It’s your classic good-news, bad-news scenario. Which do you want first?

The economics in our industry are clearly upside down for many at this point in time. Painting a rosy picture only serves to ignore the realities that have been punctuated by the shock waves from the subprime mortgage debacle that exploded onto the scene in late summer. Yet there may be a silver lining in this cloud.

Like every other economic downturn, the cyclical nature of business means that for those who can to take advantage of current conditions (i.e. lower costs, a lighter work load, etc.); it is an opportunity to strengthen their business. This may materialize through an upgrade of their operations or implementing strategic plans that lay the foundation for the future.

Socially, Americans continue to be on the move as the population shifts, particularly to points south. Continued concerns over global warming and rising energy prices have captured the public’s attention and are augmenting the strength of the “green” movement and the development and implementation of sustainable products, practices and procedures.

Politically, the pace of campaign advertising will accelerate through 2008 until the voters decide the political control of the White House and Congress. Meanwhile, posturing by both major political parties will make for little achievement on Capital Hill. However, some legislation is making its way through that could be beneficial.

The key in 2008 will be a clear review of the national and world situation and how it affects you and your operation. Caution may be a wise approach going forward. However, be aware that slow economies can offer unique opportunities that are not there during boom times.
Not surprisingly, Sustainable Land Development Today subscribers indicated in a survey that their biggest concerns heading into 2008 were the housing market (57 percent), local economy (44 percent), and government regulations (43 percent).

The Economy
In late November, the Bush administration reduced its forecast for U.S. economic growth in 2008 and acknowledged that problems in the housing market were greater than expected.

The White House has predicted 2008 growth in real gross domestic product at 2.7 percent, down from the 3.1 percent it had projected in June. The forecast will be used in the administration’s fiscal 2009 budget proposal that it will submit early this year.

Edward Lazear, chairman of the White House Council of Economic Advisers, said that the level of growth is still solid, especially in light of the downward slide in the housing market. Meanwhile, the Federal Reserve projects real growth in gross domestic product (GDP) to range from 1.8 percent to 2.5 percent in the new year.

The recent past illustrates that even with a sharper decline than expected in the housing market, the U.S. economy has managed to remain steady with most experts acknowledging modest growth under the circumstances. Preliminary indications point to a two percent growth total for 2007.

This is despite an almost continuous decline in single-family home construction since the record high water mark in 2005. The slowdown began in 2006 and continued this past year.

The drop in construction starts for 2007 came in at eight percent, the largest decline since 1990 when it hit nine percent, according to figures in McGraw-Hill Construction’s  Construction Outlook 2008.

In August 2007, the excess inventory of homes was compounded by recent homebuyers’ problems making house payments on adjusted subprime mortgages. The result has been a ripple effect throughout the industry as builders, developers, and contractors joined homebuyers, mortgage lenders, and traditional banks in feeling the affects.

When the subprime crisis first hit, new home sales dropped eight percent to just 795,000 units on an annualized basis, recording the lowest monthly rate since June of 2000.

The numbers for multi-family housing took a more drastic dive in 2007. There is a typical lag in the impact to this market segment due to longer development planning and construction processes. For instance, when the single-family market started its significant decline in 2006, multi-family housing starts slipped only two percent, despite noticeable reductions in condo and town home sales.

In 2007, as the single-family market steadied, analysts believe the financial figures for multi-family housing starts will show a whopping 18 percent plummet.

These large housing projects, those that are able to continue to completion, will further add to the unsold inventory of condos and town homes, creating a glut of housing unit inventories in many markets. McGraw-Hill analysts predict this will put downward pressure on new starts and result in an 11 percent decline in 2008.

As we predicted last year, commercial construction helped steady the overall development picture in 2007. However, the growth that continued last year will evaporate over the next year as developers, investors, and traditional funding sources become much more conservative.

From all indications, there will still be a more than adequate supply of funds for builders, developers, and investors to utilize for land development projects in 2008. However, tapping into those resources are expected to be more challenging. The evaluation and due diligence performed by lenders will be more thorough and discretionary. This will more than likely include residential and commercial projects.

