Tag Archives: construction

New Office Construction Down 91% in Orange County – Dozens of High-Rise Projects Stalled

An ominous sign for the Southern California commercial real estate market – and for the economy in general – is the report this week that office construction in Orange County, California, plunged 90.8 percent in the second quarter of 2008 from last year’s figures.

According to a report from Voit Commercial Brokerage, “The first half of 2008 has been characterized by a significant reduction in office development in Orange County.” 

“The total space under construction in Orange County at the end of the second quarter is 325,276 square feet,” said Jerry Holdner, vice president of market research for Voit Commercial Brokerage. “The total amount of construction is 90 percent lower than what was under construction at the same time last year.”

A drive down the 405 Freeway in Irvine shows dozens of stalled high-rise office construction projects.

Perhaps another indicator of the bust in office construction are the recent closings of several high-end restaurants in the Irvine Spectrum, which had relied substantially on business lunches. 

The slowdown in new office construction in Orange County means that more jobs will be lost in the building sector, and indicates that few companies plan to expand, or move to, this affluent and still high-priced Southern California county, which had served as the epicenter of the subprime mortgage industry.

On the other hand, the lack of new construction will likely mean that the vacancy rate for Orange County offices, which has been climbing steadily, will come down.

The vacancy rate is at 14.46 percent this quarter, which is significantly higher than the 8.95 percent vacancy rate recorded in the second quarter of 2007.


Proof We’re in a Recession

Here’s proof that we’re in a recession: Starbucks is closing 600 stores.

According to the New York Times, “Starbucks said Tuesday that it planned to close another 500 underperforming stores and eliminate as many as 12,000 full- and part-time positions. The company, which now plans to close a total of 600 underperforming stores, will take related charges totaling more than $325 million. Most of the stores, which are company owned, will be closed by the end of the first half of its fiscal year, which ends September 2009, the company said. Starbucks estimated that total pretax charges associated with the closures, including costs associated with severance, would be $328 million to $348 million. The nation’s largest coffee chain said 70 percent of the stores targeted for closure have been open since the beginning of fiscal 2006. The job losses would represent about 7 percent of the company’s global work force.”

These closings are clearly fallout from the housing bust.  As the Times noted, Starbucks had “aggressively opened stores in areas like California and Florida, which have been hardest hit by the housing downturn. ”

The next time economists get together to discuss whether we’re really in a recession, they may have to meet somewhere other than the local Starbucks. 

It might be closed.


Financial Sector Blamed by U.S. Report as Primary Cause of Nation’s Economic Decline

While there is still disagreement among economists over whether the U.S. is in a classically defined recession, there can’t be any doubt that the economy is in serious trouble and has been for quite some time, and that the primary culprit is the nation’s financial sector.

The dismal economic growth figures announced this week by the Commerce Department’s Bureau of Economic Analysis underscore just how bad our national economy is, and which regions of the country and sectors of the economy have been hit the hardest.

The new estimates released by the U.S. Bureau of Economic Analysis (BEA) show that economic growth slowed in most states and regions of the U.S. in 2007. Real GDP growth slowed in 36 states, with declines in construction and finance and insurance the leading factor in most state’s economic losses.

Nationally, real economic growth slowed from 3.1 percent in 2006 to 2.0 percent in 2007, one percentage point below the average growth of 3.0 percent for 2002–2006.

According to the BEA report, “The deceleration in growth in 2007 was most pronounced in Arizona, California, Florida, and Nevada. Each of these states had experienced faster real growth than the nation since 2003, but slowed dramatically between 2006 and 2007, to rates below the national average (chart 2). In 2006, Arizona and Nevada were in the highest growth quintile, and California and Florida were in the second–highest quintile. But in 2007, Arizona dropped to the third quintile; California dropped to the second–lowest quintile; and Florida and Nevada dropped to the lowest quintile. In Arizona, Florida, and Nevada, construction subtracted more than one percentage point from real GDP growth. In California, construction and finance and insurance combined subtracted one percentage point from real growth.”

Forty-nine states saw losses in the construction industry 2007.  The sole exception was Wyoming with a 6.0 percent increase in construction. Nationwide, the combined drop in construction was 11.0 percent.

The largest drop in construction in dollar terms was in California, down $10.8 billion, which accounted for 1-in-6 of the $67 billion lost in construction work nationwide between 2006 and 2007.

In terms of percentage of construction work losses, the hardest hit states were:

New Hampshire -18.70%
Michigan -16.74%
Delaware -16.34%
Florida -15.96%
Arizona -15.53%
Maine -13.82%
Iowa -13.77%
Virginia -13.55%
Vermont -13.47%
California -13.46%

The BEA clearly identifies the credit crisis, and its domino effect on related industries such as real estate and construction, as the primary cause of the nation’s economic woes. 

BEA noted that “A downturn in the finance and insurance industry group accounted for nearly half of the slowdown in economic growth in 2007.”

“Construction’s value added declined 12.1 percent in 2007 after falling 6.0 percent in 2006. Real estate and rental and leasing value added growth slowed to 2.1 percent in 2007 from 3.4 percent in 2006.”

Four industry groups — finance and insurance, construction, mining, and real estate — “accounted for about one quarter of GDP in 2007. However, they accounted for nearly 80 percent of the slowdown in economic growth.”

