CONSTRUCTION INDUSTRY INSIDER
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
CONSTRUCTION INDUSTRY INSIDER 2021
ECONOMIC DEVELOPMENT BOARD
KATHRYN HECHT, CHAIR JORGE ALCAZAR SKIP BRAND PAM CHANTER
DIRECTORS
BOARD OF
WAYNE LEACH MICHAEL NICHOLLS RICHARD MARZO JORDAN KIVELSTADT
REGINA MAHIRI LINDA KACHIU
SHEBA PERSON-WHITLEY, Executive Director
EDB FOUNDATION SPONSORS
FOUNDATION LEVEL
PRESENTING LEVEL
PREMIER LEVEL
EXECUTIVE LEVEL
• AMERICAN RIVER BANK • NORTH BAY ASSOCIATION OF
• COMCAST REALTORS
• SONOMA CLEAN POWER • SUMMIT STATE BANK
• PISENTI & BRINKER LLP
SONOMA COUNTY BOARD OF SUPERVISORS
SONOMAEDB.ORG PG. 2
CONTENTS
4. EXECUTIVE SUMMARY
6-8. MOODY’S INDUSTRY ANALYSIS
SONOMAEDB.ORG PG. 3
INDUSTRY INSIDER: CONSTRUCTION EXECUTIVE SUMMARY June 2021 The Sonoma County Economic Development Board (EDB), in partnership with the Workforce Investment Board (WIB), is pleased to present this 2021 Local Industry Insider Report. For additional information, questions, comments, or suggestions, please contact us at (707) 565-7170 or visit www.sonomaedb.org. Disclaimer to the Reader: The forthcoming details in this report reflect trends sourced from data gathered during the novel COVID-19 pandemic. Figures, such as employment rates, have been susceptible to great variability and are ever-changing. HIGHLIGHTS Real Estate Market: Labor Force: Construction Costs: Sonoma County’s With construction payrolls Builders are experiencing construction industry has being relatively successful higher commodity and labor managed the trouble of the during the COVID-19 expenses. Though pandemic better than most pandemic, the demand for construction labor wages industries. On an annual basis, the construction workforce is plateaued in mid-2020, they Sonoma County construction expected to continue well are expected to accelerate as job losses are five percent less after. Though it is expected residential building ramps up than the losses spread across for there to be job and competition for an total employment. The relative opportunities in the industry, adequate workforce rises. success has been supported employers may have trouble Other input costs are on the by the residential real estate acquiring an adequate rise as well. Most notably, market. Sonoma County house workforce. The potential Lumber prices are likely to prices continue to rise at the trouble is twofold, and are continue going up until there fastest pace in over two years not mutually exclusive. The is an end to the COVID-19 as demand outpaces supply; first reason is housing induced supply shocks; the despite single family permit affordability and the second same holds true with copper, issuance still being nearly reason is the demographics in steel and fuel prices. Despite double what it was in 2017. Sonoma County shifting the short term increases in This surge in demand is likely toward an aging population. input costs, it is likely that coming from the following: Both of these challenges pose short term returns on the increase in remote work, potential threats to securing a construction will be strong proximity to the Bay Area, and willing and able workforce for and will likely move steadily relative affordability among the construction industry. with home prices. Bay Area counties. SONOMAEDB.ORG PG. 4
SONOMAEDB.ORG PG. 2
CONSTRUCTION Sonoma County
Recent Performance. Sonoma County’s bust in early 2007. In addition, lending standards Biden’s term as president increasing by 13.5 mil-
economy has taken its foot off the gas. Fol- and income requirements for borrowers have lion jobs. This compares with 11.4 million jobs
lowing a steep drop in December, job gains remained relatively stringent through the worst without the plan, and 10.5 million if neither the
through the first two months of the year have of the pandemic, so the risk of a downturn in infrastructure plan nor ARP had become law.
been minimal, pushing year-ago job growth house prices is lower. Unemployment is also meaningfully lower with
further behind the California average. The The lack of existing-home supply available the plan, falling to a low of 3.5% by the end of
chief culprit was the reimposition of business for potential homebuyers will remain a weight 2024, consistent with the low reached just prior
restrictions given rising COVID-19 case counts as the dearth of selection begins to eat away to the pandemic. Labor force participation is also
throughout the state. Sonoma remained in the at sales. Seasonally adjusted existing-home expected to fully recover from the impact of the
state’s most restrictive purple tier through the inventory fell to 1.12 million units in February, its pandemic by the end of 2024.
