The direct correlation between construction and the property market is pretty obvious. The population is increasing at a certain rate so we need a certain amount of new space to accommodate the new people. Therefore, demand for new space could be a lead indicator of demand for real estate in general. Like with anything though, this relationship gets more complicated the closer you examine it.
A rather comprehensive examination of this relationship just came out from BuildFax. They aggregate construction spend numbers about properties and construction activity from permitting authorities across the U.S. and analyze to generate insights for their customers. Their new report shows that it is important to understand the distinction between the types of building being reported. They distinguish the permit applications into maintenance, remodel and new construction and all of them have their own implications for what might be brewing in the property market.
This report had a bit of a bleak tone. For the first time since 2011, new and existing housing supply is experiencing declines in every category. They think that this might be a sign of a softening housing market. In the report the BuildFax team say that they think the next few months will be critical in understanding what will happen to the property market and possibly the economy as a whole. I asked the CEO Holly Tachovsky exactly what they think will be the things to look for in the short term. She told me, “We will primarily monitor whether year-over-year activity declines for another straight month, watching to see if this activity becomes a trend or is a one-off event.”
She also explained that larger declines in some categories of construction can be telling, “We’ve noticed other indicators in the market that point to changes in consumer behavior. For example, steady increases in remodeling while new construction subsides, among other systemic factors, suggests consumers may be unable or unwilling to re-enter the housing market. Instead of closing on a new home, they are re-investing in their existing property. This lock-in effect could snowball into a market-moving phenomenon.”
Since every region in the U.S. is competing for both construction and people, not every area is affected the same. When I asked Holly about which parts of the country were particularly sluggish she told me, “Declines across the board, like we saw in November, are often driven by nationwide decreases in maintenance and new construction. However, in November, we saw the highest year-over-year declines in maintenance activity in Oregon, Florida, and Hawaii and the highest year-over-year declines in maintenance spend in Arizona, Florida, and Virginia. The decrease in Florida maintenance activity is caused in part by Hurricane Irma, which made landfall in August 2017. While recovery after a hurricane typically lasts over a year, peak activity occurs three to four months following the storm. It follows that Florida saw subdued year-over-year maintenance activity this month, considering heightened activity occurred around this time last year.”
As for the commercial side of the property industry, the report also looked at commercial construction, which shows decreases this month are in line with similar residential declines. Although again, more can be understood if those declines are put into a larger context. The report says that “Commercial construction over the last five years has seen steady increases, primarily in construction spend. In fact, BuildFax data suggests there are disproportional increases between construction cost and volume, which point to a labor shortage in the market.”
While I had Holly’s ear I asked a question I often do to people creating real estate technology, “What does the future hold and how will technology help?” To this she replied, “Increased visibility and context around property data will be particularly beneficial as consumer preferences change and more millennials become homebuyers. For instance, increases in accessory dwelling units (or ADUs) used to suggest elderly family members are moving in with their adult children. Now, these ADU’s are helping to solve affordability crises in urban areas, lending themselves to short-term rentals. Understanding what to expect from new homebuyers is an exceedingly valuable tool.”
