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Posted on July 26, 2022 at 1:15 PM
Written by Plumb
At Plumb, we exclusively focus on a few key industries.
This focus allows us to be true experts in both the accounting needs of the industries we support, as well as the industries themselves. In our first of a new series of Plumb’s Industry Outlooks, we are going to focus on the construction and real estate industry.
We don’t need to belabor the point that the past couple of years have been a roller coaster of ups and downs. Nowhere has this been more evident than in the construction and real estate industry. The issues surrounding a global pandemic, a global supply-chain slowdown, and global economic and governing uncertainty have had far-reaching and potentially long-lasting implications. We aim to provide you with our thoughts on where these industries are heading in the coming months and years.
Construction is a general term for what are several disparate industries – commercial, residential, industrial, infrastructure, energy and utilities, and institutional. Although nothing exists in a vacuum, and elements that impact the residential construction world will also affect infrastructure and so on. For this reason, we focus below on the residential, commercial, industrial, and infrastructure industries only. Similarly, those who work in residential real estate will be quick to tell you how different it is from working in commercial real estate. Yet, the two are linked by common needs and goals: to connect buyers and sellers to properties at the right time for the right price.
The housing market boom of 2021 is showing signs of slowing, but we think of it more as stabilization. Factors related to higher interest rates, low inventory, and high – in some parts of the country astronomical - home prices have caused buyers to rethink their purchase. The proof is in a recent uptick in would-be buyers backing out of their home purchase, as is evidenced by the nearly 15% of pending home sales that failed to close in June 20221.
Jack Riddleston, Construction Analyst at GlobalData states: “A more hawkish stance taken by the Fed has added to the fear that the US economy will dive into a recession. The increase in the cost of borrowing on top of rising costs and supply chain issues that already ail the economy risk driving down output. The residential construction sector will feel the brunt of the increase in interest rates as the cost of borrowing increases and real incomes are squeezed; the sector has benefited from expansionary monetary policy over the past two years, when mortgage rates were pushed down to new lows, helping to drive up housing demand.”2
However, people still want to move into their dream homes. The difference is that now they have more flexibility as to where that home is located thanks to remote-work options, and it might mean renting instead of buying. At least for now. Many would-be new home buyers researching their best options for homeownership are concluding that they would rather rent and wait to see if this is the top of the market.
That’s great news for those in the multi-family residential construction industry. Multi-family rents are up over 14% in 20223 and while there might be a deceleration in the months to come, the recent reports are quite incredible. This is especially true when looking at specific regions. To quote the American Apartment Owners Association: “The New York market posted the highest net absorption at 17,200 units, which accounted for 15% of the total absorption recorded in the top 15 metro areas – the strongest absorption experienced in those markets in more than two decades. New York’s multifamily sector remains one of the hottest in the country with extremely strong demand fueled by job and wage growth,” said Ryan Silber of CBRE’s New York Capital Markets team.
This industry has arguably been more plagued by the pandemic and supply chain issues than most. The combination of shutdowns, work-from-home mandates, supply delivery delays, and a labor shortage has been a recipe for disaster. While office space occupancy dipped in late 2021 and early 2022, it is showing signs of an increase – especially in certain regions of the US. According to Colliers US Office Market Q1 2022 Report, office occupancy is increasing slightly as more companies see employees returning to the office, and as more office-based jobs are being added to the economy. In addition, this report indicates that sublease space levels ticked up, and are expected to remain elevated. Concurrently, speculative construction remains subdued. Sun Belt cities are leading the way to recovery, not surprisingly given how many people left cities and colder climates amid the Covid pandemic.
However, as noted above, don’t count the large metro markets down for the count. All those people renting and investing in the NY metropolitan area multi-family residences will need to work somewhere.
Public investment programs like the Infrastructure Investment and Jobs Act (IIJA) should drive growth in the sectors that underperformed throughout the pandemic. According to Riddleston: “The outlook for North America will improve, as inflationary pressures and supply-chain disruptions will likely subside and federal spending from the IIJA will likely be realized in late 2022 and early 2023. As a result, GlobalData expects the North American construction sector to grow by 3.7% in 2023.”
The extreme growth in this sector over the last few years is showing some signs of decline but demand remains strong, and there will be an uptick in the coming years once again.
It’s a mixed bag across these diverse but interwoven industries. While the residential construction industry will continue to fluctuate, we see a stabilization and not a bottoming out. The commercial construction industry’s pains and gains vary by region and will continue to be driven by supply-chain lag times and population shifts. The industrial and infrastructure outlook is strong, and we agree with the GlobalData report of growth into 2023.
Here are three simple, but important, recommendations we are making to our own construction & real estate Outsourced Accounting clients. These are essential steps to take now, given everything we outlined above, to protect yourself and your business.
1MLS data report
3Yardi Matrix report
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