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Business Observer Thursday, Sep. 28, 2006 13 years ago

Prepare for Soft Landing

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Florida's single-family housing sector is nearing the bottom of a slowdown, but commercial construction opportunities abound in Tampa Bay.

Prepare for Soft Landing

Real estate forecast by Janet Leiser | Senior Editor

Florida's single-family housing sector is nearing the bottom of a slowdown, but commercial construction opportunities abound in Tampa Bay.

As far as number-crunching economist Hank Fishkind is concerned, it's a simple matter of arithmetic. Florida builders are constructing houses and condominiums faster than people are moving into the Sunshine State.

In some areas, such as Fort Myers, that overbuilding is continuing at an unprecedented pace, he says. Here's the math: Lee County is still seeing about 1,000 housing starts monthly, while the creation of new households is less than one-third that amount, at about 300 monthly. In 2005, more than 25,000 new houses were started in Lee and about 15,000 new households were added.

Fishkind compared today's overbuilding in Lee County to lemmings running off cliffs with no backward glance or hesitation. A crash is inevitable.

In other areas, such as the Tampa Bay area, housing construction has already slowed significantly, and it's just going to take time to sell existing inventory.

"The economy has downshifted," Fishkind told the REIC Tampa Bay membership at a Sept. 20 sold-out dinner meeting at the University Club.

The good news is that "we're in for a soft landing," Fishkind says. "I don't think we're going to get a [national] recession this time out. I do think we're going to have a small amount of decrease in growth."

Less 'new stuff'

This is the 23rd year that the Orlando-based economist has analyzed governmental data, from unemployment statistics to the issuance of new housing permits, and prognosticated on the economy.

Last year was great. But Fishkind says he expects the national economy to flounder through the rest of this year and decline further in 2007.

"The housing boom of 2005 not only caused investment spending to go up and everything related to it, it also caused consumption to go up," he says. "That's no surprise. If you buy a new house, you have to put stuff in it, right?"

Since housing is now declining, he expects consumption spending to also slow.

In addition, he expects Federal Reserve Chairman Ben Bernanke to bump up rates once or twice more in an attempt to keep inflation in check since he's new to the job and has to prove his credibility. But the economy should pick up in 2008, the Feds should lower rates, and it'll continue to improve through 2009.

"I do think that with the Fed's moderate interest rate forecast that the housing market will achieve equilibrium in a fairly orderly fashion," Fishkind says.

High oil prices

The average price for a barrel of oil this year is about $70, Fishkind says. Since half of all oil is imported, that means half of the money spent at the pump towards that barrel price leaves the country.

Some states are suffering greatly from oil prices, he says. For others, it's a good thing.

"If you were from Dallas, Texas, you'd be cheering the higher oil prices," he says. "You'd think it was absolutely great for the economy."

Other oil-producing states are also benefiting since higher income and job growth offsets the pain of higher prices paid at the pump, he says.

Two states, Michigan and Ohio, are particularly affected by oil prices, he says. Those two states have already suffered a reduction in employment and are in a recession.

"If the economy downshifts from a 5% growth rate to a 2% growth rate on the average, what that really means is all the states in blue [on the chart] grow by 3% or 4%, while all states in red go to negative 2% and states in black go to negative 4%."

States, such as Florida shown in green, suffer moderately since "we don't consume that much energy," Fishkind says.

But since Florida derives 95% of its population from people moving to the state, it's affected in another way, he says.

Florida's East Coast derives most of its population growth from the northeastern United States, which is suffering about average, he says. While much of Florida's West Coast derives its growth from states in red on Fishkind's chart and those states are more severely affected.

"Already I can see a differential affect across the Florida geographies," Fishkind says. "The fact of the matter is things slowed down more rapidly on the West Coast of Florida and in the Panhandle of Florida than it has on the East Coast. This chart really explains why we're seeing many more problems in the Fort Myers real estate market than we see in Tampa, than we see in Orlando, than we see in the East Coast."

Thirty-year flashback

In 1974, Fishkind was new to Florida. He recalls taking a drive down U.S. 1 in the Fort Lauderdale area and seeing so many condos for sale that one builder was offering a free Cadillac with the purchase of a unit. Today, more than 30 years later, he says, you can get a Mercedes-Benz.

Expect to see more promotions as investors try to unload condos. But Fishkind warns buyers they're taking a great risk if they buy condos or land, at this point.

"Those converted properties are dangerous," he says because investors typically overpaid for the properties. "There's going to be some real issues for banks, for appraisers, for owners. Those markets have real risk."

The housing bubble isn't in all Florida markets. He says it's "compartmental and specific," with much of it in the condominium market. He expects condo prices to erode prior to the market finding equilibrium.

"On the single-family side, it's starting to stabilize," Fishkind says. "We're starting to see the bottom of this single-family cycle. Except in Fort Myers and other places, it's not going down anymore on the residential side."

Land buyers should be cautious, he says. He quoted a recent article in the Wall Street Journal article that states builders are overvaluing land they own.

"That's very unfortunate and I think that's a reflection the next leg down in these markets is going to come on the land side," he says. "A lot of land has been purchased in the last few years with the expectation that residential property values would continue to rise significantly. That is obviously not going to come to pass."

The market for land in Florida will also be impacted by all the orange groves that must be plowed under because of citrus canker, he says, adding, "When that big rock lands in the pond, there'll be ripples everywhere [in Florida]."

In addition, property land values have been boosted by residential land purchases, he says. Since that market is slowing, "we're going to get an increase in the supply of land. All that happening at the same time puts the land market at particular risk along with the condominium market."

Tampa Bay

Fishkind says he was shocked to see a north-south expressway, the Suncoast Parkway, in the Tampa Bay area.

