Category Archives: National information

Demographic Changes That Will Impact Real Estate

Demographic Changes That Will Impact Real Estate

As the years progress, audiences change, and this includes target audiences. When you work in residential real estate, your entire region serves as a target audience, so the best way to measure changes in that audience is to look at changes in the demographics.

While every region has its own unique shifts, the United States as a whole has its own trends. These nationwide demographic changes will impact local residential real estate over time. Richard Fry, a researcher at the Pew Research Center, decided to investigate these nationwide trends to determine how residential real estate will be affected. Specifically, he projected what the state of the industry would be by the year 2065.

Current Demographic Changes

Current Demographic Changes

Click to enlarge image

Through his research, Fry was able to find 5 demographic changes that will impact what housing units residents are willing to spend their money on, and why. In no particular order, here are his findings:

 

  1. If you are looking at demographics decades into the future, then present birth rates will naturally have a significant impact. Currently, young Americans are not having children at the same rate as the generations that came before them.

    In 1980, 43% of women 18 to 29 had at least one child. Today, that number has dropped to 30%.

    Millennials are waiting to have children, and this directly impacts the types of housing units that will be in demand in upcoming years. This also affects where those units will be purchased or rented.
    downtown assets
  2. Currently there is a trend that shows that Americans and many millennials are moving away from the suburbs to live in the city. This is also impacted by millennials waiting to have children. This focus on work will decrease demand for suburban housing, and increase the traffic towards city apartments.

    Demand could bolster the market’s already-frothy prices for downtown assets, and perhaps discourage some development in the suburbs.

    When more millennials do begin to start families, it is possible that this trend reverses. For now, however, urban growth is worth the investment for the years leading up to that potential family formation.
  3. Birth rates don’t just impact where people choose to live; they also impact household size. Around the country, household sizes are increasing. Not only are millennials not having children as easily, but with economic hardships increasing foreclosure rates, families find themselves living together under one roof. Students and graduates are continuing to live at home, and older parents are moving in with their adult children.

    An increase in average household size is much of the reason why demand for new housing has been so sluggish, even as the wider economy has recovered.

    With families coming together like this, demand for new homes naturally decreases. However, if you are in the homebuilding business, homes that can accommodate multiple generations will help facilitate these new family dynamics.
  4. While studying current Americans can provide insight into future changes to residential real estate, there are also benefits to looking outside the United States. Currently there are over 350 million Americans in the US, but Fry predicts that the population could grow to 441 million by 2065. Fry attributes this growth to immigration.

    Taking middling, reasonable assumptions about immigration – 1 million immigrants per year – the American population should grow to 441 million by 2065. Now let’s suppose we switch off immigration…By 2065, we would only have 338 million Americans. Without immigration, there’s very, very little population growth at all.

    The highs and lows of real estate demand will be determined by immigration, and how it grows or declines over the years. The policies that influence immigration will then have an indirect influence on real estate demand. It also follows that areas that typically have a high percentage of immigrants will see increases in demand, as immigration into the country increases.
  5. The final of these demographic changes connects everything together. Residential real estate will be impacted in multiple ways by racial and ethnic diversity moving forward. Currently the US population is made up of 60% non-Hispanic white residents. According to Fry, however, white Americans are not having children at the same rate as other races. This will have an impact on future household sizes.

    Only 16% of the white population in the U.S lives in a multigenerational household, compared to 29% of the Asian American population, 27% of the Latino population and 26% of the black population.

    When building residential housing in the future, it is necessary to consider the population and its racial/ethnic background, how that will impact household size, and where people with those household sizes tend to live (city vs. suburbs).

Look at changes in the demographics

Going Forward

The real estate industry needs accurate information to understand who is willing to spend money on what housing units. Knowing where people choose to live, and what they need out of their living quarters will provide the necessary insights for developing the right housing units, and selling them successfully.

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An Interesting Take on Growing the Workforce

The shortage of skilled workers in construction has been a problem for several years and the impact on construction costs has reached the point where commercial real estate development is being slowed, according to NAIOP. There is a CoStar post about the issue that is very interesting in that it puts contractor groups on opposing sides of what you would think would be a unifying issue.20190422_174002

At issue is the Department of Labor rule, which resulted from an executive order in 2017 that expands apprenticeship programs to allow trade groups and employers to establish separate training from industry certifiers. The revised National Apprenticeship Act exempts construction from its rules for now, but developers are pressing for the rules to be expanded to include construction, and the nation’s largest contractors group is supporting them. Associated General Contractors of America (AGC) has been advocating for growing the construction workforce, including pressing for supportive legislation. AGC supports the revised rules, even though the rules allow apprentices to be paid minimum wage.

