As we delve into our third annual outlook for this diverse and increasingly complex land development industry, three primary components that form the framework of our outlook (economy, politics, and society). Those components vary slightly from the national, regional, and local perspectives. With that said, however, to be successful in land development, it is important to understand the big picture issues because they will eventually impact the industry at every level of development.

First, we’ll examine the current environment in each of the three primary components that impact the industry, then we’ll summarize what impact they are expected to have in 2006.

The Economy
The economy is one of the areas in which everyone has an opinion. Some say that 2005 was a strong year, while others say that a decline is underway. The facts, however, should guide the discussion.

The common wisdom is that general economic gyrations foreshadow land development activity by a few months up to a year or so. However, while economic activity has an obvious impact on development activity, it is one factor among many that determines actual industry performance. With that said, let’s examine the current economic environment.

Growth in the United States’ Gross Domestic Product (GDP) appears to have slipped very slightly in 2005 from a 4.2% gain in 2004. In fact, the first three quarters of 2005 showed growth at 3.8%, 3.3%, and a surprisingly revised 4.3% level in the third quarter, 2005. Fourth quarter numbers are expected to come in at about 3.35 based upon increased energy costs. Therefore, overall growth in 2005 will be around 3.65% - still a positive sign of an expanding and growing economy.

The Federal Fund rate rose 2% in 2005 with 25% increases at almost every opportunity. Many experts predicted that mortgage rates would climb to 6.5% last year. Well, they did come close to that mark briefly in the summer of 2005, but a slight decline and a steadying posture kept the rate below that 2005 high mark.

Interest rates are typically utilized to keep inflation, most commonly measured by the Consumer Price Index (CPI), under control. As mentioned, base rates jumped 2% last year which is almost exactly equal to the core rate (less food and energy) of inflation that will finish at about 2.25%. For the 2005 calendar year, the CPI will finish at about 4% due mostly to the high energy costs caused by the results of the 2005 hurricane season.

On the investment front, unless a significant decline during the last week of 2005 occurs, stocks and bonds will post moderately positive results for the year. That is great news for businesses and good news for investors heading into the next year as additional cash for capital expenditures will be available.

The construction sector of the economy – which will be detailed in much greater depth later – continued aggressive growth in 2005. McGraw-Hill Construction projects that total construction starts in 2005 will show an 8% gain which follows on the heels of 2004’s record-setting 11% gain.

So, what is in store for these areas of the economy in 2006?

First, in a factor that may be as much political as economical, February will bring a new Federal Reserve Chairman with the retirement of Alan Greenspan. This brings a certain amount of uncertainty to the table.

Many economic forecasters, as related by the National Association for Business Economics (NABE), are predicting a continued GDP increase in the range of 3.3% next year.

This, in turn, will also likely result in an increase in interest rates during 2006. Most projections indicate another 1-1.5% rise in the Federal Fund rate, thus resulting in mortgage rates approaching 7% by the close of 2006. Overall, the CPI is expected to maintain its rate of 2.25% through the next year.

Ironically, while many of the numbers are similar to 2005, the various segments of the industry will be impacted differently in 2006. For instance, a quick and drastic spike in energy prices caused many of the economic numbers to go in specific directions last year, but a gradual decline and stabilization of energy costs beginning in October of 2005 is predicted to continue through most of 2006 thus moderating the numbers and having an opposite effect next year.

Likewise, the industry’s $132 billion growth over the past three years has been bolstered by double-digit percentage increases in single-family housing starts. While the industry is expected to continue its growth pattern in 2006, single-family housing will not be leading the way – in fact, it may be a slight drag on the industry.

Interest rates, the consumer price index, and other economic factors such as financing options, housing bubbles, and debt ratios will significantly impact the land development industry and emerging trends in 2006. These will be detailed in our segment-by-segment analysis.

The Political Landscape
On a macro level, it may appear that politics will play a minor role in 2006 because of little presidential campaigning or positioning. The authorization in 2005 of two major appropriation bills, SAFETEA-LU and the Energy Policy Act of 2005, clear the way for additional infrastructure development this year.

However, the adage that all politics are local will certainly be a truism in 2006.

The eminent domain ruling (Kelo v. New London) by the U.S. Supreme Court last year has certainly resulted in a renewed focus on land development. In a paradoxical twist, state and local municipalities are condemning the tactic of implementing eminent domain for economic gain while also attempting to end urban sprawl and refocus attempts of infill and redevelopment. These battles will continue to rage this year throughout the country as politicians and policy-makers attempt to balance societal forces.

