The Building Boom Is Prolonging Market Pain
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The Building Boom Is Prolonging Market Pain

Construction employment is higher than ever—undermining bets the Fed will soon pivot

By RYAN DEZEMBER
Mon, May 1, 2023 8:48amGrey Clock 4 min

US: The building boom has helped push unemployment to around its lowest level in more than 50 years. That is perplexing investors who want to see the Federal Reserve switch course on interest rates.

Construction spending and employment have risen to new records this year, boosted by government outlays for infrastructure, a domestic manufacturing renaissance and a wave of apartment building that got off to a slow start during the pandemic when prices for building materials, such as lumber, were sky high.

Construction companies with jobs ranging from airport overhauls to bathroom renovations say they have enough work booked to maintain payrolls—for years in some cases. Even home builders, who slowed down last year when rates began to rise, are ramping up into spring.

The persistent strength in a sector that is usually among the first to suffer job loss when borrowing costs rise is undermining investor hopes that the Fed’s aggressive interest-rate increases would quickly slow inflation and rejuvenate the stock market.

It also threatens to upend bets in the market that recession and lower rates are on the horizon. Investors are trading government bonds as if rate cuts will come within the next year and buying technology stocks, bitcoin and other speculative assets that surged when borrowing costs were near zero.

The issue for investors is that the longer it takes for construction activity and employment to decline, the longer it will be before the central bank can cut rates.

“Through this whole cycle, many have expected a much faster slowdown than has occurred,” said Bob Elliott, co-founder and chief executive of asset manager Unlimited. “Macroeconomic cycles take years to play out.”

There are signs of slowdown, to be sure. Apartment construction is expected to decline once the latest batch of buildings is finished. Problems at regional banks are drying up financing for some projects. Spending on home improvement and repairs is forecast to decline over the next year, the first contraction since the depths of the foreclosure crisis in 2010, according to a closely watched barometer of the remodelling industry.

“Maybe we’re starting to see the effects of higher cost of capital on interest-rate-sensitive sectors,” said Anirban Basu, chief economist at trade group Associated Builders and Contractors, which said its measure of construction backlog declined in March to the lowest level since August. “The Federal Reserve raises rates until something breaks and something is starting to break.”

Even when construction employment declines, the effects might not be felt immediately in the broader economy. During the relatively fast-crashing 2008 financial crisis, the number of people working in residential construction peaked in April 2006 and had fallen roughly 15% before overall employment began to drop about two years later, Bureau of Labor Statistics data show.

The 2008 crash kicked off a deep recession and a years long home-building slump that left the U.S. severely short of housing.

Meanwhile, millions of homeowners are locked into historically low mortgage rates, which is keeping existing homes off the market and stoking demand for new construction, builders and analysts say. New-home sales climbed 9.6% in March, the Census Bureau said.

PulteGroup Inc., the country’s third-largest home builder, Tuesday reported record first-quarter revenue after selling 6% more houses at a 9% higher average price than a year earlier. Executives said they are adding sales and construction staff and building more spec homes, especially those aimed at first-time buyers.

“They don’t have a home to sell. And so they are not hampered by the low interest rate,” said Chief Executive Ryan Marshall. Pulte’s shares are up 47% this year and among the leaders of the S&P 500 stock index, which has gained 8.6%.

Employment in residential construction has been buoyed by the biggest burst in apartment building since the mid-1980s. Apartment projects were delayed after the Covid lockdown because of the budget-straining expense of building materials, such as lumber, which shot to more than twice the pre pandemic high and added millions of dollars to construction costs.

“People couldn’t build their projects, so they kicked the can down the road,” said Ivan Kaufman, chairman and CEO of Arbor Realty Trust Inc., which lends to landlords.

Though prices for lumber and other materials have come down, developers now face construction financing that is about twice as expensive as it had been and landlords are unlikely to be able to offset greater borrowing costs with rent increases, which should hinder new projects, said Mr. Kaufman.

So far, the roughly $50 billion decline in residential construction spending over the past year has been more than made up for by gains in commercial projects, including highways, hotels and hospitals. A record $108 billion was spent building factories last year, and the amount has risen this year, to a seasonally adjusted annualised rate of about $141 billion in February, according to Census Bureau data.

Some, such as those in fields that the Biden administration has made national priorities, such as semiconductors and electric vehicles, are supported by government incentives. Others are being built by big companies that can fund projects without borrowing.