beginning of March, but case and test positivity lowest level in more than 20 years. Although the Industry drivers. Sonoma County’s hous-
rates have fallen sharply, allowing the county inventory-to-sales ratio improved slightly as a ing market has proved resilient in the wake of
to move into the less restrictive red tier on result of a drop in sales, at two months of supply years of devastating wildfires and the disrup-
March 14. This allows the county’s retail and at the current pace of sales, it is hovering near a tion caused by shelter-in-place orders amid the
leisure/hospitality establishments to open in- record low. Moreover, even as new-housing con- global pandemic. Significant rebuilding efforts
doors at limited capacity. struction streamed higher in 2020, it has given following the Tubbs wildfire and to a lesser
As expected, leisure/hospitality is the worst- up gains in the opening months of 2021 and has extent the Kincade fire over the past few years
performing industry, with payrolls down nearly thus far been insufficient to relieve the supply have eased supply concerns, and the county has
40% from year-ago levels. While still struggling, challenges in the existing-home market. recouped nearly all the housing units lost to the
goods producers are broadly faring better than Despite higher rates and constricted sup- natural disasters. Permit issuance cooled again
service providers. Construction in particular has ply, existing-home sales will advance slightly in 2020 as these rebuilding efforts wound down
held up well given the strength of the hous- in 2021 as the broader economy accelerates in but was still nearly twice as strong as in 2017.
ing market. Payrolls are down just 8% on an the second half of the year. Vaccine distribution Still, demand is surging, partly because of the
annual basis, compared with nearly 13% for is picking up the pace, and as herd immunity proliferation of remote work, which is drawing
total employment. is reached in mid-2021, consumer confidence more residents to Sonoma, given its high quality
The residential real estate market held up will rebound. Generous fiscal stimulus will also of life and proximity to the Bay Area economies.
remarkably well during the initial stages of the course through the economy, bolstering the la- Available inventory is being whittled down, with
pandemic and remains in good shape. House bor market and income in coming quarters. the National Association of Realtors reporting
price appreciation is advancing at its fastest pace Consequently, existing-home sales will end the just over two months’ worth of supply at the
in more than two years and sits neck and neck year at around 1.4 million units, up modestly from existing pace of sales, the lowest level since the
with the California average. According to the the 1.2 million units registered at the end of 2020. post-Tubbs fire rush.
California Association of Realtors, housing inven- Demand for certain segments, particularly Though a pickup in construction coupled
tories in terms of monthly supply are at just less office structures, is unlikely to be clear until with a retreat in household formation has meant
than three months, on par with the July 2018 low. workers can safely return. From there, many in- that single-family housing completions have
Single-family permit issuance showed signs of ac- dividuals and companies that have transitioned caught up to household formation, it will take a
celerating late in the year, but has since retreated. to a remote work environment in the past year few years of above-trend growth to bring supply
Nonetheless, it remains above its historical pace may continue to do so, crimping demand for and demand back into balance and alleviate the
as the fire rebuilding phase winds down. new office investment longer term. The infra- shortage of listings. Affordability is forecast to
The commercial real estate market is bifur- structure plan results in a stronger economy decline only modestly through the end of the
cated. Vacancy rates have ticked higher, especially over the coming decade, with higher GDP, decade as house price appreciation slows to a
in the most affected retail market. There are still more jobs and lower unemployment. However, more modest pace and income growth finds
signs of life, however. The value of nonresidential the most immediate impact in early 2022 is another gear. Yet Sonoma will still rank as one
permitting surged in the fourth quarter, register- to marginally reduce growth, as the higher of the least affordable metro areas in the nation
ing its best performance since mid-2018. corporate taxes take effect right away while despite remaining among the most affordable in
Macro drivers. National house price apprecia- the increased infrastructure spending does not the Bay Area.
tion will extend into 2021, although it will cool get going in earnest until later in the year. This In 2019, the last year for which data are avail-
somewhat from its breakneck pace in 2020. The changes quickly. By 2023 and throughout much able, the county’s population fell by 0.9%, marking
aggregate CoreLogic Case-Shiller price index will of the middle part of the decade the ramp-up just the fifth decline since tracking began nearly
grow by 5.6% in 2021, bolstered by consistently in infrastructure spending significantly lifts a half century ago and by far the sharpest drop in
tight existing-home supply. Nonetheless, there growth. The apex in the boost to growth from that period. Previous research by Moody’s Analytics
will be some moderation on the demand side, as the plan is in 2024 when real GDP is projected sought to separate the effects of natural disasters
financing costs are increasing. For example, the to increase 3.8%, compared with 2.2% if the from affordability in determining net migration
30-year fixed mortgage rate will advance to 3.7% plan fails to become law. In terms of jobs, with and found no statistically significant impact of
by the end of 2021 and 4.1% by the end of 2022 the infrastructure plan the economy recovers wildfires on net migration in California. Although
U.S. house prices are only moderately the jobs lost in the pandemic recession by early it is naïve to assert that two significant wildfires
overvalued, according to the Case-Shiller trend 2023, not much different from without the in three years will have no impact on Sonoma’s
equation, at 8.5%, a far cry from the 35.2% rate plan. But the plan does result in substantially population growth, there is little empirical evidence
of overvaluation before the onset of the housing more jobs mid-decade, with employment under to suggest that they will prove meaningful drivers
MOODY’S ANALYTICS / March 2021 1CONSTRUCTION Sonoma County
of demographic trends. Instead, broader macroeco- Many expansion plans were postponed or de- rise in housing starts even after rebuilding efforts
nomic factors such as costs, availability of jobs, and layed during the outset of the pandemic, but are completed. Lower in-migration would sap
more qualitative considerations such as weather with the national economy expected to surge housing demand and hamper Sonoma’s ability to
and quality of life are more predictive of population this year, vacancy rates across property types outrun labor market constraints.