The last point is what has developers hoping that the rule change is extended to construction. It’s also what has union-affiliated contractor groups in opposition to the expansion of the rules. Union apprentices are typically paid two or three times minimum wage while working their way to journey-level. Opponents of extending the rules to construction also worry that independent apprenticeship programs won’t adhere to industry standards for certifications and will lead to poor work or unsafe conditions. The arguments are summarized in this excerpt:

Proponents of expanding construction apprenticeships argue the initiative will address the dearth of these kinds of workers and help close the job gap, adding to the workforce pool for contractors and reducing their costs as well as those of developers. The lack of construction workers such as pipe layers, sheet metal workers, carpenters, concrete workers and pipe fitters/welders, as well as logistics employees, has hurt the commercial real estate business.

That’s driving up development costs and hampering the expansion and profitability of warehouse and distribution centers, according to NAIOP, the national trade organization for the industry, which issued a report on the issue earlier this year.

But there is a debate on apprenticeship expansion, with opponents charging it would create a separate, and inadequate, certification system from existing programs, with poorly trained workers who could endanger themselves, others and do substandard work.

As the labor department proposal is written now, it excludes construction, an industry that has for decades had apprenticeship programs in place for trades such as plumbers and electricians. Those programs are registered with the labor department and are funded by unions and employers, as part of collective bargaining agreements.

History has shown that government making rules to solve temporary market conditions rarely solves the problem, and usually creates unintended negative consequences. If you are developing a commercial project right now, the costs of construction – and the schedule – are becoming unfavorable. The pro forma rents aren’t going up as fast as construction costs. Investors will have to accept less of a return or the project won’t pencil out. That’s not a great thing but that is an inevitable consequence of economic prosperity that lasts as long as the current expansion. In truth, wage gains have been held off for much longer than in any previous business cycle; and the magnitude of wage growth is much lower than the typical 4-5% that accompanies a recovery. During the recovery stage of this business cycle, wages barely grew and only moved above 2% since early 2018. Business cycles run from imbalance to imbalance, from lean conditions to fat. It’s not fun to be the development that builds during fat times but, then again, it’s also not fun to try to lease up during lean times. It’s the nature of business cycles. At some point, things will slow down and costs will fall back. New development will follow.

Note: In the Sept. 26 BreakingNews email blast, PJ Dick was omitted from the list of contractors proposing on the $15 million Flats on Forward in error. The list of contractors should have read PJ Dick, A. Martini & Co, Mosites and Rycon.

US Construction Up Again

The Census Bureau reported on February construction activity April 2 and the data showed a reversal of the recent trend in private/public spending. February’s construction totals reached a record $1.273 trillion (seasonally-adjusted), an increase of 3.1% over February 2017.  The AGC’s Ken Simonson noted that the increase was the result of a 5.5% jump in private-nonresidential spending. Spending declined in 12 of the 13 public construction categories, including the largest – highways and streets – which saw a drop of 0.1% from January and 5.1% from last year.
total us construction spending

The $80 million Peters Twp. High School has been released for bidding, due May 10. Bids are out on early packages at the AHN Wexford Hospital being managed by Massaro/Gilbane. CMU took proposals last week from Jendoco, Mascaro, Mosites, PJ Dick, and Rycon on its $45 million Health & Wellness Center – a renovation of Skibo Hall. Pitt selected A. Martini & Co. for its $3.2 million Thaw Hall renovation. The Steelers tabbed Mascaro Construction to build the $2.5 million expansion of Bud Light Pub 33 at Heinz Field. Turner Construction was awarded the 20,000 sq. ft.  build-out of Cozen O’Connor’s space in One Oxford Centre. Franjo was awarded the contract for the new Aldi’s in Greensburg. Nexus Construction has started work on the first of The Healing Center’s medical marijuana dispensaries in Monroeville and Washington. PA Turnpike Commission awarded Trumbull Corp. the $37.8 million contract for Section 55C1-2 of the Southern Beltway.

Some Optimism From Leasing/Finance Executives

The equipment leasing and finance industry is a $628 billion industry that can be an interesting barometer on activity. The industry’s association released its November 2011 Monthly Confidence Index on Friday and confidence in the equipment finance market is 57.4, up from the October index of 50.7, indicating an increase in optimism about business activity from leasing and finance execs, despite ongoing concerns about the global economic situation.

