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Reading the Tea Leaves on Atlanta Construction

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With all the conflicting signals which direction makes sense?

tealeavesWhat’s happening with residential and commercial construction in the Atlanta region and what to expect going forward? That’s our task for the day but first, a little bit of history to put things in perspective. Through the nearly 35 years we’ve watched the Atlanta region there has been a tendency for residential to lead commercial construction activity, but not always. At times, new arterial roads and highways become significant growth vectors that lead to commercial activity preceding residential construction. In the classic “build it and they will come” concept that’s all you need, but in practice that does not always work. This was particularly true on the south side of Atlanta where commercial got way ahead of residential construction with dire results for some. Commercial construction pulled way back but did not experience the expected foreclosure cliff forecasted by many pundits. We are still absorbing a lot of properties, even to this day. However, shortages are developing in more than a few geographic areas and a general shortage of land for homebuilding (again in specific areas) is putting some of those old metrics back into play. Commercial is not dead!

 

There has been a general decline in household formations going on since 2006. The U.S. Census Bureau nationally is projecting a continuation of this trend for the 20-64 age bracket population over the next 10 years. We have a lot of concern with millennials who traditionally are the majority of first time homebuyers. Millennials spend a staggering 46% of their income on debt according to a recent Wells Fargo survey. At first blush, this might be received as doom and gloom news for both the residential and commercial markets but there are three major caveats:

1.      America is seeing the baby boomer generation retiring at the highest rates ever recorded. These individuals tend to be affluent and many like the Atlanta area and will continue to want to live here putting pressure on the housing supply by not freeing up their old homes.

2.      What is true of the whole is not necessarily true of the specific, i.e., the Atlanta market has historically been unique and while the most recent downturn very much included our region, certain characteristics of our market are once again in play. Our transportation system, excellent higher education, medical facilities, land availability, pro-government policies, lower cost of living and other factors favor our region long-term. We see this in a continuation of out-of-state headquarters moving to the area along with more and more warehouse and office consolidation continuing to favor us.

3.      Those massive numbers of retirees in government and industry projected over the next ten years will create the need for replacements at a higher than normal rate. This will create a demand for skilled employees across the board. In addition, wages, stagnant for so long, should begin ramping up as spot skills shortages develop; again helping our recovery to be both vibrant and protracted.

The most significant seismic shift has been in the homebuilding sector. Major homebuilders have perhaps permanently changed the landscape with the top 25 homebuilders producing more than half of all homes in the Atlanta metro region. This compares with numbers from 10 years ago showing the top 25 builders producing about 30% of homes back then. In our estimation this is a permanent change. What does this mean? With large homebuilders having access to Wall Street, bonds, IPO’s and equity; large homebuilders are feeling their oats and can be expected to knock on everyone’s price point. These very same mega builders also have the ability and perhaps the inclination to put growth over profits to consolidate their hold here. The limited amount of traditional bank financing available for the other 1,200 plus homebuilders in our market is a major factor in this sea change. Look for more price pressure on subs and suppliers to become the norm.

For every cloud there is a silver lining. In our case, homebuilders have demonstrated flexibility in where, who and what they build. Atlanta is enjoying one of the greatest renovation periods in its history. Everywhere you look you see remodels, add-ons and tear down and rebuilds. This kind of activity leads to other opportunities. We have not lost our custom builders. Many old-timers are back with innovative upscale designs outside of what the production builders can effectively deliver. Multi-family construction is beginning to boom once again and demographics favor rentals once more; both multi-family and single-family. Interest rates are not moving up again anytime soon. It appears that the Fed and government policy will continue to keep interest rates low, particularly so that there will be no explosion in borrowing costs for the government going into the presidential election season.

In summary, we see the next 2 ½ to 3 years as an excellent time for the Atlanta Metropolitan area with a general recovery on almost all fronts excluding some laggards in the south and some specific project types like retail. Commercial construction is ahead of last year but there is much more in the pipeline than in the recent past. All systems appear to be “Go” for the time being.  Good Selling!

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