Real Estate Research
Real Estate Research provides analysis of topical research and current issues in the fields of housing and real estate economics. Authors for the blog include the Atlanta Fed's Kristopher Gerardi, Carl Hudson, and analysts, as well as the Boston Fed's Christopher Foote and Paul Willen.
February 13, 2017
Investigating the Trend in Office Renovations
Have you noticed more talk of office property renovations lately? Over the course of the past year, we've been hearing a lot of talk about office renovations from business contacts engaged with the Atlanta Fed's Regional Economic Information Network, as well as reading about more office renovations in our markets (see here, here, and here for just a few of many examples). This motivated our search for data that could help us understand the trend in office renovation activity, particularly as it relates to new office construction.
To our dismay, there was not much readily available data on office renovations. We turned to Dodge Data & Analytics, formerly known as McGraw Hill Construction, which collects project-level data on construction activity across 382 metropolitan markets in the United States. The data set not only tracks nonresidential construction activity by property type and stage of construction on a monthly basis, but also identifies the type of construction (which includes new construction, addition, alteration, and conversion).
Using the construction type variable, we selected all office projects that were marked as additions, alterations, or conversions and created a time series that provides a proxy measure for office renovation starts across the nation. Our time series runs from January 2003 to September 2016. Chart 1 shows the composition of office starts (that is, the share of new office construction starts versus office renovation starts) in any given month to provide insight into the mix of projects over time.
From 2003 through 2008, new office-construction projects comprised a larger share of office-related starts. But since 2008, the majority of office starts have been office renovations. We drilled down a bit further to understand the composition of the office renovations activity and found that alterations accounted for the majority of all renovations captured in this database over the course of the time series.
In addition to examining the makeup of the office-related construction activity, we also sought to understand the level of office construction activity. Ideally, we would have liked to examine the trend in renovations activity in terms of square feet under way because it would have given insight into the volume of activity (that is, size of projects) while controlling for changes in things like cost of land, materials, and labor (which have the potential to distort the project value), thus providing the best apples-to-apples comparison of activity over time. Unfortunately, this was not possible due to data limitations. Specifically, square footage under way is captured only for projects that add to the existing stock of office space (that is, where the construction type is listed as new construction or additions). Since additions make up such a small share of overall renovations activity, square footage data are missing for the majority of the observations.
As a result of this data limitation, we examined the trend in the number of office projects started over time. In chart 2, the blue line represents the number of new office construction starts, and the orange line represents the number of office renovation starts.
New office construction starts increased sharply from 2003 until 2005, when the number of projects leveled off. Office renovation starts increased during the same period, though at a much more modest pace, then also leveled off in 2005. New office construction starts began to drop in the first few months of the recession and fell rather sharply until the middle of 2010, while office renovation starts appeared to continue at a steady pace until halfway through the recession before softening a bit. Both new office construction and office renovation starts flattened out and continued at an unchanged pace throughout the early years of the recovery. New office construction starts experienced very little in the way of an uptick until 2016. Office renovation starts, on the other hand, began to rise at a fairly quick pace starting in 2015.
By creating a proxy measure for office renovations, we were able to take anecdotes from business contacts to the data and confirm that office renovation projects have, indeed, been on the rise over the past year. Stay tuned for our follow-up report, when we will drill down and explore renovations activity across the Southeast in more detail.
November 23, 2016
Commercial Construction Update: Third-Quarter 2016
The Atlanta Fed's Center for Real Estate Analytics conducts a quarterly commercial construction poll to keep a finger on the pulse of the industry as it relates to the performance of the economy. In this post, we will discuss a few of the more interesting results from our third-quarter poll. To view all of the results, please visit the Construction and Real Estate Survey web page.
Pace of multifamily construction appears to be slowing
After several years with most incoming reports indicating that the pace of multifamily construction activity had increased from the year-earlier level, it seemed noteworthy that indications from contacts were much more mixed in the third-quarter report. Half of respondents noted that activity had increased from the year-ago level, but the rest indicated that activity was flat to down.
These reports seem to align with the incoming Census Bureau data on multifamily starts through November 17, which, when aggregated to a quarterly frequency, reveal a slight decline (-6.2 percent) from the year-earlier level.
Available finance perceived to be sufficient to meet demand
Since about the second quarter of 2013, the majority of our commercial construction contacts have indicated that the amount of available commercial construction finance has been sufficient to meet demand. Interestingly, the share reporting that credit was insufficient to meet demand spiked in the first quarter of 2016 and remained high into the second quarter. The reports from our commercial construction contacts seemed to align closely with the results of the April and July Federal Reserve Board's Senior Loan Officer Opinion Survey (SLOOS) on the lending environment in the first and second quarters. The survey suggested that banks had tightened their standards for commercial real estate loans.
