Don’t let the negative warnings of a bubble-bursting homebuilding market cloud the 2006 perspective for the entire land development industry. While virtually all analysts agree that single-family housing will undergo a decline next year, we believe that the economy and the land development industry will continue to experience growth over the next 12 months.

In our 2006 Industry Outlook (beginning on page 8), we took a look at the ‘big picture’ as it relates to the economic, political, and societal impacts upon this industry. In this article, we will bring together the thoughts, comments, and musings of many leaders in this industry to provide a detailed outlook for each of the key industry segments.

One of the key differences between our outlook and others in the market is that we differentiate the industry components. The land development industry is about more than design, construction, and buildings. It truly needs to include the factors of regulatory impacts, national and local policies, and of course, land development trends on our wide and diverse market.

For instance, the mainstream media and other prognosticators have been forecasting an economic and housing downturn for the past six to nine months. With record-setting numbers, it is relatively easy to predict and/or assume that a decline is on its way. But there are other complex factors involved, which is why the decline has been slower to materialize. In fact, November 2005 numbers illustrated that new home construction in November rose by 5.3%, the most in seven months, giving a strong signal that the housing market still has a good bit of sparkle left in it. Recent news of an increase nationally in new homes on the market indicates that a slowdown may be beginning.

It is our desire to provide more detailed information to allow our readers to anticipate and be proactive in their business approach for the next 12-18 months.

It doesn’t get much more complex than sorting through economic, housing, and construction facts and figures. The residential sector includes single-family and multi-family residences.

Ironically, the two components of the residential market appear to be heading in opposite directions. As single-home starts are starting to trend down, the condominium and multi-unit residential market is surging.

Even as early as last April, surveys of architectural firms showed that the entry level and affordable first-time home market was seeing a decline, but condo and townhouse design demands were growing at a rapid pace.

Residential construction will remain strong in 2006, but builders and developers must be aware that they no longer have the luxury to build whatever they want, wherever they want, however they want, and expect it to sell as many could do over the past few years.

Single-Family
Make no mistake about it; the single-family new home market is in the midst of a decline from the numbers it has posted over the past four years. The severity of the drop differs from one expert to the other. However, as many point out, a decline from the past few years does not mean an end to the market – just a return to a normal growth period.

“In terms of single-family sales and starts,” said National Association of Home Builders’ Chief Economist David Seiders in a media teleconference on December 20, 2005, “we’ll basically be retracing the increases we saw in 2005, heading back to 2004’s very healthy levels.”

Seiders predicts that single-family starts will decline to 1.59 million next year from this year’s 1.71 million units, while sales of new single-family homes will ease to about 1.19 million units from this year’s record-breaking 1.27 million.

Robert Murray, Vice President of Economic Affairs for McGraw-Hill Construction, indicated that the decline is already underway when he announced that “single-family housing in October retreated 5%, as this robust market appears to be settling back very gradually.”

His forecast for this sector of the industry calls for 1.525 million units this year– a 5% decline from 2005, but higher than any single year prior to 2004.

The decline will not likely affect every region of the U.S. While the Northeast will continue its decline that started earlier than all others, it will be joined by the Midwest, Southern Atlantic, and even the West. However, the Southern U.S., namely Florida and the Gulf States suffering housing destruction by the 2005 hurricanes, will continue to see homebuilding growth.

The unique region is the West. Murray expects the West to see a drastic drop of 9% in 2006.

The decline will likely be even more substantial in California since the overall drop in the region is mitigated by the spectacular growth taking place in Nevada and Arizona.

The reasons for the decline are relatively simple to understand.

There has been a slowing demand for new homes, which, when you consider that virtually everyone wanting and able to purchase a new home over the past three years has done so because interest rates have made the affordability of these homes available, it is not a surprise.

Another factor has been the over-appreciation of the home market that had been inspired by earlier demand and a shortage of homes. As home prices climb, and the interest rate climbs too, the demand has decreased in some of the high-end markets.