"It's an absolute revelation to me when I go outside that there are roads that go north," he says. "The tremendous boom is now going north."

Another significant development in Hillsborough and Pinellas counties, he says, is the large volume of job creation.

"Much of that job creation has been in business and professional services, indicating the maturation of this marketplace," he says. "I think that's a very good development."

And as Pinellas County reaches build-out, it's affecting Pasco County to the north. He predicts the Pinellas population will decline in the future.

"There isn't any land to accommodate growth," he says. "Therefore growth has to go someplace else. Furthermore prices have escalated significantly for land in Pinellas County making it less competitive."

Even though home sales are down significantly in Pinellas, the average price for a new home was $425,000, according to data through July.

The condominium market, he says, hasn't yet found its bottom in Pinellas. When it comes to commercial construction, the market still has good volume, he says.

In Hillsborough County, Fishkind expects job growth to hit a bottom in 2007, with about 8,000 new jobs created annually. It's now at 10,000 jobs. After it hits bottom, it'll move back up.

He expects population growth to remain strong with about 20,000 to 22,000 people moving to Hillsborough annually. Even with that growth, there's too much inventory in the housing market, which he expects to reach equilibrium by 2008 or 2009.

As evidenced by the rising inventory of homes for sale, people tend to sit on their houses rather than sell for less, he says. "In Florida, the prices of homes stair-step up and then flatten out for a long time. Remember how many years prices were flat in this marketplace? Then all of a sudden, they jumped up. Well, they're going to be flat for another four or five years until all that volume is worked out of the marketplace."

The good news is that means housing will be more affordable, which helps in employee recruitment.

Commercial construction, he says, is in great shape. After overbuilding in 2000-2001, the market achieved equilibrium.

Vacancies are now very low in office, retail and warehouse, and rental rates are rising, he says.

"Even with slowing population growth, even with slowing residential demand, there are still 22,000 people that are going to move into this county at the low point of the market," he says "That means there's going to be a lot of demand for all those things that are population related. I'm pretty optimistic about the non-residential side."

Pasco County, to the north of Hillsborough and Pinellas, is seeing fast population growth because Pinellas is near capacity and Hillsborough is more expensive, he says.

"Even after it comes off the peak, that valley is still higher than it was in the year 2000," he says of Pasco.

But the single-family market is way overbuilt, apparently because of individual investors speculating on the market, he says, adding, "There are a lot more houses than there are people."

"It's going to take a few years, in my projections, for us to work out of that," he says.

Pasco abounds with opportunity for commercial construction that has yet to catch up with population growth.

North of Pasco is Hernando County, another bedroom community to Tampa, that has seen significant population growth. Like Pasco, job growth isn't keeping up with population growth.

Hernando's single-family homes are overbuilt by about two years, he says. But values are still rising in the county. And commercial construction, once again, hasn't yet caught up with population growth, which means there are plenty of opportunities for builders.

ECONOMIST HANK FISHKIND SPEAKS OUT:

FREEZING PROPERTY RATES. It would stimulate the property market certainly, especially the commercial side and the second home side who do not have those protections. It would cause tremendous problems and issues for local governments with consequential impacts on how much infrastructure is going to get financed and by whom. So there are some significant tradeoffs that would be involved. I think if we shifted away from a property tax system to more of a transactional - based on deed records and sales tax and other things - ultimately we could do a substantial overhaul of the system. There are huge distortions caused by the Save Our Homes cap that we'd probably be better off without. But we're talking about a system that is so huge that we need to be very careful about what kind of changes we make.

PROPERTY INSURANCE. There's no doubt it's going to cost more. I think we all understand that. I think the state of Florida would do us all a service to become the re-insurer of last resort, and not the insurance company of last resort. I think that's a fundamental structural failure. I think as the re-insurer of last resort, the state could use its resources much more effectively to control insurance rates and to create a market that private companies would wish to compete in. I think the state, in the short run, though, like in the next six months, needs to expand the mandates to stabilize the commercial property market. It will take another six months to a year to create a re-insurer of last resort and to move us to an effective, market-based insurance solution.

CONSTRUCTION COSTS OUTLOOK. Costs actually have become much more well behaved. I think we're going to see overcost in the 2% or less range. I think that when oil prices begin to stabilize we're going to see some stabilization on petroleum-based products, especially roofing. There'll be much more availability, especially as residential has slowed down significantly. We're going to see much better material prices in terms of concrete and those related items. Once again, demand is off significantly. Companies are now are going to start to offer promotions you'll see over the next six months. Steel is going to stabilize where it is. Other than that, I think we're going to see some good news, and labor is going to get much better with much better availability, much better timeliness.

OFFICE MARKET. The retraction of home builders and vendors is causing some vacancies, but there is a lot of really strong office demand coming from other sectors that I think will do well. Although I'm talking about 20% to 40% reduction in single-family home construction, that has already happened. It's not another 20% to 40%. This is where the stabilization occurs. I don't think you're going to see much more erosion on the going forward basis. I think the danger is for those speculating on the land and the condos.

FLORIDA MIGRATION. We're still seeing 1,000 people a day moving to the Sunshine State in '06. I think that goes down to about 900 in '07, a little bit lower in '08 and then back up. Population growth will continue through 2015-2018 but not as much. I think there are a lot more competitors for that retirement and boom market in the Southeast U.S. Yes, if we are not able to stabilize the property insurance market, it will affect population growth. And it will have different affects on different parts of the market. The impact of insurance is obviously much more dramatic in the coastal areas than it is in the Panhandle. We haven't seen major [premium] increases in the Orlando marketplace and in other areas that aren't within three to four miles of coast.

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