Interestingly, the most recent survey results deviated from the SLOOS. The share of contacts in our commercial construction poll that indicated credit was insufficient to meet demand continued to drop in the third quarter despite the fact that results from the October 2016 SLOOS indicated that banks continued to tighten their standards for commercial real estate loans. Granted, our commercial construction poll and the SLOOS pose slightly different questions to different types of respondents, but the divergence in results that have typically trended in a similar fashion seems notable nonetheless.
More hiring on the horizon?
Each quarter, we poll our contacts about their hiring plans. The majority (74 percent) in the third quarter indicated that their fourth-quarter hiring plans entail increasing head count by a modest to significant amount. This increase is more or less consistent with the entire history of responses; most respondents have always indicated their hiring plans were flat to up.
The last time such a large fraction of respondents indicated they had plans to increase their head count was more than two years ago, back in the second quarter of 2014. Since a large share of respondents answered the same way, can this be taken as a signal that hiring will indeed increase in the coming quarter? To investigate, we charted quarterly figures for construction new hires using the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey to get a sense for what happened the last time contacts overwhelmingly indicated they had plans to increase hiring and used markers to call attention to second- and third-quarter figures of 2014.
It appears the number of construction hires did in fact increase between the second and third quarters that year, so perhaps this most recent result will serve as a leading indicator. We will keep an eye on this series to see if there is an increase in the number of construction hires in the fourth quarter of 2016.
June 09, 2016
Construction Lending Update: Have the Banks Finally Opened the Spigots?
When we last blogged about at bank call report data, in June 2014, we found that "aggregate lending remained well below its 2008 peak," but "more than half of banks with a construction lending business line were expanding" their lending. Fast forwarding two years, where does construction lending stand now? We pulled bank call report data through the first quarter of 2016 and found that construction lending has continued to grow, albeit at a measured pace (see table 1).
Of the insured banks with a construction lending business line, 62.2 percent have stepped up their lending relative to the year-earlier level. Not only are there more banks actively lending, but half of these banks increased their lending by at least 11.9 percent.
Despite this seemingly good news, it appears that most banks remain selective about the loans they make, and a few large banks are largely responsible for the increase in aggregate lending. In the first quarter of 2016, the top 20 construction lenders accounted for more than one-third of all construction lending (that is, 0.4 percent of active construction lenders are responsible for 37 percent of all construction lending). To provide some perspective, the top 20 banks accounted for 32 percent of all construction lending in 2005 and 42 percent in 2010. Slicing the data this way suggests that it is not particularly unusual for the top 20 to play such a large role in construction lending and that smaller lenders have made some progress toward recouping the market share of the top 20, though they aren't as active as they were in 2005.
Shifting attention now to the second and third set of columns in table 1, we'd like to point out that call report data in 2010 started breaking down total construction lending data into "Residential 1–4 family construction loans" and "Other loans, all land development and other land" categories. Note that this "Other" category includes construction loans for nonresidential and multifamily properties. While lending in both categories has increased over the past two years, growth has been much stronger for "Residential 1–4 family construction" relative to "Other construction, all land development and other land." Our interpretation of this divergence remains quite similar to our assessment two years earlier: the slower growth in "Other" is likely the outcome of fairly strong growth in multifamily construction lending weighed down by banks' continued reluctance to lend on land and lot development.
While the data seem to indicate that the construction lending spigots have opened up a little over the past two years, it is less clear who is able to access this credit. Bank call report data is aggregated in a way that prevents us from knowing anything about the borrowers. Anecdotally, using our monthly poll of Southeast homebuilders, we have not picked up much in the way of improved access to construction credit (see table 2). The majority of builders in our monthly poll continued to report that the amount of available credit for construction and development falls short of demand.
About a year ago, we asked our builder respondents to self-identify as small, medium, or large. By tagging respondents with a size, we've been able to break out the results to see how small-builder responses compared to all responses. Not surprisingly, small builders find credit to be less available than the group as a whole. Moreover, there has only been a slight change in the responses over the past year (three out of four small builders still find credit to be insufficient compared to four out of five one year ago). While a few smaller builders may have had better luck in securing construction and development lending over the past year, we haven't been able to detect much in the way of broad improvement in access to credit for construction and development.