Economists are warning that current homeowners in the Northeast as well as the East (including parts of Florida) and West coasts are likely to experience a significant case of mortgage exposure over the next few years. They explain that many buyers jumped at the opportunity to purchase larger homes (i.e., more expensive) since lower interest rates made them affordable. However, many used unconventional financing that featured interest-only or adjustable rate mortgages. The concern is that if home values decline in these areas, and these mortgage features start transitioning to higher fixed rates, there will be a significant impact.

In the first nine months of 2005, the median home sale price jumped by a staggering 34% in the Orlando, Florida market according to the Orlando Regional Realtor’s Association.

For small, local, and regional developers, there is one additional factor to watch. The growing markets are being gobbled up by major homebuilders. In 2004, the top 10 homebuilders in the nation owned a 21% market share of the industry. It is expected that by 2010, that percentage will be 40%. To put this in perspective, the top 10 homebuilders currently control over one million lots right now.1

As an example, we present Central Florida.2 The red-hot market produced an unexpected secondary side effect: the acquisition of privately held home builders by larger, national companies.

Among the buyouts:
• Landstar Homes, which sold its Central Florida home-building operations to Horsham, PA-based Toll Bros. Inc., the nation’s 14th-largest home-building company. The deal allows Toll Bros. to make its Central Florida foray with some 2,500 lots ready for development.
• Orlando-based Cambridge Homes, which owned or controlled some 3,600 lots throughout the greater Orlando area, was bought by Red Bank, N.J.-based Hovnanian Enterprises Inc.
• Coral Springs-based Transeastern Homes — which launched eight Orlando-area communities — was bought by Hollywood, Fla.-based Technical Olympic.

 The reality is that to succeed in the single-family homebuilding market over the next few years, developers will need to make a few adjustments. Any new home will not be an automatic seller. It will require unique value-added components and a real assessment of the wants and needs of those consumers still shopping.

Look for energy efficient homes, creative neighborhood designs, and technology features to be the differentiators.

The American Institute of Architects Home Design Trends Surveys in 2005 illustrated that residential home builders/buyers preferred a special room in a new home to be a home office and the top request for technology is now wireless computing capabilities. In addition, the desire for energy management systems has topped requests for security systems.

Likewise, architecture firms report that yards are being used differently, increasingly as outdoor living space and with more improvements.

Almost half of firms report that upscale landscaping is on the increase, as is the popularity of outdoor living space (with features such as decks, porches, and patios). Thirty percent of firms report the increase in other outdoor amenities such as swimming pools, tennis courts, and gazebos, while 17% of firms report a decrease in these features. A less popular trend is providing greater emphasis on borders, such as fencing, walls, or plantings to define lot boundaries, with 25% of firms reporting increased popularity, and 8% reporting decreased use.

Even with greater emphasis on the property and more outdoor living, few architecture firms report growing lot sizes. To the contrary, only 5% of firms indicate that lots are increasing in size, while 43% report that lots are getting smaller.3

Multi-Family Housing
Reports and projections on condos are literally all over the place. Like everything else in this industry, projections depend upon the context.

“The multi-family market has been very steady throughout this decade,” stated Murray at McGraw-Hill’s Executive Outlook Conference in Washington, D.C. “I’m a little concerned that the condo-booming we saw over the past six months may have been too much.”

Murray continued to reflect what we have heard from other industry leaders as well. Urban infill and redevelopment has increased the focus on revitalization and “apartments are being turned into condos, thus helping to increase apartment demands. Multi-family housing will be a prime beneficiary of downtown development.”

However, like many other good things, success can create excess. As an example, Orlando’s condo craze produced about 20 new projects - totaling 6,000 units – in 2005 alone. Opponents in San Francisco are complaining that low-rent apartment dwellers are being evicted so that the buildings can be converted into luxury condos.

“Multifamily is doing well, with the condo share of the market up to about 50% at this point,” Seiders noted. “We think multifamily starts will be pretty stable, with condos losing some market share in the year ahead and the rental side regaining some ground.”

Meanwhile, according to Seiders, manufactured or “HUD-code” homes can be expected to see a temporary surge, due in part to orders for affordable housing in areas hit by the 2005 hurricanes.

