Real Estate Development Industry 2014 & Beyond

Once the real estate industry sustains a positive momentum, are we back to business as usual? Or are we in unchartered waters with new opportunities?

As Housing Goes………So Goes the Economy? Will housing jump start the economy or will interest rates and inflation slow down housing before it gains sustainable traction?

Will we be partnering with various stakeholders to reduce risk?

Has the government regulatory pendulum swung so far away from the entrupenuirial spirit that it can’t be returned?

From this point forward in time, we must redefine our real estate industry or it will continue to be redefined by others. What is in store for us 2014 and beyond?

We can all agree that there needs to be a balance between government regulation and the freedom to use our property as we see fit? This blog post will hopefully generate reaction, debate & action or maybe even inaction from being paralyzed.

2014 and beyond will be a new horizon for the real estate development industry. Those that can answer these questions will know that it is not business as usual. These questions are not new but the answers may very well be different especially after this great recession.

What to build

How to build

When to build

Where to build

Start thinking about doing what you do and always have done …..differently!

Starting in mid-January 2013, I devoted my blog to the review of the following key real estate development industry components. In 23 blog posts, I have illustrated the changes in the industry since the 1970‘s.

Land

Land Overview
Land Acquisition & Due Diligence
Land Design
Land Development Stakeholders
Land Development Government Regulations
Smart Growth
Sustainable Land Development
Agenda 21
International Council for Local Environmental Initiatives (ICLEI)
Land Development Permits & Approvals

My intent of this post is to focus on 2014 and beyond.

As an introduction to this topic, I am offering my answers to the questions asked after every recession since the early 70’s. Do not hesitate to offer your opinions.

If you build it, will they come? Today, builders can’t build fast enough to meet the current demand. Prices will escalate and interest rates will move upward. This will result in a slower housing recovery.

Will national builders expand their market share? Yes.

National builders will again buy land for their own use. Are there developers left to develop residential properties and feed builders finished lots? Not many!

Will commercial builders enter the residential industry? Logical business expansion

Are there any regional developers left standing? Not many and not in every state

Will home building be profitable in the future? Yes but the profit will be on the land. It has always been about the land!

Will government expand its role as a builder/developer? Yes if they want growth. Commercial, retail, business, and industrial growth is already being promoted through economic development quasi-government agencies.

If we are not careful, government will become the only developer in town for residential projects – especially in small markets.

Where did all of the construction trades disappear to and will they return? They will return but very slowly back to the industry. We will experience a labor shortage for years.

Will there be material shortages and higher prices? We can expect material shortages because plants scaled back or closed over the past 5 years. In the past, sheetrock, cement, lumber and even windows have been in limited supply after a recession ended. Higher prices – yes.

Will interest rates remain low? The Fed doesn’t even know! How high and how quickly will interest rates rise are the questions to ask. The Fed has been manipulating the economy in unchartered waters. They probably don’t know the ramifications of what they are doing. Pray for the best and plan for the worst. Is there another shoe to drop?

Will inflation return? The Fed has always manipulated the rate to control inflation. Inflation has returned and will continue to be a serious problem for all of us.

Will liability and law suits break the back of the industry? It continues to be a problem no matter what industry you are in. It will only become worse.

Will gas prices return below $2.00/gal or should we expect a new norm of $5.00/gal? This new norm threshold may not take as long as we would expect.

Our energy resources are expansive and we are starting to see some benefits. However, will this translate at the pump? My guess is NO. We have accepted $3.50/gallon gas as the new norm and this will go higher.

So how can our real estate development industry return back to a normal business model? I don’t think it can. We must do what we do and always have done differently.

Random thoughts and opinions:

Have you read your local land development or zoning ordinances lately? 

One ordinance now includes color options for wind turbine blades in a RESIDENTIAL district.

Federal funds may be earmarked for local governments implementing sustainable community development practices.

Federal funds may drive economic development to certain locations by ONLY approving “green” housing projects.

Federal funds may be allocated to local communities which restrict sewer extensions to “green fields”.

Federal funds may be used to manage community growth patterns by encouraging re-development projects and gentrification by selecting winners and losers.

Local government may try to manipulate the housing supply and demand curve

Municipalities may restrict the number of homes built each year by managing the price points through zoning restrictions.

If a housing price point was not being constructed, will local government use eminent domain to take property for a specific housing need? This has certainly been done for non-residential projects and low income housing but what about for the “move-up” market?

Government at all levels will continue controlling growth patterns by micromanaging infrastructure to ensure a social-economic balance at the expense of the industry and free enterprise.  

Projects may be put on a ballot for citizens to vote for or against. If successful at the ballot box, developers would then enter into a contract with local government.

Rezoning of property would not be permitted.

Residential projects may be approved only if it complements a commercial use – not the other way around.

Mixed use projects for small planning areas will be the norm balancing residential and non-residential use with higher densities and more intense uses.

Aesthetics and energy conservation will be more important to the general public than practical cost effective approaches.

The Federal government will further define lender requirements and make it more difficult for buyers to qualify for a mortgage

The Federal government will continue its mission to “take away” land for development purposes by expanding regulations. The result will be higher land prices.

Final thoughts on Land Development 2014 and Beyond:

Land –

                        Land is not being made any more
                        All the ‘good” land is gone
                        Land prices for “buildable area” will continue to escalate
                        Less buildable area will be available due to government restrictions

Regulations –

                        Outdated ordinances need to be updated
                        Density is the answer but the question is wrong
                        The pendulum has past the point of no return

 Design –

                         New home features have included too many bells and whistles and buyers      are unwilling to make concessions. A/C used to be an option in cars and in homes!
Aesthetics will be elevated as a key component of local government approval.
           
Stakeholders –
Special interest groups have become embolden by being permitted at the table. The industry has always reacted to the negative voice since those that need affordable homes or businesses that need affordable rents are not at the table

Majority right – minority rules ---- Political correctness gone a stray

 

Costs
                     Who cares about costs!!! Government? Stakeholders?
The cost to build a new home is over 50% of the sales price of the home – a new norm in response to buyer demands. Out of control spending! Will we ever return to “nice but not necessary”?

Construction

                        Labor and material shortages will be the headline in 2013, 2014 and beyond. National builders will demand attention when they start paying weekly!
                
Markets –
                        Small markets will again be the attraction
                        Commercial Developers will dominate the urban markets
Government will use regulations to limit expansion out from urban cores
“Where will our children Live” will once again be the motto of the future!
Sales will become virtual as builders shy away from the traditional model center approach.

Sustainability has only started to be in the mindset of the new home buyer.

Do you really think the college graduating classes from 2008 – 2013 are optimistic about buying a home?

Do you think they have the same dreams as their parents?

How will technology change land development?

How will we capitalize on social media platforms?

Are we visualizing 2014 and beyond as the status quo or are we going to “do what we do and always have done ---- differently”?

I admit many questions and few answers. The real estate development industry has always been and will always be a fragmented industry. Our industry is coming out of this recession but it will be different.

Local communities must rely on economic growth to stay solvent. There is a balance between what the existing citizens can shoulder with taxes or user fees and what must be paid by real estate developers. To be proactive developers and design professionals must become involved in local politics. They must be elected to the town council! We have reacted all too long. We as industry professionals must be proactive to initiate change toward economic prosperity for our local communities.

The answer to all of the above questions and random thoughts is LAND!