We also looked to the April 2016 Senior Loan Officer Opinion Survey (SLOOS), published by the Federal Reserve Board, for insights into construction lending. The results seem to paint a construction lending picture that is similar to but not completely aligned with the one we outlined above. In short, the SLOOS reports that a "significant net fraction of banks reported tightening standards for construction and land development loans" while a "moderate net fraction of banks reported stronger demand for construction and land development loans." It is not clear that the call report data and the SLOOS are telling the same story on construction lending behavior, but perhaps this difference is simply an early signal of what we can expect from the second quarter call report.
By Jessica Dill, economic policy analyst in the Research Department and
Carl Hudson, director of the Center for Real Estate Analytics
May 04, 2016
Construction Spending Update
Looking at the latest construction spending report can be an informative exercise, despite the fact that the data lag other releases, because it bundles together various measures of construction activity for one comprehensive look. The latest report, released on May 2, revealed continued growth in construction spending. Private construction spending increased 8.5 percent on a year-over-year basis. The breakdown of growth by segment shown in chart 1 reveals that private residential (the sum of new single-family, multifamily, and residential improvements) and private nonresidential spending contributed almost equally to this increase (4.0 and 4.5 percent respectively).i
Growth in private residential and nonresidential spending from the year-earlier level has persisted since July 2011, but how does the level of spending compare to the previous cycle? The seasonally adjusted annual rate of private nonresidential spending has rebounded to a level just 1.8 percent below its previous peak. Private residential construction spending, on the other hand, remains 35.8 percent below its previous peak. With that said, after zooming out to look at spending over the entire horizon of the series and adjusting for inflation (see chart 2), it doesn't seem particularly wise to judge the health of construction spending relative to the past peak. In hindsight, the last peak was clearly an aberration, especially for residential spending.
Using this longer-running and inflation-adjusted time series to help put current spending in context, it's hard not to notice that the level of private nonresidential spending has surpassed the level seen in earlier peaks (the most recent peak excluded) while private residential spending now looks to be about on par with levels seen in earlier peaks. This surface-level comparison is a bit short-sighted, as this is not a mean-reverting time series. An upward trend in aggregate real construction spending seems perfectly reasonable as the population and economy grow over time.
Shifting focus to the dashed trend lines in chart 2, we see that spending on residential construction has yet to catch up with trend but is much closer than when compared with the previous peak, while spending on nonresidential construction is at a level that exceeds its trend.
Two high-level questions emerge after reviewing the latest construction spending data. First, does construction spending really provide a comprehensive look at construction? The construction spending data could confound the underlying trend because it reflects activity, costs, and timing of payment (for some categories). Data on activity (that is, square feet and units under construction) for all subcategories are not available, but charts 3 and 4 (below) provide some indication for the trend in residential and some categories of nonresidential construction activity.
The construction of single-family and multifamily units as well as the square footage under way for warehouse and office properties have all resumed upward trajectories. Because these measures of construction activity tell a consistent story with the spending data, they provide some reassurance that the costs aren't the primary driver of the growth in construction spending.
Second, does the recovery in real estate still have legs? This one is hard to say for certain but, taking the construction spending and construction activity data together, it seems fairly likely that there is still room for growth.
Jessica Dill, economic policy analysis specialist in the Atlanta Fed's research department
i Private nonresidential spending is comprised of lodging, office, commercial, health care, educational, religious, amusement and recreation, transportation, communication, power, and manufacturing structures.
- Investigating the Trend in Office Renovations
- Commercial Construction Update: Third-Quarter 2016
- Construction Lending Update: Have the Banks Finally Opened the Spigots?
- Construction Spending Update
- Teachers Teaching Teachers: The Role of Networks in Financial Decisions
- The Pass-Through of Monetary Policy
- Keeping an Eye on the Housing Market
- Do Millennials Prefer to Live Closer to the City Center?
- The Multifamily Market: Is a Hot Market Overheating?
- Are Millennials Responsible for the Decline in First-Time Home Purchases? Part 2
- February 2017
- November 2016
- June 2016
- May 2016
- April 2016
- November 2015
- September 2015
- August 2015
- July 2015
- May 2015
- Affordable housing goals
- Credit conditions
- Expansion of mortgage credit
- Federal Housing Authority
- Financial crisis
- Foreclosure contagion
- Foreclosure laws
- Government-sponsored enterprises
- Homebuyer tax credit
- House price indexes
- Household formations
- Housing boom
- Housing crisis
- Housing demand
- Housing prices
- Income segregation
- Individual Development Account
- Loan modifications
- Monetary policy
- Mortgage crisis
- Mortgage default
- Mortgage interest tax deduction
- Mortgage supply
- Multifamily housing
- Negative equity
- Positive demand shock
- Positive externalities
- Rental homes
- Subprime MBS
- Subprime mortgages
- Supply elasticity
- Upward mobility
- Urban growth