2014 IBS: A bigger, better show filled with optimism

Back in 2008 when I attended the International Builders Show in Las Vegas, the mood was somber, the exhibit floor was depressing and education sessions were focusing just as much on avoiding bankruptcy and working with lenders as they were about new products, services and trends.

Fast-forward to 2014, however, and this year’s show in early February was entirely different.  Firstly, it was huge:  more than 75,000 attendees filled the convention center for Design and Construction Week, which paired together IBS, the Kitchen and Bath Industry Show and International Window Coverings Expo in more than 650,000 square feet of exhibit space.  For IBS alone, exhibit space grew by 24 percent over last year’s totals, which certainly points to the growing confidence for our industry.  Secondly, there was a level of optimism that I’d not seen since the mid-2000s.  And thirdly, the decision to shrink education sessions to 60 minutes meant more time to wander the exhibit floors as well as to squeeze in more sessions.

The cheerfulness certainly has legs, with NAHB Chief Economist David Crowe forecasting 822,000 single-family housing starts for 2014 – likely more than 200,000 over 2013 levels.  His relatively aggressive forecast is due to five main reasons:  consumer confidence has returned, pent-up demand is finally converting from theory to actuality, there is a growing need for new construction as the existing housing stock ages, there are much fewer distressed sales, and builders are increasingly taking advantage of these trends.

Not surprisingly the Housing Market Index, which tracks builder optimism, remained above 50 for eight straight months through January before dipping in February due to severe weather. In addition, 58 of the 350 metro markets tracked by the Leading Markets Index have returned to or exceeded their normal levels of economic and housing activity.  As of February, the national housing market is running at 87 percent of its long-term average.  Still, there do remain significant headwinds between today and a full recovery, such as rising prices for building supplies, tight mortgage credit, ongoing challenges with accurate appraisals for new homes, and constrained supply of developed lots and labor.

For the multi-family housing sector, Crowe is forecasting a level of starts by 2015 that’s just above the long-term average of 340,000 as more young adults prefer renting over buying – at least for now.  The strong performance for this sector is due mostly to starts returning to more normal levels, the need to house Echo Boomers born after 1980 and a higher percentage of households renting until the job market is stronger, careers more stable and mortgages easier to obtain.

In terms of product design, there were also some ongoing trends magnified by the recent winners of the Best in American Living Awards during the show’s run.  For example, we’re seeing a return to using the color white to brighten up rooms, focus on clean lines and project a modern feel.  This is made even more important when selecting a historic architectural style such as Craftsman, Prairie, Mid-Century Modern in order to properly take advantage of today’s building methods.  Dual master baths with a shared shower can still provide a spa-like experience while still being practical.

The great outdoors, long incorporated into a new home’s merchandising in the Sun Belt states, is now going nationwide, with more interior courtyards (especially on side yards), moveable glass walls or more foldable French doors, outdoor kitchens for gourmets chefs and grillers, and even courtyard pools that better bridge the gap between outside and in.

Outside the home, we’re seeing a return to bolder colors on the exteriors, made possible through a mix of paint, cladding materials, doors, windows, porches, shutters and trim.  Importantly, this is also another way for builders to better differentiate their product with the existing housing stock.  Luxury amenities are also returning for the discriminating buyer, such as communal kitchens for cooking classes, pools with their own lazy rivers, electric car charging stations and even pools and parks for dogs.

Yet for sheer brilliance, my vote would go for the Push Pull Rotate Door Locks offered by Brinks Home Security, which won top honors at the second annual Best of IBS Awards.  This new locking system opens in three ways:  by turning the knob the traditional way, pushing inward or pulling outward to release the latch.  It won largely because the judges noted that it both solves the problem of how to open a door when your hands are full as well as helping older residents whose hands have lost dexterity.  I certainly know what’s going on my Christmas list!

October column for Builder & Developer magazine now online

My column for the October issue of Builder & Developer magazine is now posted online.

