Introduction to the Real Estate and Construction Industry
The real estate and construction sectors, including the many professions and fields associated with them, are among the larger components of the global economy. As of early 2014, the U.S. Bureau of Labor estimated that 5.97 million Americans were employed in the construction industry (up from 5.64 million at the beginning of 2013, but down dramatically from a peak of 7.6 million in 2007). The agency also estimated that 1.48 million Americans were employed in the real estate industry as of early 2014 (this figure is also up from 1.42 million as of the beginning of 2013, and almost equal to the 1.5 million of 2007).
There was $13.2 trillion in outstanding mortgage debt in America at year-end 2013, up only slightly from $13.1 trillion one year earlier, despite a significant increase in home sales during 2012. (Many houses are being purchased with cash, particularly when the purchaser is an investor. This mortgage total included $9.9 trillion in home mortgages, unchanged from 2012 and down from $10.2 trillion in 2011). The total of all mortgages has been in a long term decline. In 2010 it was $13.8 trillion, and it was $14.3 trillion in 2009. Many home mortgages remained in arrears as 2014 began, and mortgage owners will continue to suffer write-downs to some degree. Also, a significant number of homeowners still have little or no equity in their homes. Meanwhile a much improved market for home sales and home prices, compared to two to three years earlier, means that owners and builders are finding it easier to sell homes than they did in the recent past.
After a dismal crash during 2007-09, real estate had improved to a large extent in major markets by mid-2012 and on into early 2014. Home prices have rebounded dramatically from the depths of the recent recession, but in many markets they remain below their 2006-07 peaks. However, home sales growth had stalled as of early 2014, as prices have risen to the point that bargains seem harder to come by. More than a few observers are concerned that another housing bubble is developing in the most popular markets. Meanwhile, real estate has enjoyed a significant boom over the past three years in China, Canada, Australia and a few other select spots. By early 2014, Chinese mortgage requirements had become stricter, and prices were off their recent highs.
A few comments about recent real estate market history can help to explain the current market: During most of the 2001–07 period, easy availability of both development loans and mortgages, low interest rates, eager investors and unbridled optimism caused massive new developments of homes, shopping centers and office buildings to sprout on a global basis. The effect was widespread. For example, large portions of the economies of Ireland and Spain were driven by real estate speculation and investment. China, Australia and India saw significant real estate booms, as did Dubai. By 2007, however, the global boom in real estate was unwinding, and property markets soon crashed. Many commercial projects failed to attract a sufficient number of new tenants. “Subprime” mortgages issued to home buyers with poor credit and little income plummeted in value, particularly in the U.S. and Europe, and what began as a real estate crash unleashed a global financial nightmare and a daunting recession that was an immense blow to virtually all nations and all industries. Many of the resulting problems have largely been resolved, in some cases through massive bankruptcies of mortgage firms, developers, banks and construction companies, as well as the bankruptcies or foreclosures suffered by home owners and property investors.
In the U.S., home sales volume has picked up, resulting in rapidly rising prices in many markets and a shortage of available homes in the most desirable neighborhoods. This big turnaround is being fueled by many factors. The most significant may be the continued efforts by the U.S. Federal Reserve to hold interest rates down to incredibly low levels, which significantly reduces the monthly payments of home owners who take out mortgages. Another boost to the market is new household formation by members of Generation Y. The oldest members of this segment were turning 32 years of age by 2014. Many had been living with their parents for much longer than normal, due to the recession. While it is difficult for first time homebuyers to find an affordable home and qualify for a mortgage, Generation Y is boosting the market as buyers and as new renters.
An additional factor is the slow but steady decline in the number of foreclosed, bank-owned homes on the market. Massive numbers of them were acquired by investors. A lower supply of bargain-priced foreclosures means higher prices and a stronger market overall. Potential homebuyers are also feeling more comfortable financially, as they have paid down credit card debts over the past few years, and the values of their stock market holdings have risen substantially in the recent past. (The difficult jobs market remains a big negative factor, along with very slow growth in the overall economy and little growth in household incomes.)
Construction of all types, including commercial, is on the rebound. About $942.5 billion in new American construction was expected to be put into place for 2014, a seasonally adjusted annual rate as of March, according to the U.S. Bureau of the Census. While this is a big improvement from recent years, it is nonetheless down dramatically from the 2006 peak of $1.16 trillion.
By 2012-14, home builders in the U.S. were once again enjoying robust sales and profits. Many were challenged in finding enough new lots for future building.
Retail centers in the U.S. were seriously overbuilt during the last boom, through 2007, and there were too many stores trying to sell to too few shoppers. The end result of the glut was that large numbers of retail store chains took bankruptcy during the recession, and many others have either curtailed expansion plans or are opening much smaller stores than in the past. However, by late 2012 and into 2014, shopping center occupancy rates were improving in general. Nonetheless, retail stores are facing dramatic competition from sales made over the Internet. Online commerce is growing at stellar rates while store traffic and store revenues are generally disappointing.
Malls and shopping centers that cater to wealthier customers have seen good results. For example, Taubman Centers, Inc., a luxury shopping center developer that owns malls in choice spots throughout the U.S., reported average sales per square foot of mall space of $615 in 2011, a figure much higher than typical malls. For 2012, Taubman saw impressive growth, reaching $688 per square foot. Average rent per square foot for 2012 was up 3.3% from a year earlier, reaching $46.69 and 2013 was even higher at $48.52.
Apartment house operators are enjoying brisk business in general. For the first quarter of 2014, the vacancy rate at U.S. apartments fell to 4.0%, compared to 4.2% in the fourth quarter of 2013. These extremely low vacancy rates are encouraging the construction of new apartment buildings at a rapid rate.
Office building occupancy rates in the U.S. have been low in many markets, but conditions are beginning to improve in many cities, and rents are rising. This will improve significantly if economic growth resumes in earnest.
Private sector (non-governmental), commercial construction put in place in the U.S. was on track to reach about $309.68 billion during 2014 (based on a seasonally-adjusted annual rate as of March 2014). This was essentially unchanged from one year earlier, but up substantially from only $266.6 billion in 2010. Private, residential construction put in place was on track to reach $369.8 billion for 2014, using the same methods, up from only $303.4 billion one year earlier. Skilled construction labor was in significant shortage by early 2014, as many workers had left construction during the recession to head to more promising areas, including the booming oil and gas fields.
Over the long term on a global basis, there will be continuing demand from the health care sector for new or remodeled properties as the percentage of the population over age 65 continues to grow, boosting demand for medical care and assisted living centers. This trend has been accelerated in America by the implementation of the Affordable Care Act. Another growing trend in construction in major economies is to incorporate a higher number of energy conservation technologies in new buildings. This is true in both residential and commercial construction. Several “green” building certification plans are now in place, so that architects and builders may seek to attain certain energy conservation and eco-friendly standards.View More
Video Introduction to Real Estate & Construction Industry