Housing Blues

Housing downturn is accelerating in spots and having significant impact on overall project starts.

By Debra Wood

Few bright spots remain in the dismal Southeast residential-construction sector, and a continuing decline is having a deep impact to overall construction activity. Additionally, with continued turmoil in the financial markets, the near-term prognosis for recovery remains poor.

“Florida is probably in the worst condition of any state in terms of a huge overhang of unsold properties,” says Kenneth Simonson, chief economist for Associated General Contractors of America in Arlington, Va. “It will be hard for builders of new for-sale or rental property to compete with the existing inventory.”

According to McGraw-Hill Construction’s 2008 Florida Report, updated in June, the state’s previously booming housing market was predicated on unsustainable demand and questionable lending practices, leading to an unsold inventory at record highs. The report indicates Orlando had a 22-month supply of unsold single-family homes in April and Fort Lauderdale a three-year inventory. In Miami, the supply of unsold condominiums tops more than five years.

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But it’s certainly not just Florida. McGraw-Hill Construction says the value of residential project starts is down throughout the Southeast. Through the end of June, the region’s residential markets had experienced the following declines: Florida, 49% behind the same period a year ago; Georgia, 48% lower than ’07; North Carolina, off by 35%; and South Carolina, 24% behind. (Throughout the Southeast region, single-family starts were doing more poorly than multifamily.)

Paul Wallace, chief estimator for Bovis Lend Lease in Atlanta, describes the city’s multifamily residential activity as “a market on hold.” The company is building the St. Regis Hotel & Residences in Atlanta, a $150 million, 26-story, 634,000-sq-ft mixed-use project in the Buckhead area.

He says 48 of the 53 condominiums have sold at $3.5 million or more per unit. However, the developer, Trammell Crow of Atlanta, has placed the project’s second phase, a high-rise apartment building, on hold due to market conditions.

Still, Bovis is chasing more hotel-residential projects, Wallace says.

“People can find financing for the hotel portion, but it’s the residential portion that the banks and lenders are starting to get queasy about,” Wallace says.

Hardin Construction of Atlanta is working on the $101 million, 30-story, 460,000-sq-ft W Atlanta Downtown Hotel and Residences at Allen Plaza for Barry Real Estate Co. of Atlanta. Completion is scheduled for winter 2009.

Hardin also is wrapping up construction on the $50 million, 19-story 10 Terminus condominiums, and Sovereign, both part of mixed-use projects in Atlanta. Sovereign is part of 3344 Peachtree. Hardin would not release a cost on Sovereign, but Southeast Construction previously reported this as a $250 million project.

Meantime, new multifamily starts aren’t happening like they were a few years ago. “The condo market is all but nonexistent on large-scale projects,” Bill Pinto, president of Hardin, says in an e-mail. “Some smaller unit-count projects have some life to them, but this market will continue to suffer well into 2009.”

Nine other contractors formerly building high-rise condos in the Southeast did not return requests for comment.

Gloomy National Picture

The woes of the nation’s housing market have been a top news story for more than a year now, and national leaders are attempting to ease the problem with various measures. For example, President George W. Bush signed into law a housing bill designed to boost financial market confidence and help some struggling homeowners refinance.

But the news hasn’t gotten much better lately.

The National Association of Home Builders/Wells Fargo Housing Market Index, released in July, indicated builder confidence was at an all-time low, with builders reporting perspective buyer traffic having fallen off substantially. (In early August, Naples, Fla.-based WCI, a builder and developer of luxury homes and high-rise condominiums, filed for bankruptcy protection while it reorganizes.)

The Federal Reserve’s July 23 “Beige Book” summary of economic conditions confirmed a continuing national downturn, with declines in single-family construction in all districts reporting activity. Most districts indicated there was a further tightening of credit standards, especially for residential real estate and construction loans.

“Clearly, the traditional mortgage market is now the problem,” Pinto says. “Oversupply of available units and the inability to resell units adds to the problem due both to a lack of buyers with the financial capability to take units off the market and a dearth of reasonable, available mortgage vehicles.”

Foreclosures play a role in creating a skittish market. RealtyTrac, a California-based provider of foreclosure data, released at the end of July a report showing a 121% increase in foreclosure filings in the second quarter 2008 compared to second quarter 2007. The report states one in every 171 U.S. households received a foreclosure filing from April through June.

In Florida, the foreclosure rates for Fort Lauderdale, Miami, Orlando, Sarasota-Bradenton-Venice, Tampa-St. Petersburg-Clearwater and Palm Beach all ranked among the worst 20 markets in the country, according to the RealtyTrac report.

The number of foreclosures in Florida increased 181.83% from second quarter 2007. Georgia was up 85.12%; North Carolina, 57.97%; and South Carolina, 211.97%, which the report attributed to data collection improvements.

Apartments

While condominium starts are few and far between in the Southeast, apartment developers view the current situation as an opportunity. Due to difficulties buying homes, many people are turning to rentals.

“Overall, the fundamentals of the multifamily apartment industry are strong,” says Bill Donges, CEO of Lane Co. of Atlanta, a multifamily real estate company managing about 140 apartment complexes in its portfolio. “People are coming back to rentals. People don’t have cash for downs. And they are nervous about buying because they are not sure it is at the bottom yet.”