Graphic Packaging Holding Co. is building a plant in Waco, Texas, to recycle old cardboard into new paperboard and said it would cover the $1 billion cost with cash over three years of construction. A similar facility that Graphic completed last year in Kalamazoo, Mich., required as many as 1,200 workers from 38 states.

The 2021 infrastructure bill and last years’ climate, tax and healthcare law are pumping money into industrial projects—such as renewable-energy facilities and railroad expansions—that promise to keep workers busy for years.

John Fish, CEO of the Suffolk construction firm, said the Boston-based company is focusing more on government-supported construction, such as airport upgrades. Suffolk employs roughly 2,500 and contracts with another 25,000 or so. It has three or four years of work lined up, including the renovation of Terminal C at Dallas Fort Worth International Airport, which won’t start until next year and isn’t scheduled for completion until 2026.

Home remodeller Jay Cipriani said his staff of 34 has plenty of kitchens and bathrooms to work through this year. But he said he’s getting fewer calls for new jobs and expects a slowing economy could make some prospective clients think twice about nonessential projects: “Maybe we don’t put in that fish pond this year.”



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Stronger demand in some areas is pushing unit rents up faster than houses

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Tue, Mar 5, 2024 3 min

Renters are returning to the apartment market, leading to higher growth in weekly rents for units than houses over the past year, according to REA data. As workers return to their corporate offices, tenants are coming back to the inner city and choosing apartment living for its affordability.

This is a reversal of the pandemic trend which saw many renters leave their inner city units to rent affordable houses on the outskirts. Working from home meant they did not have to commute to the CBD, so they moved into large houses in outer areas where they could enjoy more space and privacy.

REA Group economic analyst Megan Lieu said the return to apartment living among tenants began in late 2021, when most lockdown restrictions were lifted, and accelerated in 2022 after Australia’s international border reopened.

Following the reopening of offices and in-person work, living within close proximity to CBDs has regained importance,” Ms Lieu said.Units not only tend to be located closer to public transport and in inner city areas, but are also cheaper to rent compared to houses in similar areas. For these reasons, it is unsurprising that units, particularly those in inner city areas, are growing in popularity among renters.

But the return to work in the CBD is not the only factor driving demand for apartment rentals. Rapidly rising weekly rents for all types of property, coupled with a cost-of-living crisis created by high inflation, has forced tenants to look for cheaper accommodation. This typically means compromising on space, with many families embracing apartment living again. At the same time, a huge wave of migration led by international students has turbocharged demand for unit rentals in inner city areas, in particular, because this is where many universities are located.

But it’s not simply a demand-side equation. Lockdowns put a pause on building activity, which reduced the supply of new rental homes to the market. People had to wait longer for their new houses to be built, which meant many of them were forced to remain in rental homes longer than expected. On top of that, a chronic shortage of social housing continued to push more people into the private rental market. After the world reopened, disrupted supply chains meant the cost of building increased, the supply of materials was strained, and a shortage of labour delayed projects.

All of this has driven up rents for all types of property, and the strength of demand has allowed landlords to raise rents more than usual to help them recover the increased costs of servicing their mortgages following 13 interest rate rises since May 2022. Many applicants for rentals are also offering more rent than advertised just to secure a home, which is pushing rental values even higher.

Tenants’ reversion to preferring apartments over houses is a nationwide trend that has led to stronger rental growth for units than houses, especially in the capital cities, says Ms Lieu. “Year-on-year, national weekly house rents have increased by 10.5 percent, an increase of $55 per week,” she said.However, unit rents have increased by 17 percent, which equates to an $80 weekly increase.

The variance is greatest in the capital cities where unit rents have risen twice as fast as house rents. Sydney is the most expensive city to rent in today, according to REA data. The house rent median is $720 per week, up 10.8 percent over the past year. The apartment rental median is $650 per week, up 18.2 percent. In Brisbane, the median house rent is $600 per week, up 9.1 percent over the past year, while the median rent for units is $535 per week, up 18.9 percent. In Melbourne, the median house rent is $540 per week, up 13.7 percent, while the apartment median is $500 per week, up 16.3 percent.

In regional markets, Queensland is the most expensive place to rent either a house or an apartment. The house median rent in regional Queensland is $600 per week, up 9.1 percent year-onyear, while the apartment median rent is $525, up 16.7 percent.

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