 When asked to assess their business conditions over the next four months, 18.9% of executives responding said they believe business conditions will improve over the next four months, up from 9.8% in October.  75.7% of respondents believe business conditions will remain the same over the next four months, a decrease from 80.5% in October.  2.0% of executives believe business conditions will worsen, a decrease from 9.8% in October. Some of the other highlights of the survey are:

  •  24.3% of survey respondents believe demand for leases and loans to fund capital expenditures will increase over the next four months, an increase from 17.1% in October.  70.3% believe demand will “remain the same” during the same four-month time period, up from 68.3% the previous month.  5.4% believe demand will decline, down from 14.6% who believed so in October.
  •  27.0% of executives expect more access to capital to fund equipment acquisitions over the next four months, up from 12.2% in October.  73.0% of survey respondents indicate they expect the “same” access to capital to fund business, a decrease from 87.8% the previous month.  No survey respondents expect “less” access to capital, unchanged from October.
  •  When asked, 16.2% of the executives reported they expect to hire more employees over the next four months, up from 14.6% in October.  75.7% expect no change in headcount over the next four months, a decrease from 78% last month, while 8.1% expect fewer employees, an increase from 7.3% in October. 
  •  In November, 32.4% of respondents indicate they believe their company will increase spending on business development activities during the next six months, up from 26.8% in October.  67.6% believe there will be “no change” in business development spending, down from 68.3% last month, and no one believes there will be a decrease in spending, down from 4.9% one who believed so last month. 

 

 

Housing Market May Have Found the Bottom

One of the more perverse (and comforting) realities about doing economic forecasting is that you can get a reputation for wisdom by merely being wrong less than your audience. So emboldened I am going to go out on a limb and predict that the national decline in housing values has hit bottom, or at least the trend has. By that I mean that the indicators of housing sales have reversed themselves within the past 90 days, and that housing values should begin to firm and move upward by the early part of 2009.

 There’s alot of reasons that should sound like a damn fool forecast, not the least of which is the almost certainty of recession symptons (if not the official recession) in 2009. Higher unemployment, stagnant wages and potentially higher prices for necessities don’t make for good buying conditions; however, remember that the seeds of the decline were sown when the economy was flying at its highest in 2006.

Here’s what has finally pushed me to the side of the recovery signal: Pending home sales in August spiked over 9% compared to July. Now there’s no assurance in that, and in fact, the data probably includes alot of bad anecdotal news, like “vulture buying” and price capitulation in overbuilt markets. But the diamond in the rough of the August data was that the increase marked the third straight incidence of an increase following an earlier increase/pullback. That probably sounds confusing. What that shows is that the increase in pending home sales bounced back, tested the bottom and bounced back higher again. That happened in April over February, June over April, and now August over June. If this was a stock chart you’d be calling it a buy signal.

PHSI chart shows pending sales since 2005

PHSI chart shows pending sales since 2005

What’s also good in the August data is that the biggest gains regionally were in places previous in the worst shape: Naples FL, Las Vegas, Central California.

Regardless of the discounting that may be involved, the removal of housing from the inventory is the first step in reducing supply before prices can start to rebound. The realistic prediction is that recessionary forces will probably keep demand from growing for the next 6-18 months, but a decline in supply will firm housing prices ahead of renewed demand, whenever that may occur. And don’t forget that it’s the decline in home values that exposed the weakness of the lending standards and started this whole financial crisis 15 months ago.

Month Pending Home Sales Index
Aug-05 124.4
Aug-06 111.9
Jul-07 92.8
Aug-07 85.8
Sep-07 87.8
Oct-07 89.8
Nov-07 86.9
Dec-07 85.9
Jan-08 86.2
Feb-08 83.8
Mar-08 83
Apr-08 88.9
May-08 84.5
Jun-08 89.4
Jul-08 86.5
Aug-08 93.4

Don’t Panic

September 29th marked at least the third ‘worst day in banking’ this year. With six or seven different ways for the average citizen to find out simultaneously that the House of Representatives turned down the so-called ‘bail-out’ and that Wall Street didn’t like that, it is easy to understand how fear could well up in such a short time. The worst thing any investor can do is to sell into a market panic, unless minimizing your portfolio is the goal.

Remaining calm when all around you is chaos is easier said than done, but there are a couple of things you can do to practice calming your nerves.