The Federal Reserve took action in 2007 to shore up liquidity to ease credit strains. Similar moves are predicted in 2008. Mortgage interest rates are hovering at about 6.25 percent for a 30-year fixed mortgage as the calendar turns to 2008, and the expectations are that rates will likely stabilize this year.

In addition, the Federal Reserve imposed tougher new restrictions in mid-December 2007 to curb unfair and deceptive home-lending practices and prevent a recurrence of the meltdown in subprime mortgages this year. The Feds approved a plan that would tighten provisions meant to protect borrowers and apply them to a far larger share of home loans - whether from banks, mortgage companies or other lenders - than under current regulations.

Most economists and industry insiders agree, however, that the reigns on loan availability for consumers will also be tighter in 2008, which will reduce home buyer demand. Meanwhile, home builders with existing inventory will be challenged to move product in this environment of tighter money and slackened demand.

With housing and commercial construction undergoing a continued slow down in 2008, this will not be the case in other industry segments. Due in part to increased property tax revenues caused by the booming development earlier this decade, and a refocus on the nation’s decaying infrastructure, government investment in land development is expected to undergo a significant increase in 2008.

The collapse of the I-35W bridge in Minneapolis, Minn., has sparked support for transportation projects. Environmental concerns over water quality have also resulted in public awareness of stormwater and wastewater issues. This is profiled further in an adjoining article about regulatory changes impacting the industry in 2008.

FMI, a management consulting and investment banking firm for the construction industry, predicts 5.8 percent growth in construction in 2008 in its annual U.S. Construction Overview.

“The 2008 construction forecast is generally positive and many sectors of the construction industry will remain healthy, despite the continuing drag of the housing downturn,” said Heather Jones, construction economist for FMI’s Research Services. “In terms of trends, the aging of the population, immigration and deteriorating infrastructure will drive much of this growth. The health care, public safety, office and transportation segments will see the strongest growth in 2008.”

The projection is that there will be a total $1.21 trillion in construction put in place in the new year, about nine percent of GDP.

On the other hand, the McGraw-Hill Construction overall analysis predicts a two percent reduction in overall construction in 2008, to $616 billion, which follows this year’s eight percent drop.

One of the factors that FMI cites for its positive forecast is the growth in green building and environmentally friendly construction activity. Its report projects $21.2 billion of all new nonresidential construction will employ the use of green-building principles—a 58 percent increase from the $13.4 billion in 2006.

“This sizable growth in green construction has created a shift in perception among owners and the architectural and engineering communities over the last few years—the industry is increasingly recognizing green building capabilities as a necessary part of a firm’s best practices,” the report states.

Publicly owned buildings—schools, administration buildings and the like—appear to be the most likely to adopt such environmentally methods as well as federal, state and local governments.

There are also a growing number of multi-family projects that are incorporating green practices as a way to increase their marketability.

Retail chains will go that route related to social responsibility, lower operational costs and gain positive public relations, according to the McGraw-Hill Construction report. It predicts that by 2010, green building will comprise 5-10 percent of non-residential building stock.

A survey of Sustainable Land Development Today subscribers indicated that over 58 percent expect their business in 2008 to be slightly better or much better than last year. More than 30 percent expect this year to be the same as last year; leaving less than 12 percent believing that 2008 will be slightly or much worse than 2007.

Ironically, respondents were less optimistic about the prospects for the industry. Over a quarter polled thought that the industry will be worse in 2008 than 2007. Slightly more than 41 percent expect the industry to improve this year.

Consumer confidence is down significantly, according to Lynn Franco, director of The Conference Board Consumer Research Center. The reading in November 2007 continued a sharp decline since the summer.

"Consumers' apprehension about the short-term outlook is being fueled by volatility in financial markets, rising prices at the pump and the likelihood of larger home heating bills this winter,” she said. “In fact, consumers' inflation expectations have surpassed the spike experienced this spring and a larger percentage of consumers than last month expect stock prices to decline.”

Those anticipating business conditions to worsen increased to 16.7 percent from 13.9 percent. Those that believe business conditions to improve declined to 12.4 percent from 14.0 percent.