These figures support what we’ve been saying for a long time: the real estate market (and related industries like construction) will not recover until the financial markets are stablized.

Las Vegas’ The Palazzo Hotel is the Largest “Green” Building in the World

We recently stayed at The Palazzo Hotel in Las Vegas, just shortly after it opened. 

We were pleasantly surprised to find that, despite its size, The Palazzo has an intimate feeling, and the staff is warm and helpful. 

The hotel itself is magnificent.

Now we’ve learned that The Palazzo is the largest “green” building in the world.

The U.S. Green Building Council (USGBC) presented a Silver LEED Certificate (Leadership in Energy and Environmental Design) to The Palazzo at an award ceremony on April 10.

LEED certification is an independent, third-party verification that a building project is environmentally responsible, energy-efficient, and is a healthy place to live and work.

Not only is the Palazzo the largest green building in the world; in fact, the $1.9-billion, 3,000-room, 50-story resort is more than four times bigger  than any other than any LEED-certified building.

Key features that contribute to The Palazzo’sconservation and environmental design include:

  • Artificial turf, drip irrigation and moisture sensors in planted areas result in over a 75 percent reduction in irrigation needs. 
  • Swimming pools are heated with an expansive solar pool heating system. In the summer, the excess solar energy not needed for the pools is directed to the hotel’s hot water system, reducing the need to heat water for guest suites. 
  • Air conditioning controls in guest suites that automatically setback by several degrees when guests are not present and reset to the desired temperature upon return. 
  • Team member service areas equipped with lighting occupancy sensors that shut off lights when no one is in the area. 
  • Interior plumbing fixtures use 37 percent less water than conventional buildings as a result of water-efficient showerheads, high efficiency toilets and low-flow lavatory faucet aerators. 
  • Moisture sensors monitor real time, site specific air temperature, humidity, rainfall and other factors to provide daily watering cycle adjustment. 
  • A waste recycling program implemented from demolition through completion diverted over 70 percent of waste from the landfill. 
  • The building’s structural steel averaged 95 percent recycled content, while the concrete averaged a 26 percent recycled content rate.

We’re strong advocates for green and environmentally conscious building. 

But we had no idea that The Palazzo was so green. 

We just thought it was a beautiful hotel.

The USGBC publishes a guide to building green homes online at greenhomeguide.org.

The site features a guide to green homes, green home programs, regreening exisiting homes, living green, resources, and green building news and events.

If The Palazzo can do it, and do it so beautifully, we can do it, too.

Crisis Exposes Conflicts in Real Estate Industry as Apartment Sector Opposes Aid for Homeowners

Recent attempts in Congress to relieve the real estate crisis may not have produced much in the way of solutions, but they have certainly exposed the conflicting interests inherent in the real estate industry.

One such conflict is between individual homeowners (and the realtors who are allied with them) and the owners of multi-family housing.

In a joint statement issued on April 10, 2008, before the House Financial Services Committee, the National Multi-Housing Council (NMHC) and the National Apartment Association (NAA) took the opportunity to blame what they called the “misguided” national policy of “home ownership at any cost” for the current housing crisis.

According to the joint statement,“People were enticed into houses they could not afford and the rarely spoken truth that there is such a thing as too much homeownership was forgotten”

In sharp contrast to other sectors of the real estate market, the apartment industry has not suffered as a result of the current housing crisis.

As a recent NMHC press release observed, “The challenging economic times and financial market disruptions are having little impact on the apartment industry’s biggest firms.”

We think that the apartment industry is understating its gains from the real estate crisis.

The real estate crisis is forcing the lower end of the single-family housing market back into multi-family rental apartments.  People have to live somewhere; if they can’t afford to live in a house that they own, they will be forced to live in a house that someone else owns, such as multi-family apartment units. As homeowners suffer, apartment owners benefit.

The multi-housing and apartment sector therefore opposes pending legislation that would create a new tax credit for people who buy a new house or a house in default or foreclosure. 

According to a statement issued by Jim Arbury, Senior Vice President of Government Affairs for the NMHC and NAA Joint Legislative Program, “a home buyer tax credit does nothing to help people stay in their houses. The real problem in the housing market is not the oversupply problem, which the home buyer tax credit targets, but the liquidity problem. Investors have lost confidence in the mortgage market securitization process and until that confidence is restored, the housing market will continue to suffer. ”

“The unintended consequences of a home buyer tax credit should cause any lawmaker to pause and reconsider, Arbury said.  “In short, such a credit could actually increase foreclosures and accelerate house price declines…It would increase foreclosures because it creates an incentive for lenders to foreclose so that they can entice a buyer to use the government subsidy to take the house off their balance sheet… It would also accelerate the decline in house prices, specifically the house prices of fiscally responsible owners.  If these responsible owners want or need to sell their houses, they are now competing with new and foreclosed properties that come with a $15,000 taxpayer subsidy (the value of the proposed home buyer credit).  These responsible owners will be forced to lower their sales prices by $15,000 in order to compete.  Should the government be using taxpayer dollars to erode the equity of hardworking, responsible homeowners?”

Instead of a tax credit for home buyers, the apartment industry proposes measures that would “create more affordable housing for the people who are going to be displaced from their single-family houses in this market downturn” – in other words, incentives to build and invest in more apartments.