Effect of Recession on Development Projects in Your City

[BTinSF]

Wall Street seems to be more and more concerned about a recession in the US brought on by the housing collapse and associated "liquidity issues". Some would also say by excessively tight Fed policy. But in any case I am left wondering what effect you all think a general recession manifested as a decline in consumer spending and reduced demand for consumer durables and housing would have on the general economy of your cities and on development projects in particular.

I may have my head in the sand, but so far I'm pretty upbeat about the Bay Area. That's partly because in the inner Bay Area--the urban core--housing prices are holding up well so far because of the perpetual housing shortage here. There was never any overbuilding and so there's not a significant surplus of homes on the market now (again, I'm speaking of the urban core--things are very different in the distant suburbs). I'm also reassured by the fact that we went through a horrendous period in the aftermath of the dot-com collapse (2000-2003) and I think that may have slightly immunized us against something now--we are really just hitting our recovery stride after that. And finally a lot of the economy here is international--the tech industry sells its products as much or more outside the US as inside--and that should help protect against a purely domestic downturn. The one area of the local economy I'm concerned about is tourism in San Francisco itself, but even there a lot of the tourists are from overseas.

So far, I know of no firm projects in SF delayed or abandoned. There have been a few buildings that were to be office projects prior to 2000, switched to housing after 2000 and have, in the last year or so, once again become office projects as concerns about residential real estate have mounted. 535 Mission is one such project and indications are it could get built starting late this year or early in 2008. There are a few other projects that have never been that solid and whose status remains unknown--one or two of them may now be delayed that isn't known. Perhaps the two largest residential projects presently underway have second "phases" (second towers, actually) and one of those has recently started the second phase while the other has announced the intention to start late this year.

[Front_Range_Guy]

Little old Colorado Springs' economy has been a mess for some time. For some reason, this town is convinced it's only options are single family home construction of the sprawling variety, the military, and religious organizations.

Damn. No wonder everyone here hates us.

Anyway... foreclosures are through the roof and home construction is at a virtual stand still. Kind of a good thing because it's stopping the sprawl in it's tracks. Temporarily anyway. The army is the army. As long as Fort Carson doesn't get shut down it will be a force here. Focus on the Family is laying off 15 people...

Hm. Anyway... when houses aren't being built here, everyone panicks. There is at least the sense that economic recession is already underway here and has been since spring.

I view recession here as potentially positive. If it gets bad enough, the city may be forced to take a long hard look at how it operates and how the rest of the world sees it, and, if it wants to recover, it may have to make some serious changes in the way it operates and the way it portrays itself to the rest of the world.

The last 20 years have been shameful.

[MolsonExport]

In my hometown (Montreal), recessions have always been extremely brutal on development, but with a lagged effect. Usually, the biggest projects are just underway when the economy comes back to earth. When they are completed, they release much extra capacity at a time when there is contraction in existing structures (i.e., sharply increasing vacancies). The result of which is when the economy gets going, there is no new construction for quite some time.

[bryson662001]

What recession?
The only thing that stops development in Philly is overbuilding/over supply until absorption catchs up.

[MayDay]

Cleveland has been hard-hit by the foreclosure problem, but for the most part the developments in downtown and the neighborhoods that were already doing well haven't been affected. The plans for the Warehouse District (5 million sq. ft. mixed-use) and Flats East Bank (600 residential units, plus 1+ million sq. ft. mixed use) are going full-speed ahead and about seven downtown corporations are looking to expand. As you get further away from downtown, you see a few projects stall or go belly up. There are a few exceptions, particularly the area along the Shoreway (slated for conversion into a boulevard to provide access to the Lake) and University Circle (billions going into the hospitals, museums, etc.).

Neighborhoods that weren't doing well before all this are still struggling, and now's not the best time to try to sell your home, but despite what our local media says, that's not just a Cleveland thing. The foreclosures have hit some suburbs particularly hard - primarily a case of subprime lenders and uneducated borrowers.

[MayDay]

And from cleveland.com - the projects that have been greenlighted so far (i.e. everything you see in the City Compilation thread) wouldn't really be affected since they're on the small side, and the few (very few) larger projects that have been proposed are being led by developers who have secured financing in tougher markets than this. Developers who tend to build "spec" projects in untested areas will likely suffer the most from this.

Mortgage mess hits NE Ohio commercial market

The subprime mortgage mess is spilling over into the commercial real estate market in Northeast Ohio.