With single-family home prices rising exponentially and downtowns turning to luxury condos for the upscale, the market for apartments is also seeing a resurgence. Not surprisingly, the metro areas with the lowest apartment vacancy rates (according to the National Association of Realtors) are those with some of the highest housing costs: Los Angeles, Orlando, and Newark.

The low-end condo and new apartment markets, though, won’t be limited to the Gulf Coast. They are becoming the new model for affordable housing from Hartford (CT) to Des Moines (IA) to Seattle (WA).

In Hartford, there is a high demand for lower-end condos. The number of days it takes a single-family house to sell has been slowly rising over the past five years; the reverse is true for low-end condos. It now takes an average of 30 days to sell condo units priced at $200,000 or less.

The median price for a condominium surpassed that of a single-family home for the first time last year. And it appears that this year will be the 10th consecutive record-making year in terms of rising U.S. condo prices and the number of condo sales, with median condo price tags still above those for single-family homes, says Walter Molony, spokesman for the National Association of Realtors.

With land either scarce or commanding top dollar, it should come as no surprise that a market shift is underway to the multi-family sector.

Now that the residents of our great country have moved into new homes in suburbia, they need places to conduct commerce and enjoy themselves. It doesn’t take long for enterprising developers and retail speculators to follow the people. In many cases, retailers and other commercial enterprises are able to move in to a new development area quicker than the residents. 

This sector includes retail (stores and shopping centers), office complexes, hotels and motels, and manufacturing/industrial buildings.

Retail
Just viewing the landscape of any growing area should provide a rather clear indication of the retail segment for 2006.

The major retailers continue plans for major expansions. The big-box trend is still going strong as wholesaler clubs remain a significant force. The nation’s top retailer, Wal-Mart, has expressed plans to open approximately 275 supercenters in 2006.

However, there are some new twists that are taking shape around the country. Open-air shopping complexes, initially started by the “outlet malls” a few years ago, have expanded to the mainstream. No longer are the typical malls being constructed under one common roof, but specialty stores, usually with a mid-range retailer serving as an anchor, are grouping together in a style that merges strip malls and open air markets – called lifestyle centers. According to the International Council of Shopping Centers, the number of these centers is expected to increase from 130 to nearly 170.

Bret Wilkerson, CEO Property & Portfolio Research, cited four main factors driving capital to commercial real estate when he spoke at the BuildingTeam Summit, hosted by Reed Construction Data in November: 1) worries over rising inflation; 2) shifting demographics as baby boomers begin retiring and the need for office space decreases and sales of second homes increases; 3) strong relative performance; and 4) decent growth in rents. Wilkerson also reported that retail construction will experience the most growth in terms of construction and industrial space will experience growth in big boxes and warehouses.

There is wide agreement that the warehouse market will be a significant source of commercial development in 2006. Speculation is that uncertainty about the volume and ability to meet Internet purchasing needs and the related delivery models have matured and construction of warehouses for distribution are proceeding.

Unlike some other sectors in the industry, the retail market is more closely tied to economic conditions.

Marcus & Millichap, a leading real estate brokerage firm, stated in an early December press release that “forces of globalization and high consumption of the U.S. population should significantly increase demand for warehouse and distribution space through 2020.”

They also expect perimeter-related expansion of retail space to include the major markets of San Francisco, the northern suburbs of Dallas, and Orange County, NY.

McGraw-Hill isn’t as optimistic on the retail sector, citing expectations that there will be a 5% decline in this construction sector from 2005 levels.

Office
The continued economic growth enjoyed by the United States – in spite of the 2005 hurricanes – is perhaps the best barometer that the country is enjoying significant and sustained employment growth. This is, of course, despite the numbers some politicians toss to the media.

One of the scenarios that has played itself out throughout the country over the past few years is a result of the white-collar and middle-manager purging by some major employers that happened early this decade. Many of these affected workers used the opportunity to start new businesses…many in their own homes.

If office vacancy rates are any indication, business is flourishing for many.

For the largest 69 markets (excluding New Orleans), absorption is projected to total just below 65 million square feet this year, the highest total since 2000, according to Reis, Inc., a New York real estate research firm. The average vacancy rate declined to 15.1% in the third quarter, the sixth consecutive drop.