For this issue, entitled "Marketing to the Millennial Generation," I had read an article in The Atlantic magazine which suggested a combination of demographic and economic forces had replaced the aspirational pursuit of cars and homes with a sharing culture that relied heavily on technology.  So just what does that mean for the building industry?  An excerpt:

According to a 2007 survey, 43 percent of Milliennials would prefer a close-in suburb where both the need for cars and the size of homes can be smaller as a trade-off for proximity to reliable public transit, shopping and entertainment options...

Although there will still be great opportunities for builders and developers, they will have to continue evolving along with their customers. This will likely mean fewer suburban tract houses in favor of well-designed flats, semi-private townhomes and small homes which preserve the functionality of single-family living in a denser environment...

Moreover, by spending less on housing and cars, consumers will have more money left over to save or spend on education, thereby making them more nimble for a global and largely knowledge-based economy.  This industry could thus have an outsized impact on the future:  by deliberately encouraging Millennials to live closer together and share their ideas (as well as their cars and extra rooms), America could regain its economic strength for generations to come. 


To read the entire column, click here.

To read the entire October 2012 issue in digital format, click here.

Marketing to Millennials: Buying a home or a car not yet a priority

For several years now, we’ve been hearing about how to market to the Gen Y cohort, also known as Millennials or Echo Boomers.  Sure, they’re attracted to technology and sustainability, but what if their attitudes about owning things like cars and houses are completely different from the generations which preceded them?  According to a recent story in The Atlantic magazine, it’s possible that a perfect storm of economic and demographic forces have altered the very way that this generation participates in our consumer culture, potentially changing how we develop and build housing in the years ahead.

For those of us who remember driver training classes in high school, getting that license meant gaining independence, demonstrating responsibility and embarking on adventures outside of the local neighborhood.  But that was then, and this is now. Back in 1985, adults in the 21-34 age range bought 38 percent of all new cars sold, but by 2010 that capture rate had fallen to 27 percent.  While more people could be simply buying used cars, the proportion of teens with a driver’s license fell by 28 percent between 1998 and 2008.

Enter the sharing economy, in which companies like ZipCar, Airbnb.com and thredUP allow members to share, rent or sell goods which would otherwise simply sit idle.   Yet according to a ZipCar survey, it’s been the evolution of the smart phone – yes, the smart phone – which has somewhat replaced the car both as a status symbol and as a way to stay connected to the outside world.  At the same time, the connectivity of those same smart phones has symbiotically energized a sharing culture which relies on technology.

When it comes to housing, however, the sharing economy has had a lot more to do with The Great Recession and steep student loan bills than technology.  According to Harvard’s Joint Center for Housing Studies, between 2006 and 2011 the homeownership rate among adults under 35 fell by 12 percent, and another two million had boomeranged to live back with their parents.  A report from the New York Federal Reserve showed that just 9 percent of those aged 29 to 34 were approved for a first-time mortgage from 2009 through 2011.  Nonetheless, a recent FannieMae survey reported that 90 percent of Millennials still aspire to owning a home someday even as they contend now with low savings, low pay and tighter lending standards.

So, over the next decade, as a group of people of over 35 million begin to form households, where will they live?  According to a 2007 survey, 43 percent of Milliennials would prefer a close-in suburb where both the need for cars and the size of homes can be smaller as a trade-off for proximity to reliable public transit, shopping and entertainment options.  One great example of this would be the redeveloped Culver City, CA, which, besides being the home of Sony Pictures, has become a trendy spot for restaurants and bars, and will now be more accessible with the recent opening of Phase I of the light rail Expo Line (which promises to whisk riders to downtown Los Angeles in less than 30 minutes).

Places like Culver City offer up what’s called “urban light,” which blends the best of suburban attributes like good schools and safe streets with the efficiency of smaller residences connected to a town center with a transit stop.  Although there will still be great opportunities for builders and developers, they will have to continue evolving along with their customers.  This will likely mean fewer suburban tract houses in favor of well-designed flats, semi-private townhomes and small homes which preserve the functionality of single-family living in a denser environment.  It will mean more households opting to rent than buy – at least in the short to medium run.

