment sales reported in April was 35%. The decline in volume has led to the first decline commercial investment values in six years. Values fell 0.3% in January from the prior month.
The Fed is not likely to increase rates at all this year.
As the U. S. real market begins to flatten out and wind down, what impact will this have on public sector planning?
More of government is driven by the real estate sector than any other portion of our economy. Between taxes, fees and jobs, the real estate sector is very important to the public sector. In California, Stockton has been working through a bankruptcy. San Bernardino is in the middle of bankruptcy. The City of Riverside and Maywood are teetering on the brink of bankruptcy.
Emphasis on Efficiency
As more of the public dollar goes toward public employee salaries, benefits and pensions and less to fixing infrastructure, the public is demanding more efficiency from the public sector. In the City Los Angeles, street trees are trimmed every 18 years and most sidewalks are never fixed.
Focusing bond issues around specific problems has become a strategy for the public sector. Issues that are being considered include infrastructure, sidewalks, affordable housing and homelessness. This is another way for politicians to protect public employees, increase taxes on the residents, and give the public sector money that will never be enough to solve the intended problem.
In limited situations public-private partnerships have been utilized for pet public sector projects. Up and coming public-private partnerships include: the redevelopment of the Los Angeles City Hall Center, the redevelopment of the Long Beach City Hall and redevelopment of Ports O’Call Village on Port of Los Angeles property. The Port will provide the funding for all the necessary infrastructure and the Ratkovich & Co., the developer, will finance all the vertical development privately.
While the economy will be headed downward, residents will be demanding more services and the removal of utility taxes, but less dense development. Only the strong and strategic public leaders will survive the vortex of these contradictory forces.
Wilshire Grand Center (office tower) under construction. Photo by Downtowngal, Wikimedia Commons
Multi-Brick Design Beach Spring Farm subdivision. Photo by Jason Meredith, Flickr Creative Commons
Bluff Creek and the new Playa Vista residential development Photo by Downtowngal, Wikimedia Commons
Beach bikepath in the Venice Beach Park, California. Photo by SameerKhan – This work has been released into the public domain by its author.