growth—and consequently, economic potential—in will decline and prices will rise. Retail will be the The changing of the demographic guard is at
the long run. There is some upside risk that the shift slowest to recover. Vacancy rates were already hand, and millennials are diving into homeown-
to remote work may benefit Sonoma, given its rising prior to the pandemic, and retailers are be- ership as they age into having families. Better
amenities and proximity to the Bay Area. ing pressured by the rise of e-commerce. income gains and improved job prospects will
The commercial real estate market is more Operating expenses. Commercial and resi- stir even more young households to plunge into
of a mixed bag. According to Keegan & Coppin, dential builders will contend with higher commod- homeownership. This will boost home sales and
vacancy rates across property types have ticked ity prices and labor expenses. Robust demand for new construction. The recent improvement in
higher during the pandemic. The proliferation workers will increase wage pressures for construc- the national homeownership rate suggests that
of e-commerce helped buoy industrial property tion workers. Construction wages in Sonoma had this is already happening.
demand, but at the same time chipped away at paused in the second and third quarters of 2020 The feverish pace of expansion at local food,
retail, which was already being pressured prior to following strong growth in previous years. With beverage, consumer goods and hospitality op-
COVID-19. Office vacancy rates rose modestly residential building set to accelerate, construction erators will create fertile ground for commercial
as well. Moody’s Analytics expects office vacancy wage growth will accelerate again. developers. However, the construction of new
rates to improve as Sonoma moves into the red Commodity prices are already hitting an- office buildings will proceed at a more modest
tier. Vacancy rates across property types will other gear as the global economy heats up. pace as office-using industries expand into exist-
likely improve as the vaccination rollout acceler- Lumber prices, in particular, are surging, and the ing space and the acceptance of remote work
ates and the economy marches into recovery. forecast calls for continued growth until COVID- chips away at some demand for office space.
Firms will look to capitalize on the rip-roaring 19-related supply shocks are unwound. Upside risks. The newly passed fiscal stimulus
growth as consumers unleash pent-up demand Returns. The economic recovery will see bill will pave the way for a faster than expected
over the next few years, and with more economic upward real estate price pressure as material economic recovery, and the American Jobs Plan
certainty, expansion plans that were put on hold costs climb, but across the country the for- specifically provides significant upside risk for the
will push forward. F The biggest boost to spend- mer will predominate in terms of near-term construction industry. The infrastructure package
ing goes to traditional infrastructure, including profitability. Returns had been especially is larger than that assumed in the March baseline
transportation projects such as roads, bridges good prior to the pandemic, fueled by low forecast and lends significant upside to construc-
and ports, and to shore up the nation’s crumbling energy and materials prices. However, as the tion spending over the next several years if passed.
water and power infrastructure. These projects expansion aged and labor costs rose, returns Stronger than expected population growth
will spur construction spending and employ- were already beginning to tighten and con- should more Bay Area residents move to the
ment nationally as government spending is verging to long-run averages. more spacious Sonoma County region pro-
distributed to the private sector through grants With the economy set to rev up this year, vides significant upside risk for the housing
and partnerships. strong demand for both commercial and residen- forecast. Improved housing affordability as a
Short-term pricing. Homebuilders’ pricing tial properties will exert upward price pressure that result of more modest house price increases,
power will remain strong in the near term, buoyed will ensure near-term profitability. House price better than expected income gains, or more
by ultra-low mortgage rates and the release of appreciation will slow from last year’s breakneck rapid rebuilding efforts is the primary avenue
some pent-up demand for residents that have pace but will remain robust. Thus, construction through which the forecast for residential con-
been cooped up for nearly a year because of the returns will move in tandem with house prices. struction could surprise to the upside.
pandemic. Historically low inventories that have Long-term outlook. The long-run outlook for Downside risks. The distribution of
propped up house prices this year will encourage Sonoma’s residential and commercial real estate COVID-19 vaccines remains a primary risk.
