RealtorPeg: Surge in Residential Construction Lifts Building Activity

Surge in Residential Construction Lifts Building Activity

REAL ESTATE: Commercial Side Not Faring as Well Locally

By Lou Hirsh

Monday, August 2, 2010

San Diego County residential construction led a continued rebound in overall building activity during the month of June, helping the region post an overall 24.9 percent increase in new permit valuations from June 2009.

However, a 48.7 percent rise in residential permits was partly offset by a 15.8 percent drop in valuation on the commercial side, according to data released July 26 by the Construction Industry Research Board.

For the first six months of 2010, total residential permit valuations, including construction and renovations, were up 27.2 percent from the same period of 2009, to $590.5 million. Commercial valuations dropped 10.9 percent from a year ago for the six months, to $306.2 million.

The end result was a 10.9 percent lift from the first half of 2009 for residential and commercial valuations combined, according to board data. The total $896.8 million is still well off from the first half of 2006, when the region saw more than $2.3 billion in construction activity.

Borre Winckel, president and chief executive officer of the Building Industry Association of San Diego, said the first-half data — indicating starts on 1,381 new single-family housing units in the first six months of 2010, compared with 936 units for the same period of 2009 — represent the first glimmers of upbeat news that local home builders have seen in several months.

“Builders are going to stay cautiously optimistic right now, with the emphasis on cautious,” Winckel said.

Conservative Approach

Most of the local building permits taken out in the latest quarter are for houses that will hit the market in the first quarter of 2011. Winckel said how those homes fare will depend on whether current low mortgage rates hold in place; and also whether banks and government agencies are releasing more foreclosed resale homes back on to the market at cut-rate prices.

“Builders can’t compete with those foreclosed properties,” Winckel said.

With credit remaining tight compared with pre-recession levels — both for developers and potential buyers — he said builders will continue to play things conservatively by releasing homes in small phases.

Russ Valone, president and CEO of locally based research firm MarketPointe Realty Advisors, said there are several signs pointing to continued improvement on the residential side in coming months.

More of the smaller, privately owned builders are taking out permits for new home construction than was the case during the past two years, when most of the completed projects were by larger public companies with regional or national operations.

Valone said that’s an indication that smaller firms are gradually getting more access to financing as lenders become more confident in their prospects of selling homes.

Housing Market Improves

One result is that 13 new housing projects were delivered to the San Diego County market in the first quarter of 2010, followed by 14 in the second quarter. That’s much better than the average of four projects coming online per quarter in 2008 and 2009, though still less than half the number delivered in 2004 and 2005.

Also, absorption of those new homes has improved. Valone noted that there is currently about a 17- to 18-month supply of new homes on the local market, reflecting an equilibrium between what’s being built and what’s being bought.

Today’s supply and demand are much better matched than in 2008 and 2009, when there was about 32 months worth of unsold new homes. Continued local job growth should contribute to healthier home sales in the months ahead, he said.

Dip in Private-Sector Projects

While San Diego-area commercial contractors are being helped by a steady flow of military and education-related construction work throughout the region, development of private-sector projects has trailed off significantly from pre-recession levels in segments including office and retail.

According to the U.S. Bureau of Labor Statistics, San Diego County in June saw a drop of 3,000 construction jobs compared with June 2009, going from 61,500 to 58,500.

The region ranked 133 out of 337 metro areas for creation of new construction jobs, according to a July 27 report issued by the Virginia-based Associated General Contractors of America, which is based on Bureau of Labor Statistics data.

The contractors group said construction employment declined in 285 of the 337 metro areas during the past year, noting that weak overall demand for construction is “outpacing the benefits” of a national stimulus program’s $135 billion in construction-related investments.

“While more metropolitan areas have started adding construction jobs, most are still experiencing losses nearly four years after the construction downturn began,” said Ken Simonson, the association’s chief economist, in a statement.