Commercial developers are finding they have something in common with homebuyers looking for financing: Loans are harder to get and more expensive.

Much of the collateral damage in the commercial market so far has hit the East and West coasts, where major construction projects have been held up in the past 30 days. That doesn't appear to have happened yet in Greater Cleveland, but developers are taking a harder look at plans because of the rising cost of borrowing.

"It may curb the appetite for taking on new projects," said Forest City's Robert O'Brien, executive vice president of strategy and investment management. "The supply of lenders has shrunk."

The public markets that commercial real estate developers customarily tap for financing have effectively dried up overnight, said Thomas Coyne, leader of the real practice group at the Thompson Hine law firm in Cleveland, which had a panel discussion on the subprime implosion this week.

One reason is that many investors in this market - called the commercial mortgage backed security market - also invest in residential securities. Market volatility and margin calls on investors in residential subprime investment have driven commercial real estate investors to the sidelines, contributing to a lack of market liquidity, Coyne said.

Properties have been repriced, and it has become more of a buyer's market in commercial real estate. Look for opportunistic buyers to start making moves, he advised.

Not only is the cost of borrowing higher. The subprime fallout also means that banks are being more selective about who they'll lend to and underwriting standards are tightening.

Developers with small projects may not be affected too much. But large scale projects will have a tougher time getting financing if they need to go to the public markets.

The panelists said the disruption may be short-term - three to six months - or become a full-blown recession of a year or two.

Subprime loans are those made to inherently risky borrowers such as people with poor credit histories, insufficient proof of income or high debt-to-income ratios. Subprime mortgages in 2001 totaled about $120 billion. By 2005 and 2006 combined, the total exceeded $1.2 trillion.

Many of the loans were adjustable rate mortgages, meaning that monthly payments could skyrocket after a year or two at initially low interest rates. This "re-set," and the spate of foreclosures it's bringing, means that mortgage-related problems will get worse before they get better.

KeyCorp Vice Chair Beth Mooney likened it to watching a rat move through a boa constrictor.

"You can see it," she said. "We're going to have to live with it for a while."

[Stratosphere 2020]

Wall Street seems to be more and more concerned about a recession in the US brought on by the housing collapse and associated "liquidity issues". Some would also say by excessively tight Fed policy. But in any case I am left wondering what effect you all think a general recession manifested as a decline in consumer spending and reduced demand for consumer durables and housing would have on the general economy of your cities and on development projects in particular.

I may have my head in the sand, but so far I'm pretty upbeat about the Bay Area. That's partly because in the inner Bay Area--the urban core--housing prices are holding up well so far because of the perpetual housing shortage here. There was never any overbuilding and so there's not a significant surplus of homes on the market now (again, I'm speaking of the urban core--things are very different in the distant suburbs). I'm also reassured by the fact that we went through a horrendous period in the aftermath of the dot-com collapse (2000-2003) and I think that may have slightly immunized us against something now--we are really just hitting our recovery stride after that. And finally a lot of the economy here is international--the tech industry sells its products as much or more outside the US as inside--and that should help protect against a purely domestic downturn. The one area of the local economy I'm concerned about is tourism in San Francisco itself, but even there a lot of the tourists are from overseas.

So far, I know of no firm projects in SF delayed or abandoned. There have been a few buildings that were to be office projects prior to 2000, switched to housing after 2000 and have, in the last year or so, once again become office projects as concerns about residential real estate have mounted. 535 Mission is one such project and indications are it could get built starting late this year or early in 2008. There are a few other projects that have never been that solid and whose status remains unknown--one or two of them may now be delayed that isn't known. Perhaps the two largest residential projects presently underway have second "phases" (second towers, actually) and one of those has recently started the second phase while the other has announced the intention to start late this year.

I think the media and those economic folks are talking the people of the U.S. into a recession. Didn't the U.S. economy grew much stronger than expected in the second quarter?!

All these reports are only scaring people of spending money because of uncertainty, so they will save instead.

[Front_Range_Guy]

I think those of us who live in smaller cities and are in the lower income brackets have known trouble was brewing for a long time.

I also think there has been a lot of denial... afterall, economic downturns are inconvenient.


Economic forecast according to Adams
By WAYNE HEILMAN
THE GAZETTE
September 12, 2007 - 5:33PM


The Colorado and national economies will sink into a recession by early next year — if they’re not already there, the state’s longest-tenured economist predicted Tuesday.