Lane is building the $60 million No. 10 Park, a 312-unit, upscale rental property in Atlanta, and plans to start construction this fall on the Montage, a 19-story, luxury rental project with 160 units in downtown Orlando. The city of Orlando lists the cost of Montage at $20.4 million.

“The real story for the next 18 months is there will be the shortfall of supply,” Donges says. “With the capital markets, the situation is difficult to get money to develop new apartments.”

Donges expects demand to surge once the economy strengthens, with new college graduates and downsizing baby boomers seeking apartments.

Brett Fortune, a principal with Fortune-Johnson General Contractors in Atlanta and past president of Associated Builders and Contractors of Georgia, says his firm, which builds primarily high-density multifamily, had its best year ever last year, and 2008 continues to be strong for apartment construction.

Even so, Fortune says, “It seems some jobs are being pushed off or are slow to start, and the reason is financing is tougher to get now for developers than three to four years ago.”

Fortune-Johnson builds throughout the Southeast, with the units and ground-floor retail wrapped around a parking deck. The company is currently working on the $22 million, 225-unit Montage Embry Hills in Atlanta for Tucker Development Partners of Atlanta; the $31.7 million, 301-unit Six Sixty Old Fourth Ward Apartments in Atlanta for Southeast Capital Partners of Atlanta; the $58 million, 409-unit St. Albans at North Hills in Raleigh, N.C., for Kane Realty Corp. of Raleigh; and the $49 million, 360-unit Circle at South End in Charlotte, N.C., for Crescent Resources of Charlotte.

Single family

High-end, $5 million-plus houses continue to be in some demand in Naples, and Kraft Construction Co. of Naples is currently building more than a half-dozen homes with values up to $13 million.

“People with money are looking at it as a time to take advantage of lower labor and material costs,” says Keith Wulber, senior vice president of Kraft’s special projects division. “They are spending and building beautiful houses.”

Wulber says new housing at lower price points in the Naples market are meeting with varied success. He adds that Kraft’s high-rise condominium work has dried up.

Neal Creech, president of Creech Custom Builders in Atlanta and president of the Inner Atlanta Chapter of the Atlanta Home Builders Association, says prices have come down closer to what buyers expect, and he’s seeing more interest in homes valued from $1 million to $2.5 million in established neighborhoods.

“With gasoline and energy costs so high, we feel traffic is now a serious [concern] to people,” says Creech, adding that buyers are willing to pay more on their mortgages to be in the city rather than spending on gas.

Audie Barefoot, CEO of Fonville Morisey & Barefoot, a new-home marketing firm that works for developers in Raleigh, N.C., says that region is faring better than most areas of the country, but new home sales are off 25% to 30% from a year ago.

He adds that homes priced at $400,000 and below are still moving, but slowly. He reports the Raleigh area still is experiencing good job growth, but people relocating to the area are choosing to live in apartments.

Broad Impact

“Improvement depends on how quickly house prices come down and whether interest rates remain stable or fall,” AGC economist Simonson says. “I expect at least six more months of declining or very weak home sales and probably several more months after that before builders pick up their tools again.”

Bovis’ Wallace says people will need some time to feel easier with the stock market declines and increases in energy prices and groceries before the residential market will improve. He adds that he hopes that will occur within the next year or two.

“Clearly it will take us into 2010 to get the numbers down on the house excess inventory,” says Lane’s Donges. “You’re looking at a situation with less supply in 18 months and more demand in 2010.”

With the residential market down and the economy weak, other sectors also are faltering. Wallace says he has seen a dropoff in retail starts.

Simonson explains that a great deal of shopping accompanies moving to a new home and fixing up an old one for sale. With a decline in home transactions, people are not visiting home-improvement, furniture and garden-care stores.

“Many of those chains have scaled back and are not opening or remodeling,” Simonson says. “The bigger impact on construction that we are seeing now is the drop in value to existing homes and the addition of fewer new properties to the tax roles, which results in a drop off in tax receipts. School districts and local governments that rely on property taxes will be scaling back.”

Jim Ploska, president of APM Construction in Daytona Beach, Fla., and treasurer of Associated General Contractors of Greater Florida in Tallahassee, Fla., says municipalities have cut back on building fire houses and other projects.

“It’s so far reaching,” Ploska says. “The tax base goes down, the school district has closed schools and laid off teachers and the local public works projects are fewer than a few years ago.”

Pinto adds, “From a pure construction standpoint, more resources are available for commercial and institutional work, [with] more subcontractors chasing fewer projects, putting considerable downward pressure on the numbers, making it difficult for all contractors.”

At the same time, Pinto says, turmoil in the financial markets has bubbled over from housing into the commercial sector, making it more difficult to pull equity and debt together for commercially viable projects.

“The longer projects are delayed, the more material prices increase, thus putting more pressure on making the numbers pencil out,” Pinto says. “Material prices continue to outpace the subcontractors’ ability to absorb increases, causing overall project costs to inch up.”

Yet the fiercer competition is forcing contractors to absorb more material cost increases, especially for commodity-type products, Pinto says. Plus, the labor force continues to be stressed, since the residential workforce isn’t completely transferable to the commercial workplace.

“Finding the right balance of financial viability, consistent materials availability and pricing, and availability of labor are the overriding challenges for the next 12 to 18 months,” Pinto says.