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2014 in the Mirror - We do our Crystal Ball Gazing Act

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Crystal BallPerfect Knowledge would be the ultimate way to get ahead. Unfortunately, I don’t know anyone who has it and you probably don’t either. The next best thing though is a great sense of what’s happened in the past and an excellent grasp of the various external factors that frequently control events. Almost all our members are Georgia based or at least focused on this market. Georgia and particularly the Atlanta environs have gone through at least nine up and down economic cycles since I became involved in 1978. Until the most recent down cycle hit, Atlanta and by extension Georgia had what I would characterize as a coastal climate, i.e. we did not get the low, lows that inland communities got, we remained relatively temperate when it was freezing elsewhere. Not so this time. The economic tsunami that flooded the country did not spare us.

 

It is important to look backward to remember what is true of the whole is not necessarily true of the specific. The converse also applies as well. The fundamentals that stood us in such good stead for so long are still in play. We have land, people, a relatively permissive and aggressive economic development situation and most other good things that attract people, companies, capital and opportunities. We simply outscore a great many other areas of the country. The recent snagging of the Mercedes Benz Headquarters is just another sign of our incipient dynamism. On the other hand, this is not your father’s economy. We still have major structural unemployment, distorted economics, a schizophrenic national political situation and other unknowns including the ever present terrorism wildcard. I forget who said it, but in the final analysis you play the game you know. Our members are business people, entrepreneurs, builders and all kinds of subs and suppliers. You can’t hide out waiting for certainty; time to go to work. Get ready to enjoy that Google Fiber Atlanta was just shortlisted to receive! This matters.

 

2014 showed extensive gains across the board with Single-Family construction up an impressive 19% over 2013 and up more than 300% from the bottom. That’s confidence. Our view is that there are still some important structural issues that will place a continuing drag on homebuilding in the state. New home prices are up and incomes are down. It does not take a rocket scientist to infer that this is a problem. Due to some of the aforementioned problems such as problems in Washington and lack of a cohesive economic recovery plan, we are still very fragile. Nevertheless, we project 2015 will see continued growth as long as interest rates stay in the general range of where they are today. The Federal Reserve really wants to start raising short-term rates, but long-term rates are likely not to spike anytime soon. Look for an 8% increase in Single-Family concentrated in the traditional growth areas.

Multi-Family construction did very well in 2014, with the best numbers since 2008. We have come back about 75% from the peak and we see that continuing this year as well. Land is becoming an issue in multi-family construction. Redevelopment rather than Greenfield will become more and more the norm as it has in other cities. We expect a 6% increase in multi-family building permits this year. Financing is still an issue and equity deals are still king. Watch vacancies continue to fall this year and next before stabilizing. A great many of the new projects will be in the high end, and that market is finite. We need to see more affordable housing develop even if it is a bit farther out. Look for this to be the next multi-family growth area.

Commercial construction is still worrisome. We are 38% off our 2008 peak. 2014 was actually down from 2013, and similar to the level of construction in 2011. Projects are bigger on average and taking longer to work their way through the process. 42% of proposed projects we tracked in 2013 actually got built. The numbers for 2014 are not in, but seem to track close to that number or a bit higher. This deep into the recovery is worrisome. Atlanta’s reputation for being over stored, among other factors, continues to be problematic. Niche markets and players abound but the really smart people who read the economic tealeaves are still urging caution. Notice big box players slowing down their expansion plans and many companies, including IBM, rumored to be looking at big layoffs. Commercial construction success today demands great thought and good positioning. There are plenty of projects out there but lots of competition and longer cycles are the norm today.

2015 will be another good year for much of the industry. Consumer Confidence is the largest single economic driver of all. It is our belief, however, that we will not likely see consumer confidence rise to pre-recession levels until their incomes rebound and job opportunities become abundant once again. The uncertainties of the present political gridlock in Washington have many deals left in limbo; especially those funded and actualized by local interests and optimistic but skittish entrepreneurs. For us, that means that it could be 2017 before the U.S. economy and by extension, Georgia’s, once again is firing on all cylinders. Once those issues are resolved our natural advantages will once again come to the fore.

Good Selling!

 

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