Nonetheless, on a larger scale, this gradual shift to higher-density living could have profound impacts on the entire economy, chiefly productivity.  For example, research has reportedly shown that doubling a community’s population can increase economic output by 6 to 28 percent, and that half of the variation in per-worker output between states can be largely explained by density.  Moreover, by spending less on housing and cars, consumers will have more money left over to save or spend on education, thereby making them more nimble for a global and largely knowledge-based economy.  This industry could thus have an outsized impact on the future:  by deliberately encouraging Millennials to live closer together and share their ideas (as well as their cars and extra rooms), America could regain its economic strength for generations to come.

Forecast for 2011

Although the National Bureau of Economic Research officially declared the ‘Great Recession’ over in June of 2009, over 18 months later the building industry continues to wait for that proverbial light at the end of the tunnel. Sure, there were some rumblings of activity in the land market in early 2010 as it seemed that a rebound was imminent, but that turned out to be related more to homebuyers taking advantage of tax credits than sound economic fundamentals. So what can we expect in 2011?

For the general economy, the recovery will remain painfully slow, but our colleagues at Beacon Economics are not predicting a double-dip recession because the imbalances we saw during the boom years have been largely wrung out of the system. Nonetheless, as the fiscal stimulus programs of the past two years begin to abate, expect to see more layoffs in the public sector at the state and local levels, as well as officials finally forced to address untenable pension promises. In addition, as the Federal Reserve and Congress begin to reverse historically low interest rates and huge budget deficits, consumer spending – which accounts for more than two-thirds of the country’s GDP – will grow at a reduced pace.

With up to 65% of the earnings for the companies listed on the S&P 500 coming from overseas, domestic job growth will also remain lackluster, so it will take time to replace the 7 million jobs lost in this downturn. Although the U.S. retains the world’s largest manufacturing sector by value, capital investments and increasing productivity will replace many of those jobs, requiring retraining for millions of workers. Yet the good news for construction workers is that although it will take several more years for their jobs to come back, it’s not easy to outsource the building of new communities overseas or replace workers with automated equipment. A year from now, Beacon Economics is forecasting the national unemployment rate to remain elevated at 8.8% and not approach the 8.0% level until the middle of 2013 – well above the levels seen in the boom years, but still representing a slow and gradual decline.

For the real estate market, improvement will vary widely depending on the sector. The first sector to rebound will likely be apartments, led by former homeowners looking to rent as well as the rise of the Echo Boomer population. As the economy improves, people forced to live with each other due to financial issues – such as boomerang children living at home, roommates who have nothing in common, and even former couples who simply share space – will opt for their own households as soon as they can.

Naturally, the rebound for new housing will depend largely on the state of the foreclosure market, which is expected to remain elevated through 2012 even though the rate is flattening out in some hard-hit areas such as Los Angeles. Not surprisingly, discounted foreclosures will continue to pull down median sales prices, but an important caveat here to remember is that many foreclosures offer low-quality housing with missing appliances, damaged interiors and neglected yards. Once those foreclosed homes are eventually flushed through the pipeline, prices could stage a moderate rebound based both on better-quality comps and an improving economy.

Finally, with just about 200,000 unsold units – the lowest since 1968 -- builders have kept a tight lid on inventory, which should help bolster the industry when the rebound occurs. For 2011, the NAHB is forecasting 655,000 single-family starts that should climb nicely to 970,000 starts by 2012. For the multi-family sector, an unforeseen rebound in mid-2009 helped bump up the forecast to 125,000 units by 2011 and 210,000 units by 2012.

The future of new housing is -- foggy?

It seems that one of the most important lessons that the country’s builders learned from the past downturns was to immediately react when the market turned with generous incentives, price cuts and, over time, a dramatically scaled-down industry with simplified product lines that are now affordable to almost 60% of potential buyers.