The Supreme Court will also be dealing extensively with wetlands issues in 2006 as three cases will be heard regarding the federal government’s rights and powers at the local and regional level in relation to the Clean Water Act (see November 2005 issue of Land Development Today for more detailed explanation).

Undoubtedly there will still be political battles that will impact our industry in 2006. Concerns about the budget deficit and funding the rebuilding of the Gulf Coast using funds already allocated to projects in the highway bill have already been mentioned. In addition, energy sources such as drilling in Alaska and subsidies for additional energy refineries will be highlighted discussions on the federal level.

State politics will move to the forefront in 2006 as 36 governorships take center stage in the mid-term elections. You can bet that environmental and eminent domain topics will play a role in these campaigns.

Of course, mid-term elections also place the control of the two houses of the U.S. Congress into play. While Republicans are expected to hold onto the House, there are indications that they may lose control of the Senate…although the War on Terrorism, Homeland Security, and political campaigning over the next nine months will likely determine the direction that these elections will take.

The Societal Landscape
While politics and economics are difficult to predict, gauging the “pulse of society” may be even more complicated.

Community leaders want additional economic development and residents want guarantees of no additional tax increases. Yet, they do not want urban sprawl or changes to established neighborhoods.

The desire for additional units of affordable housing is requested by many, but increasing density and salvaging ‘historic’ buildings are often thrown up as roadblocks.

Redevelopment and infill development appear to be of significant interest, but bureaucracy and regulatory components often make it cost prohibitive. Of course, when everyone likes your development plan, it is OK as long as it is “not in my back yard!”

Despite these real-life battles that must be confronted, there are other facts the must be considered. The focus for development follows the people. According to actual numbers from the Census Bureau, the people in the United States are heading from the East and Midwest to the Southeast and the Southwest.

Plus, once the decisions are made on how to rebuild New Orleans and the areas of Mississippi and Louisiana devastated by the hurricanes, plenty of activity will head to the Gulf Coast.

Other dynamics will continue to entrench themselves in our industry in 2006. First, the movement to “green” building and a more environmentally friendly approach to development has moved beyond the “tree-hugging environmentalist” push. As a result of a convergence of technological innovations, additional consumer demand (prompted in part by higher energy costs), and an educated and informed regulatory and design team, the ability to meet green building concepts is becoming more financially feasible.

Secondly, the realization that the long winding land development process is becoming more complex and needs to be accomplished with a team effort is forcing the industry to communicate with each other more frequently, earlier, and about less traditional issues, in order to achieve success. This pressure to gain community support, financing, and meet the needs of a community ultimately improves a project’s likelihood to reach a successful conclusion.

Finally, more effective cooperation between industry professionals will almost certainly be required. The establishment of a wide range of best management practices to be used throughout the industry – regardless of whether they are for specific problems like financing, erosion control, stormwater management, waste water management, etc or for business preparation and planning – will continue to be more essential to creating and maintaining successful development projects.

Summary
Sure, there are many economic, political, and societal variables that are impossible to anticipate.

New infrastructure development, namely transportation and energy projects, will ramp up significantly following last year’s passing of key legislation. Continued economic growth will be tempered by another 1 to 1.5% increase in interest rates. This, combined with the recent record-growth in residential homebuilding, will likely result in a significant decline in new home residential development. In fact, the early 4th quarter 2005 results indicate this trend is underway. Nationally, a significant number of new, unsold homes are beginning to glut the market. However, this will vary regionally. Population migration will continue to warmer climates and residential development activity in those areas, plus the Gulf Coast, will see increases.

Eminent domain, wetlands, and the Clean Water Act, will be at the forefront of the political scene as a result of the Supreme Court cases and statewide elections in 2006.

In general, those who fail to monitor ongoing developments, and/or are slow to adapt to the changing industry environment will see their competitive position continue to decline this year. Professionals within the development industry will need to evaluate their goals and objectives as to what market segments will be in their future by matching them with opportunities and a changing marketplace. Project collaboration and teambuilding will be a necessity to maintain profit margins in a tighter market.

Finally, the sustainable development movement is not a fad or a short-term trend. “Green” building, low impact development (LID), sustainable community forests, and other development concepts and techniques are quickly becoming standard best management practices for the industry. Supply and demand will increasingly favor those who embrace and implement these technologies and strategies in our ever-changing environment.  SLDT