Reed Business Information reports that it expects to see an increase in office construction spending through 2006 (from the spring of 2005) of about 30%. McGraw-Hill Construction projects a 12% growth in spending on a 9% growth in office square-footage.

Hotel/Motel
It is apparent that the tourism industry is fully recovered from the terrorist attacks. They are also expanding their revenue sources.

Virtually every research and reporting source for the industry illustrates increasing occupancy rates. Likewise, industry forecasters are all expecting a large boost in hotel/motel construction spending in 2006: McGraw-Hill (18%); Reed Business Information (22%); AIA (12.7%).

Lodging Econometrics (LE) released its first Development Forecast for three important specialty sectors of the lodging industry early in December 2005 – timeshare development, condo hotels, and hotels developing private residences. Patrick Ford, president of LE, predicts rapid growth.

In 2006, 39 timeshare projects are forecasted to open, having 3,998 dedicated timeshare units. The total timeshare pipeline currently contains 111 projects being actively pursued by developers with 15,360 units – with 97 projects currently under construction or scheduled to start in the next 12 months. Nearly two-thirds (63%) of all projects are for new ground-up construction, while 37% are for the unit expansion of existing projects.

Casino destination areas are the most popular locations for development. Oceanside vacation areas and theme park destinations follow, then mountain and ski areas. Las Vegas is the most popular market with 26% of all pipeline units, followed by Orlando with 17%.

Marriott’s Vacation Club has 12 company-owned projects with 2,413 units in the Pipeline, while Hilton has four projects with 1,108 units. Cendant’s two brands – Worldmark and Fairfield have a combined 14 projects/1,327 units. Ford commented, “Although the branded vacation clubs are developing most of the large projects, timeshare is still pretty much a fragmented industry with 74 out of 111 projects in the pipeline being constructed by smaller local and regional developers.”

The primary purpose of each Condo Hotel project is to function as a hotel servicing regular transient guests. So, most often, unit owners are required to place their units into a hotel rental program when unoccupied, receiving a share of rental proceeds in return. Subsequently, Condo Hotels are usually upscale, full-service developments focused in the strongest hotel markets: either popular vacation destinations, or in large cities where suburbanites frequent hotels for business or leisure purposes.

In 2006, 32 projects with 4,831 Condo Hotel units are forecasted to open. The current construction pipeline contains a total of 105 projects with 29,042 condo units, averaging a very high 276 units per project. Of these 105 projects, 85 projects are either under construction or are scheduled to start within the next 12 months. Surprisingly, 75% of all projects are ground-up new construction, while 25% of the projects will convert existing guestrooms in open and operating hotels to condo units.

Ford indicated that Condo Hotels are a significant factor in the lodging industry’s growth because without these products that draw such individual investor participation, large upscale hotel projects could not otherwise be conventionally financed and built so early in the industry’s economic recovery.

Another proven way to build luxury and upscale hotels in the early stage of a recovery is to include private residences for sale in the project. In the regular hotel construction pipeline, 142 projects are including some form of private residential development – condominium residences inside the hotel and/or condominiums, town houses, and single-family homes adjacent to the hotel.

Most all developers will choose a major upscale brand early on as it adds important cachet to the project and communicates a level of amenities and hotel services that often permits developers premium pricing greater than what comparable residential projects in the same community can command, sometimes up to 25% or more. Currently, 62% of this type of development is in urban centers or close-in suburban locations of large cities where regular residential condominium construction has strong momentum.  Another 20% of the development is at the country’s most upscale oceanside resort destinations.

Manufacturing/Industrial
This particular segment is projected to continue showing growth in 2006.

While manufacturing is not a glitzy industry, it will receive a significant boost this year due in large part to the passing of the Energy Policy Act of 2005. This is expected to start the planning and design phase of numerous energy facilities, but there will be hurdles to overcome.

David Wyss, Chief Economist with Standard & Poor’s, stresses that NIMBYism (Not In My Back Yard) will be one of the biggest stumbling blocks. He stressed that energy production is the least of our challenges, the loss of refining capacity is the big problem.