As of September 2009, this slash-and-burn strategy has sent new home inventory down to its lowest level in 14 years, which would sell in just 7.5 months. And in spite of brutal competition from the existing home market – in which 30% of sales are for distressed properties – new home prices seem to have stabilized at just under $205,000, although that could be the result of buyers taking advantage of tax credits that were recently extended until April of 2010.

Since the U.S. population and related demand for housing continues to increase no matter the economic climate, when the economy improves and people decide they no longer want to live with roommates or their parents, it is clear that a dormant industry will be revived, as we’ll need 1.3 million housing units each year just to keep up.

What’s not so clear is how fast this rebound will occur and, more importantly, how future new home communities will be shaped, marketed and sold.

Over the past 30+ years, most of the new homebuilding activity was to follow the demands and tastes of the 78-million-strong Baby Boomer generation, from starter homes and move-up housing to vacation homes, retirement communities and even condominiums in urban locations.

But according to a series of presentations at the ULI Fall Conference & Urban Expo last month in San Francisco, demographic changes in the U.S. will force many builders and developers to change how they build for a population that is getting increasingly grayer (older) and browner (more diversified).

In addition, the 70-million-strong Generation Y, having largely grown up in quiet suburbs requiring cars to run simple errands, have morphed into a gadget-obsessed cohort whose penchant for urban-oriented, walkable communities and cynicism for traditional marketing techniques will require an entirely new skill set from an industry that has long relied on precedent in the hopes that each new rebound will be much like the last.

Maybe not this time.

For one thing, according to Reach Advisors, overly rosy demographic projections of the past were used to justify multiple years of over-supply for empty-nester projects in urban areas (especially high-rise condos), vacation homes and traditional retirement communities at a time when many Baby Boomers prefer to age in place.

Moreover, even if they want to trade down to a smaller home in an active adult community, today’s over-55 homeowners are sitting on a huge supply of large homes in suburban areas against a backdrop of potential buyers that’s not just smaller, but less interested in this type of car-centric community. When many Gen-X buyers do trade up, they’re placing an economic priority on community characteristics (such as a mix of uses and population and access to transit options) rather than a large home with a premium lot.

But it’s really the Generation Y cohort – with three times the population of Generation X -- that will foster in the biggest changes to the building industry as these ‘echo boomers’ began to enter the workforce, create their own households and bring their own, separate demands to builders of homes and apartments.

For one thing, the gender gap that existed just a generation ago – in which men earned more college degrees and more money for the same job – has almost completed a polar shift, giving many women control of the household finances and home-buying decisions.

In addition, accompanying more education for Gen-Y households has been a delay in marriage and having children, thus changing both the timing and type of demand for housing needs. Most importantly, however, with today’s Gen Y woman being more fiscally conservative than her male counterpart, builders will have to change how they merchandise and model their product to appeal to this new reality.

Fortunately, there’s another reality that will allow the industry to adapt to these echo boomers: this shift will not be seen in weeks or months, but years and even decades.

Demographics point to strong future apartment market

A good catch on the Lansner on Real Estate blog this morning about apartments. The National Multi-Housing Council is predicting that 75 million 'echo boomers' will put upward pressure on rents given that construction (aside from the over-building in the for-sale market) has not kept up with demand. What does that mean? Once the inventory overhang in single-family homes and condos is absorbed (which contributes to the 'shadow rental market'), the opportunity for multi-family investors looks very bright indeed:

“The outlook for the apartment industry going forward is very strong,” said Mark Obrinsky, HMHC chief economist. “The nation’s 75 million echo boomers are already entering the housing market, and most begin as renters. … Strong immigration levels add even more demand for rental housing.”

Obrinsky said apartment owners are benefiting from restraint during the housing boom, which kept them from overbuilding. “As a result, they have escaped the oversupply problems plaguing the single-family sector,” Obrinsky said.

Renters nationwide are expected to increase by nearly 4 million households over the next 10 years, with half of those likely to rent apartments, according to the council. In recent years, construction has only met two-thirds of the apartment demand. With the vacancy rates little changed over the last five quarters, apartment owners continue to be able to get modest rent increases.