more homebuilding and will slowly erode at pric- markets is sanguine. The COVID-19 pandemic The baseline forecast assumes that herd im-
ing power as supply catches up to demand. created a much smaller disruption to the housing munity will be reached this summer. However,
Apartment rents will modestly retreat as the market than first anticipated, but demographics will there is still the risk that public mistrust of the
moratorium on evictions and the pause of rental play a far more important role in the long term. vaccines could slow their adoption and use-
payments due to the pandemic are lifted, which Net migration has slowed substantially fulness, delaying herd immunity and causing
will temporarily push up vacancy rates and chip over the past four years, coinciding with the economic growth to fall short of expectations.
away at demand. While rents submarined in the swift erosion in housing affordability. The A more devastating risk is the possibility that
Bay Area during the pandemic as some workers deterioration in affordability is forecast to new variants of the virus are either partially or
left the area, Sonoma’s declined only modestly, slow over the next couple of years, and with fully resistant to current vaccines. Under such
roughly on par with the national average, despite house prices expected to advance modestly a scenario, the odds of widespread lockdowns
its high costs. Rental vacancies statewide are over the next year, affordability will hold up would increase, stressing the global recovery.
forecast to increase moderately through the better in the medium term. Still, Sonoma’s Under such a scenario, investment spending
end of this year, which will further pressure rents coastal location in high-cost California ensures and the housing market would retreat once
lower until the economy kicks into another gear. that it will remain one of the least affordable again, undermining construction spending and
Prices for commercial properties will be mixed destinations nationwide. employment.
but will generally improve as firms grow more Population growth is expected to remain Colin Seitz
certain about the trajectory of the U.S. economy. weak but strong enough to support a modest March 2021
2 MOODY’S ANALYTICS / March 2021CONSTRUCTION Sonoma County
Real Estate Market Is Surging Again Prices and Home Sales Recover Swiftly
Construction permits, Sonoma County, 3-mo MA
4.5 30 10 800
Multifamily, ths, SAAR (L) Existing-home sales, # (L)
4.0
Single-family, ths, SAAR (L) 25 9
3.5 Median house price, $ ths (R) 700
Nonresidential, $ mil, SA (R) 8
3.0 20
7 600
2.5
12-mo MA 15
2.0 6 500
1.5 10
5
1.0 400
5 4
0.5
0.0 0 3 300
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Sources: Census Bureau, CIRB, Moody’s Analytics Sources: CoreLogic, California Assn. of Realtors, Moody’s Analytics
Presentation Title, Date 1 Presentation Title, Date 2
After a brief lull at the height of the pandemic, residential and Stay-at-home orders depressed home sales during the typically busy sum-
nonresidential permitting is roaring back in Sonoma County. The mer listing months in 2020. Would-be sellers held off on listing, and home
pace of permit issuance is below that seen in 2019 as the rebuild- sales registered their slowest pace in nearly a decade. However, with
ing efforts from the Tubbs fire are largely complete. Yet the tra- contagion fears easing in recent months and the vaccine rollout underway,
jectory in recent months points to a strong 2021. Robust house home sales have come surging back. Meanwhile, house price appreciation
price appreciation and a still-low supply of homes will encourage has soared as inventories remain low and demand for Sonoma’s high qual-
homebuilders to get in on the action. ity of life has pushed more residents to snap up available property.
Affordability Declines Begin to Slow Input Costs Rise Across the Board
Composite housing affordability, 2013Q1=100 Producer prices, 2014Q1=100
130 200 5
Sonoma Santa Barbara Lumber (L)
120 175 Construction wages* (R)
Santa Cruz Monterey 4
110 Marin 150
100 Copper (L)
125 Steel (L) 3
90
100 2
80
70 75
1
60 50 Diesel (L)
50 25 0
13 14 15 16 17 18 19 20 21 14 15 16 17 18 19 20 21F 22F 23F
Sources: California Assn. of Realtors, Census Bureau, Moody’s Analytics Sources: BLS, Moody’s Analytics *% change yr ago
Presentation Title, Date 3 Presentation Title, Date 4
Housing affordability remains the key challenge facing Sonoma Coun- Residential and commercial builders will grapple with rising com-
ty’s residential real estate market. Slowing house price appreciation modity prices and increasing wage pressures. The global econom-
over the past year has helped ease some of the concern. The county’s ic recovery will increase labor market tightness for construction
high quality of life and relatively low business costs make it attractive workers and push up prices for housing materials. Demand for
to potential residents and entrepreneurs. The improvement in housing commodities is already showing signs of accelerating as vaccines
affordability could help stem the tide of out-migration and outright begin to roll out across the globe, and timber prices in particular
population declines, which have become the norm in recent years. are surging.
MOODY’S ANALYTICS / March 2021 3SONOMAEDB.ORG
707 - 565 - 7170
141 STONY CIRCLE, STE. 130, SANTA ROSA, CA 95401You can also read