Consumers are cutting spending because of the declining housing market and weak job market, according to the latest forecast from Tucker Hart Adams, chief economist in the Rocky Mountain region for U.S. Bank.

Her forecast for 2008 isn’t markedly different from the one she delivered a year ago, when she said the state’s economy would end up in a recession by the end of 2007. That could be happening — job growth has given way to job losses in the national economy and remains weak at the local and state levels.

“It is possible we are already in a recession. The National Bureau of Economic Research generally doesn’t tell us we are in a recession until six or nine months afterwards,” Adams said during a telephone interview Tuesday after giving her forecast in Denver.

Adams doesn’t prepare a forecast specific to Colorado Springs. Still, she said, the city will end up in recession. She predicted the downturn here will not be as severe as nationally because real estate speculation has not driven housing prices as high.

An expected influx of troops to Fort Carson in the next few years won’t arrive soon enough to avert a downturn, Adams said. Much of the construction to expand Fort Carson to accommodate more troops is under way and hasn’t prevented a slowdown, she said.

Adams will give her economic forecast in the Springs this morning to an audience of invited bank customers and civic leaders. She said Tuesday in Denver that this forecast, her 30th, will be her last — the 69-year-old economist, who works as a consultant to the bank, will retire early next year.

Among five economists who made forecasts in 2007 for the state and local economies, Adams is shaping up as the most accurate so far, largely because she predicted an 11.2 percent drop in state housing construction for this year. The actual decrease has been 26 percent.

The other four economists’ forecasts were further off, but their predictions covered the local economy rather than the state economy Adams forecasts. The accuracy of all five forecasts could change dramatically — most of the numbers available for this year are through July.

Consumers are struggling with falling home prices, stagnant income growth, high debt levels and rising payments on adjustable-rate mortgages, limiting their ability and willingness to spend, Adams said. She expects the nation’s housing slump to last well into 2008.

“The odds of a deep versus mild recession are now about equal, with very little chance of escaping a downturn altogether in the next 18 months,” Adams said. “We continue to believe that there is a very small possibility of a serious global recession.”

How soon a recovery would begin depends on “how long the midsummer meltdown of U.S. financial markets will last and how widely it will spread,” Adams said in her forecast. The sooner those problems “are behind us, the sooner a period of solid economic growth can begin.”

Adams’ forecast comes a day after the National Association of Business Economics said 60 percent of economists it surveyed early last month think a recession is “the major risk facing the economy over the next year.” The survey included 46 economists.

Adams said she will update her forecast early next year. She said she will continue to write a newsletter, maintain economic indicators on her Web site and do economic impact studies. To read Adams’ forecast, go to her Web site: www.coloradoeconomy.com.

BY THE NUMBERS

From a 2008 forecast released Tuesday by Tucker Hart Adams, chief economist in the Rocky Mountain region for U.S. Bank:

- U.S. economic growth: 0.5 percent, down from 2.1 percent this year
- U.S. unemployment rate: 5 percent, up from 4.9 percent this year
- U.S. housing construction: -1.4 percent, improved from -22.8 percent this year
- Colorado job growth: 0.5 percent, down from 1.5 percent this year
- Colorado unemployment rate: 4.8 percent, up from 3.9 percent this year
- Colorado housing construction: -7.1 percent, improved from -18.6 percent this year
- Colorado retail sales: 3.9 percent, down from 7.6 percent this year
- Colorado per capita personal income: 2.9 percent, down from 4.1 percent this year

RECESSION PREDICTED

City, state, country will dip into recession by early ’08, forecast says. The downturn here likely won’t be as severe because real estate speculation hasn’t driven prices as high, economist says.

[bryson662001]

The most consistant thing about these predictions is how inaccurate they turn out being. The only thing less reliable is the weather forcast.

[FREKI]

No recession here.. so logically no effect on the projects :)

[arbeiter]

we get it, we get it, denmark is perfect.

[DruidCity]

I think those of us who live in smaller cities and are in the lower income brackets have known trouble was brewing for a long time.


I'm seeing more the opposite. Those of us who never "boom" don't have far to fall in a "bust." Tuscaloosa (where I am now) is fairly small and poor, but has a big wave of new construction and San Marcos, TX (where I'm moving next year) seems to be doing just fine from what I could tell on my visit.

[imtl]

In the Quebec City Area, there's no recession and in fact, there's a boom!

Of course, like everywhere else, we still attempt to proceed cautiously...

