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San Diego residential construction woes seen continuing into 2007

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For San Diego County's homebuilding industry, 2006 represented a slowdown in the volume of construction that appears will continue into 2007.

In 2006, there were approximately 5,000 single-family units permitted and 7,000 multifamily units, according to California Building Industry Association (CBIA) chief economist Alan Nevin.

San Diego is one of two areas in California -- the other being Sacramento -- that has seen a severe reduction in permit activity, both in multifamily and single-family.

For 2007, Nevin forecasts county single-family production will match that of 2006, but multifamily construction will decline by 1,000 units in comparison with 2006.

The decline in San Diego County multifamily units permitted relates to a lack of rental units under development and a fallback in downtown construction. In this century, 2003 represented the peak year of activity, topping out at 18,300 units. Since 2003, the permit count has steadily declined. In 2006, the permit count was 12,000 -- down one-third from 2003.

The last time the county has fallen below 11,000 total residential units in a year -- the prediction for 2007 -- was in the mid-1990s, a period of entirely difference economic conditions. Currently the local economy is healthy and growing.

According to Nevin, the basic structure that creates real-estate demand is still there, but buyers are taking a wait-and-see attitude. The resale market is down about one-third and prospective buyers of new homes are concerned about their ability to sell their existing homes at rational prices.

Looking ahead, San Diego County's economy will continue to expand in 2007, although not as fast as last year. In 2005, the county added more than 25,000 jobs. In 2006, it added more than 15,000 jobs. In 2007, Nevin anticipates that the job gains will be on the order of 13,000 to 15,000.

"It would be difficult to repeat 2006, given the slowdown in construction," Nevin said, adding all other sectors of the economy will move forward, perpetuating the overall strength of the economy.

If the volume of residential construction is to increase on a statewide level compared with 2006, reforms are needed. This includes making more land available for development in a well-planned way, which would streamline the approval process and change the state's environmental laws, CBIA President and CEO Robert Rivinius said.

In addition, he said local governments need to take a close look at the "developer fees," which are passed along to the new-home buyer.

On a national level, a slowdown in residential construction and spending is also occurring.

According to Ken Simonson, chief economist for the Associated General Contractors of America (AGC), construction spending lost momentum in October. A recent report from the U.S. Census Bureau showed the value of construction put in place totaled $1.17 trillion, down 1 percent from the revised September total. And residential construction spending shrank in October by 1.9 percent, bringing the cumulative decline to 10 percent since peaking last March.

"Housing still seems to be in free fall," Simonson commented during a recent AGC podcast, adding the main reason for this was the decline in single-family residential construction, which decreased 3.9 percent in October when compared with last month. When compared with October 2005, residential construction has declined 17 percent.

He pointed out that homebuilders are cautious regarding the amount of new homes they start construction on, as they are aiming to cut their backlogs of already-built homes.

Despite this decline, the residential totals hide some good news as Simonson stated new multifamily construction climbed 1.6 percent in October and 15 percent compared to October 2005, while improvements rose 1.5 percent and 4.9 percent.

"There's been a swing from building condos to building rental housing," he said, adding this is something he expects to continue in 2007, along with a continued slowdown in residential spending.

"I don't think we're going to see a pick up in housing construction for some time," he continued. "Single-family home construction will remain in free fall for several more months."

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