“We (United States) were operating at 99% even before the hurricanes and could not keep up with our demands,” explained Wyss at the McGraw-Hill Construction Executive Forecast conference. “As of October 20, production was still down 6%. We can survive it, but it will be expensive.”

Wyss stated that natural gas and new refineries are an issue and we shouldn’t be surprised if manufacturing facilities in certain areas of the country will be shut down on cold days because we don’t have enough natural gas.

Despite the clear need, Wyss is concerned that since energy only comprises 6% of average household income and crude will likely stabilize back to $45 a barrel, there will not be enough public fortitude to get past the hurdles until it really gets bad.

 Should some energy projects actually get off the ground in 2006, conservative predictions of gains of less than 10% would be shattered in the manufacturing sector.

Generally speaking, despite lower manufacturing employment, there remains demand for manufacturing space.

“We’re able to expand output with fewer works,” explained Jim Costello, Senior Economist of Torto Wheaton Research, in December’s National Real Estate Investor. “As a result, you need space for increasing manufacturing activity.”

As indicated earlier, distribution centers will provide a healthy surge to this segment. According to Grubb & Ellis, industrial vacancy fell 20 basis points to just 8.4% nationwide in the third quarter of 2005.

Educational facilities led this sector in 2005 and are again projected to jump another 9% this year. Like other segments, the West and South are showing the biggest educational development – with California and Florida topping the state’s list. The 2005-2008 K-12 School Market for Design & Construction Firms, a report from ZweigWhite, indicates double-digit growth in student populations in those regions. Likewise, the National Center for Educational Statistics projects a steady K-12 increase through 2014.

While state and local budgets – via some bond issues – have increased the funding available for school buildings, some of this will be eaten by higher building material costs. Overall, the educational component of the institutional sector will remain steady in 2006.

Somewhat surprising, unless you read our 2005 outlook, is the surge in healthcare construction last year. According to numbers provided by McGraw-Hill Construction, heathcare construction added 12% growth to now represent 105 million square feet, a new industry high.

In reviewing this segment and the data, we project that healthcare construction will reach a new high in 2006 after another 5% jump.

Other institutional building components do not look nearly as strong. Amusement-related projects, religious buildings, and public structures such as prisons and courthouses all declined in 2005 and we project that these trends will continue in 2006.

The projections in this category are easy. Spending and activity will be up in 2006. The passing of the long overdue legislation, SAFETEA-LU, ensures growth in this area after two years of budget uncertainty. Construction in this sector, which includes highways and bridges, mass transit, waterway transportation, airports, and other public works projects like water, wastewater, and solid waste, is expected to enjoy growth that had been restrained for the past two years.

It will not take long for the industry to see the results; many of the projects that had been on hold – especially in the area of highways and bridges – following impact studies and initial planning, will pick up quicker than usual.

As we outlined substantially in articles following the passage of SAFETEA-LU, the levels of growth will be spread throughout the transportation sector, incorporating airport, mass transit, and related projects like light rail.

Adding to the transportation spending authorized by the new long-term legislation is the massive reconstruction and repairs that must take place in the hurricane-damaged areas of the South. All-in-all, transportation will be one of the major sectors helping offset losses in the residential building market in 2006.

Trends Impacting the Industry
One of the concepts that we are constantly presenting is that segments do not work in accurately measuring the building and construction markets, which we also incorporate into the land development industry. The construction phase is just one component of the land development process. Planning and design also comprise significant aspects of what we call the land development industry.

Therefore, we believe that it is essential to include trends and technologies that will significantly impact our industry in this annual outlook. Ultimately, the acknowledgement and the acceptance or rejection of these trends will determine the financial future of pending projects and your organization.

It is essential, however, that developers eliminate the practice of appearing at county, city, and township meetings with a completed plan, saying basically “here is my plan, please approve it” without ever having talked to those folks and other members of the community beforehand. We realize that this is new to many in our development community and often unpleasant for those who typically avoid communicating their ideas before they are approved. However, to avoid opposition and bureaucratic delays, this is a valuable opportunity to obtain input that will help you adjust your project to obtain faster and more willing approvals.