The Societal Landscape
Meanwhile, the nation’s population is expected to continue some long standing trends. The migration to states in the West, South Central and Southeast is expected to continue for years to come, which would indicate a robust future for the housing market in those areas.

In addition, the population in the U.S. is growing at an annual rate of one percent, making it one of the few developed countries that will have more people in a decade than it has today, according to an analysis reported in The Kiplinger Letter.

The Sun Belt will continue to see strong growth, with the Southern population ballooning by more than 50 percent by 2030 and the West by 35 percent. Meanwhile, the populous Northeast will see only five percent population growth and the less populated Midwest will grow only seven percent.

“By 2030, huge areas of Kansas, for example, will have fewer inhabitants then they had in the late 19th century,” the Kiplinger report stated.

Approximately half of the population growth today is due to immigrants.

It is estimated that approximately 25 percent of the 11.8 million workers in the construction industry are Hispanic, a trend that has not slowed, despite the housing market slowdown and increasingly stringent immigration rules.

Although tougher border restrictions will cut down on illegal immigrants, the odds favor a move by the Federal Government to eventually approve a guest worker program and the number of legal immigrants will increase. The departure from the workforce of retiring baby boomers — a gathering storm that many employers are choosing to ignore – will leave major vacancies in the workforce and necessitate the move.

Society will continue to wrestle with the dilemma of where these immigrants and shifting population will be housed. It is unrealistic to expect that the major urban areas of the country will be the desired answer for the majority. This makes it incumbent upon leaders in the land development industry to maximize efforts to perfect sustainable developments and neighborhoods.

It is also a reality that our suburbs will continue to expand, but they should be done in a manner that minimizes the waste of land, preserves open space, and balances the need of our people, planet, and prosperity.

Population growth combined with the effects of climate change and development are putting pressure on water which ushers in major challenges to conserve resources. Some climatologists believe persistent drought, particularly in the West and South—which have seen some of the greatest population growth—may be more than a temporary event spanning a few years. It may be the norm.

Expansive growth and prolonged dry spells in other areas create problems, putting pressure on water supplies as well.

“Conservation will be the new ethic,” according to the Kiplinger review. “High prices will be a motivating factor.”

So will the demand by consumers for access to clean water. The situation offers opportunities to come up with creative ways to use and reuse water. As indicated by the number of water supply and conservation measures now being supported by voters, these issues are resonating with consumers.

Our society is now aware and becoming increasingly educated on the issues and impact that land development has on the world and their personal experiences. It is essential that industry leaders continue to educate each other on the societal dynamics that impact the perception and success of development projects.

Political
As the presidential election season advances, don’t look for anything hot coming out of Congress beyond rhetoric as both political parties play a chess game to avoid providing the other with campaign fodder heading into the November presidential election.

Gridlock will be the name of the game on the national level, but a few pieces of legislation have been advanced and are worthy of note.

In mid December, Congress approved legislation to eliminate taxes on mortgage debt, noting that it will help struggling home owners to avoid foreclosure. President Bush is expected to sign the bill into law.

The Mortgage Forgiveness Debt Relief Act also will encourage market-based restructuring between lenders and home owners and discourages foreclosures, according to officials of the National Association of Home Builders (NAHB).

“This bill helps to address the subprime lending crisis by preventing strapped home owners from taking a significant tax hit to restructure their mortgages and allowing them to stay in their homes,” said Brian Catalde, a home builder from El Segundo, Calif., and president of the NAHB.

Supporters argued that existing tax rules compel many struggling home owners to seek foreclosure over restructuring their loan with lenders because forgiven mortgage debt is taxed as ordinary income.

Additionally, it will provide a temporary, three-year change to the tax code to eliminate any taxes home owners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage debt. The change in the tax law will cap untaxable forgiven debt at $2 million and apply only to principal residences.

So, while the national political scene will be dominated by appeasing consumers (aka voters) for November, expect local political activities to ratchet up as community residents start demanding more accountability and control over land development projects.  SLDT