First and foremost, focus on the facts. The media is in extreme competition for your attention, and the current theory is that you’ll pay attention to extreme reporting. That means that every event is a ‘crisis,’ complete with its own title, and that the consequences are reported as earth-shattering every day. With all forms of media shouting doomsday headlines at you every minute of the day, it’s easy to forget that the US economy hasn’t even experienced contraction in GDP yet. Unemployment is at 5%, not the 25% of the Great Depression, or even 10% that we experienced in western PA in the early 1980’s. We are most assuredly in an economic slowdown nationally (probably a recession already), but it’s about time for one of those anyway, just like in 1989-1990 or 2001-2003, or any time we have five or six years of growth.

Focus on your investment objectives. Unless you are trading for short term cash growth (in which case-good luck), these tough days for the stock market will pass. If you have an account managed by a professional, your money is probably being used to buy more stock in undervalued companies that will grow that much more rapidly when recovery comes, whether that’s next quarter, next year or next decade.

Focus on the region. Construction and real estate fundamentals in western PA are better than normal. Vacany rates are declining, rents are increasing, and job creation is accelerating. We have massive investment in industrial construction that will produce manufacturing jobs. Legal and accounting firms here continue to grow as their businesses have grown beyond regional borders. Even our banks have steered clear of the poison that has affected other regional institutions. And we all know how strong the healthcare and technology sectors have become in the region.

There is daily evidence that businesses here will be cooling off their plans for construction projects. Doubtless contracting in 2009 will be slower that the past few years, unless some real clarity about the financial markets happens in the next few months. That’s OK. It won’t be fun to endure a slowdown, but the upside is that contraction is the natural response to an extended period of economic growth, and western PA has had the growth. Moreover, the next wave of growth, be it from more tech jobs, healthcare or energy, is already building to keep the downtown relatively short and shallow.

Is the Commodities Chokehold Over?

At noon today, the spot price for oil had recovered about half its losses to sit at $97 and change per barrel. Earlier the price had plunged to just over $93. Gold was up to $780 an ounce, but that level is some $300 below its mid-summer high.  Copper was down to $3.13 per pound, almost a dollar a pound off its summer high (which was almost a record level). After more than a year of rapidly increasing commodity prices, the world’s cooling economic outlook may finally have broken the fever tht has infected basic materials and buildings products for construction.

About the only thing looking up today is diesel, and even that is trending back. Hurricane Ike had plowed into literally the worst spot in North America for the refining business, the channel that runs from the Gulf, through Galveston Bay and into Houston’s refinery row. But as the storm receded another day it looks like damage will be minimal. Some enterprising sorts in the Gulf and Florida have jumped prices at the pump by 50 cents or more (one group of knuckleheads added a buck on Saturday and are now in possession of indictments from the Florida Attorney General’s office), but locally the price of diesel has gone up a dime or less.

The parts of the world that were driving high prices for oil, steel, copper, aluminum, etc. are beginning to slow down. China expects to become a net exporter of steel by 2009. India’s infrastructure needs to catch up to its growth again. The European Union nations, which consume roughly two-thirds what the US does, is experiencing the same kinds of problems (housing slump, reeling financial firms) our economy is, and will be in a recession by the start of 2009. So there is a real decline in demand for the pereviously overheated commodities worldwide. And, as usually happens, the rising prices spurred expansion of supply capacity, which will come on line just as demand craters for a lot of basic materials.

Don’t be surprised to see oil below $75 after Christmas. If the illiquidity in the financial markets continues until that time, there will likely also be a double-digit decline in non-residential construction nationally, which will further pressure prices. None of this is new, of course. After the last oil crisis in the late 1970’s triggered a global recession, prices of commodities gradually and steadily declined until they hit record lows in the mid-1980’s (remember gold at $300/ounce, oil at $10/barrel?).

In Pittsburgh, some of this nonsense will have an effect on our economy, but overall we have become insulated by skill and luck from this economic wretching. Perhaps PNC Bank is the best example of our good economic fortune: as the rest of the banking business was being clobbered today, PNC’s stock prices fluctuated with 5% of its 52-week high.

There are some potential bad consequences to a commodity bubble bursting, but all-in-all a pull back shows that markets will swing back towards equilibrium. At the very least, falling commodities will mean falling building components. For a region which continues to have demand for new construction at high levels, cooling commodities makes pro formas that much more appealing.

Don’t panic.