I've been noodling on the real estate market for the past few months as I see it as a health indicator for the construction industry. As I have posted earlier, the housing market seems to heating up nicely. That's great for the economy as a whole, but I'm more interested in the types of construction projects that will get larger general contractors and their subcontractors working more. So how are those projects moving? Well, let's dig into that a little.
Commercial Real Estate
I am very curious about commercial real estate. I mean, if the housing market is moving in a positive direction, commercial building cannot be far behind it, right? The same low rates that are enticing people to buy houses are basically available to real estate developers as well. With borrowing rates low, you can build more space for the same loan size, as is represented in the figure below:
I know, I know...the above is for home mortgages. But the same idea applies to borrowing for commercial real estate. Right now, you can build more space for the same loan payment, or so my thinking goes. But there in lies the rub. My thinking fails to grasp that there is still a glut of commercial space on the market. I spoke to two friends of mine in the commercial real estate market, and they say that development of new space will not increase until the level of vacancies decreases. Their take on this makes perfect sense, especially since we're in Sacramento which over-developed commercial space at a crazily drunken pace before the market crashed. Do the problems of Sacramento apply to the broader United States? Probably, but there are signs of life.
Check out these graphs:
The first of the three graphs shows data collected by the St. Louis Fed. Commercial real estate prices climbed rapidly until 2011 before steeply declining until end of Q1 2011. Since then, prices have been treading water, but they have ticked up positively in 2012 (this data only shows for Q1 2012, but even after taking the rose-colored glasses off, prices, at worst, have seemed to stabilize).
The second of the three charts (from the Calculated Risk Blog) shows the U.S. Composite Indices (last updated in October), which are two broad measures of aggregate pricing for commercial properties (you can find the whole article describing the indices here). It's subtle, but while prices decreased slightly in October, they are up quarter-over-quarter and year-over-year, and the Value-Weighted index is up 35% since bottoming out. I repeat, this is subtle, but the trends are positive.
The last of the three graphs shows the results of a survey conducted with commercial real estate lenders by the Federal Reserve (see the chart and some analysis from Cullen Roche at the Pragmatic Capitalist blog). The demand for commercial real estate loans, which I would think would be a good indicator of projects to be developed, is trending positively. Lending activity is choppy over the past two years (probably due to general "market uncertainty"), but it is trending positively and is way off its low.
So what does this mean? In the worst case scenario, commercial real estate prices are stabilizing, and in the best case scenario prices are increasing modestly. Lending activity is increasing. Taken together, I think this calls for cautious optimism for builders that commercial building will increase in the next year. Certainly, there will be pockets of strength (e.g. San Francisco/Oakland/San Jose Bay Area) and pockets of weakness (Central Valley of California, which interestingly enough, is not far from the Bay Area), but the general trends are slightly positive, generally speaking. Hopefully they stay that way or improve (duh, right?).
Multi-Family/Mixed Use Development
So the single family market is improving (due to declining inventory and low mortgage rates, among others), what about dense urban housing? I haven't collected any data (it's finals week and I'm swamped with grading), but I have collected four articles on large-scale projects in big North American cities. It seems that housing, while choppy, is always a good bet in big cities because the markets will rebound, particularly in the cities highlighted below:
Washington D.C.: Developers are planning a 27-acre mixed use (1,300 residences, 960,000 SF or commercial space) in southwest D.C. (read more about it here and thanks to by friend Young Hoon Kwak for posting this link on Facebook). The developers are seeking $1.5 billion in financing, so it's not like they will be breaking ground tomorrow, but this is a good sign for commercial builders in D.C.
Toronto: Toronto seems positively efforvescent in terms of high-rise construction, with 31 projects greater than 150 meters (almost 500 feet) slated to be completed by 2015. Check out the picture in this article. It looks like an Autobots vs. Decepticons battle featuring tower cranes. Hopefully this isn't the sign of a bubble...but it is a sign of commercial builders working!
New York: More big building projects in the BK (that's Brooklyn for those of you unfamiliar with the rap game), this time with a 32-story residential tower on top of the newly-build Barclays Center (the house Jay-Z built and home of the Brooklyn Nets). This project is another piece of the massive Atlantic Yards redevelopment project. A cool feature regarding the construction of this project is that it will be completely pre-fabricated off-site and trucked into place. The general contractor is Skanska, and if you want to observe the future of the construction industry, watch this project. To read more about the project, check out this article.
San Francisco: Last, but not least, check out what is being planned in SF. Lennar is planning on building over 20k housing units in the City's Hunter's Point, Candlestick and Treasure Island areas (all former U.S. Naval Bases and, I suspect, full of environmental hazards). What's unique about this project, besides the size and scope for an SF project? It is being funded by loans (to the tune of $1.7 billion) from China Development Bank and will be built by a Chinese general contractor, China Railway Construction Co. The project is expected to take 16 years to complete and will create an estimated 5,000 jobs. China has been investing in the U.S. government for years, but this combo of direct Chinese investments coupled with a Chinese builder is unprecedented. U.S. lenders and contractors should take note, as this project will likely be a signal of future trends (good or bad, depending on your perspective and the success/failure of the project). To read more, check out this article.
So no scientific data, and certainly investments in those cities are, very relatively speaking, safe in any economic state due to the fact that they are major centers of commerce, so they cannot be used to draw broad conclusions. But they do show, anecdotally, that activity is picking up.