[Xelebes]

we get it, we get it, denmark is perfect.

No recession here either. :)

[Front_Range_Guy]

I'm seeing more the opposite. Those of us who never "boom" don't have far to fall in a "bust." Tuscaloosa (where I am now) is fairly small and poor, but has a big wave of new construction and San Marcos, TX (where I'm moving next year) seems to be doing just fine from what I could tell on my visit.

Right. Well in the end I suppose every community is different.

My general sense is that major cities have been somewhat protected from the downturn by the fact that they aren't as economically reliant on single-family construction as the smaller, less important cities.

We continue to have a commercial construction boom... at the expense of existing commercial space. The sprawl monster continues it's eastward march... despite the loss of over 1,000 high paying manufacturing jobs that are being moved out of the country, a virtual hault in home building, and a rash of foreclosures.

Every city is affected differently I guess.

[Don B.]

Phoenix is a strange creature indeed, with respect to high-rise construction.

When the boom was going on in the rest of the country, post 9/11, Phoenix's commercial and residential high-rise market was stagnant. Time frame:

2000: Phelps Dodge Tower (20 stories, 289') and Collier City (B of A tower, 25 stories, 359') were completed.

*big gap*

2005: Conversion of emply Phoenix Title & Trust building (13 stories, former office building built in 1931) to condos started. First Tgen (bio) building started.

2006: 44 Monroe (34 stories, 381') started. Convention Center expansion begun, Summit @ Copper Square started (23 stories, 250'), light rail construction begins.

2007: Downtown ASU structures begin to take shape. Twin 13-story, 161') started, 6 story 100' Walter Cronkite School of Broadcast Journalism started, conversion of several underutilized buildings completed for ASU. New 32 story, 350' Convention Center Hotel started. Conversion of 15 story office tower in uptown to lofts started. Downtown apartment project Alta Phoenix (60 stories, 80') started.

Obiously, there's been a lot more proposals than construction, as Phoenix has about 50 towers proposed or in planning. Most will never see the light of day, but people are trying.

--don

[passdoubt]

Hasn't affected Philly much. The real estate market is still playing catch-up with the rest of the Northeast.

[tdawg]

No apparent slowdown in New York City, either. If anything, development is increasing.

[BTinSF]

Friday, September 28, 2007
Bay Area may be in for short, sharp shock
San Francisco Business Times - by Eric Young

A recession within the next 12 months is likely and its impact on the Bay Area will be "sharp but short" due to the area's strong economic underpinnings, according to a new forecast.

Unlike the upheaval brought about by the dot-com implosion, San Francisco, Marin and San Mateo counties will pull through the next downturn with less disruption because of strong fundamentals in significant industries like technology, high income growth in recent years and the benefit that rising export demand means for the region, according to Beacon Economics of San Rafael. Unemployment, even in the coming recession, won't reach 6 percent like during the past downturn.

A recession will be brought on by slowing consumer spending prompted by a cooling housing market, said economist Jon Haveman. "People who have seen their house values rise 10 to 15 percent annually have been spending accordingly," he said. The Bay Area housing market is overpriced and Haveman expects prices to drop by as much as 20 percent by 2009 before stabilizing.

The Bay Area experienced one of the worst regional recessions at the start of the decade. The area lost proportionally more jobs over a shorter period of time than Los Angeles in the early 1990s during its aerospace shakeup or Houston in the late 1980s during its oil bust. But with the dot-come gold rush over, the forecast states, the local information technology industry -- an important economic engine -- has rebounded and is growing at a more moderate and sustainable level.

While the forecast, presented to business executives this month, predicts a relatively short recessionary period, there are risks to the local economy. Among them is the commercial real estate market, Haveman said.

Low interest rates allowed unprecedented speculation on office space. If lease rates dip, that could trigger an unraveling of mortgage-backed securities in the commercial market, the forecast said. "The same excesses in the mortgage markets have also been seen in commercial markets," Haveman said.

Tourism likely will take a hit, too. That's bad news for the hotels, restaurants and convention centers enjoying record-breaking tourism numbers now. But a downturn might be offset somewhat by an uptick in foreign tourists. The U.S. dollar's steady decline against foreign currencies makes travel and purchases here cheaper for visitors from other countries.

eyoung@bizjournals.com / (415) 288-4969


Source: http://www.bizjournals.com/sanfrancisco/stories/2007/10/01/story11.html