The creation of mixed-use development projects, which also can be classified by local zoning officials as Planned Urban Districts (PUDs) or some other similar nomenclature, is becoming more common – and even preferred by communities. This is especially true in redevelopment and fringe areas that serve as a transitional buffer between strong residential areas and strict commercial settings.

Professionals and developers that can form true business partnerships to accentuate the various strengths and mitigate real or perceived weaknesses will be able to succeed in this new arena. The reason for these mixed-use developments’ success is that they can incorporate many different types of unique uses that serve as complementary components rather than adversarial or competing ones. This should also be true of project partners.

Combining the interest of municipalities to re-package and redevelop portions of their communities, and the high cost of single-family homes in most areas, the re-birth of neighborhood communities with multifamily housing co-existing with light retail and commercial is very attractive. For enterprising partners, researching and securing the various funding opportunities that are made available to affordable housing and/or downtown revitalization can offset some of the uncertainties involved in these projects.

We have heard the arguments against latching on to the concepts of sustainable design and green building. For the overwhelming majority of the arguments, they are simply excuses.

We do not dismiss the potential of increasing design and construction costs to implement some sustainable design features. In many cases, there may be a premium. But there are two important follow-ups to that fact. The first is that the premiums are being drastically reduced. In some cases only a 2-5% increase in up-front costs result from adding “green” features.

The second argument is that many of these costs can be willingly passed along to the owner of the project. This is especially true in many residential situations where lifetime (also called lifecycle) costs can actually result in short-term and long-term savings.

To be sure, the green movement has moved beyond the environmentalists. It has reached the political level. This means that options to avoid incorporating sustainable features are becoming increasingly limited. On the flip side, there are numerous incentives to “jump on board.”

Hopefully, Land Development Today has provided numerous financial as well as “feel good” reasons to take part in sustainable design. We urge you to review the possibilities to implement new technologies like pervious pavements to reduce or eliminate stormwater runoff.

Many tax incentives have taken effect in 2006 for the use of conservation methods, especially as they relate to energy. The use of solar and water collection technology can now provide a large tax credit at the federal level as well as in many states. We will be addressing these new developments in future issues of this magazine.

One warning, however, concerning the sustainable movement; do your homework or work with someone who has. Many product manufacturers are attaching the “green label” to products with varying degrees of sustainable features.

Summary
There is a certain synergy to our 2006 development forecast. While the housing market slows down to catch its collective breath, communities, developers, designers, and planners are able to review the situation and act accordingly.

In many instances, while this represents a small segment of our industry, we expect that the comments made by the Portland Cement Association (PCA) to their industry members will be echoed and felt throughout the entire industry:

PCA’s Fall Forecast Report expects that while residential construction will slow down during the next few years, an increase in commercial construction and public works construction will more than make up for the residential decrease. The rebuilding of New Orleans, which is expected to begin during the second half of 2006, will also contribute to increases in cement consumption.

Here is what we are seeing:
Big-box retail stores and commercial centers are moving into new fancy suburban fringes and leaving the urban centers. Cities, in a move to revitalize and invigorate their downtowns, are turning to developers who are converting old historic structures and creating new buildings to house multi-use tenants with smaller niche retail and restaurants on the lower floors and condominiums on top.

And, throughout all of this development, energy conservation and green building practices increasingly enter the equation.

However, here is one potential problem. This is a new model.

How do professionals enter into new markets, create new solutions and still limit risk and create profitability? The answer is relatively easy – cooperation and partnerships. The implementation, though, will take some effort.

Builders and developers are generally risk-takers – the ultimate ‘Type A’ personalities.

Architects and engineers are typically risk-averse.

Community leaders and politicians can be both – depending upon the potential risks and rewards. They, however, will rely on the “experts” to assure them. That is where the teamwork and partnering opportunities arise.

If nothing else, the outlook for 2006 is a microcosm of the land development industry. It takes flexibility and the use of best practices to be successful. Very rarely can this be accomplished by single individuals or entities. In today’s market, a team effort is required since the industry is so complex and ever-changing.

In an effort to assist you in finding the best partners and solutions, we encourage you to seek as much information as you can. Our goal, as a provider of a magazine and over two dozen industry workshops and conferences this year, is to be one of your most valuable resources in 2006.  SLDT