2019 Economic Forecast for NJ Developers, BuildersMarch 7, 2019
Real estate developers and builders are strongly affected by economic conditions. As one of the only NJ accounting firms with a practice dedicated entirely to A/E/C accounting, The Curchin Group closely follows national and regional housing trends to help developers, builders, general contractors, architects and engineers make informed financial decisions and overcome the unique challenges that businesses in the A/E/C industry face. Curchin Partner, William McNamara, offers several key insights from recent economic forecasts he has attended.
Economy Holds Strong…
Charles Dougherty, VP & Economist at Wells Fargo Securities, LLC, and Robert Dietz, Ph.D., Chief Economist at the National Association of Home Builders, each suggested separately that we will not see a recession in 2019, despite what the media may be saying. There are just too many positive indicators that the economy is strong and growing. For example, unemployment is at record lows and not expected to jump this year.
Additionally, both economists believe the Federal Reserve Board will now move interest rates only three times in 2019. Fed Chairman Jerome Powell originally said there would be four quarterly increases but has since backed away from that position. All interest rate changes should be no more than a quarter point, and two will likely only be one-eighth.
…Down Cycle Still Looms
While Dougherty and Dietz shared optimism, they also issued a reminder that economies have cyclical characteristics, and we are moving towards an exit from the current cycle as we have enjoyed economic recovery and growth. Will that be bad for a home builder?
“Yes and no,” McNamara says. “The down cycle will not be anywhere as long or as devastating as the cycle we saw from 2008 to 2010, but home builders will need to manage inventory and be wary of how long product sits before it attracts interest.”
McNamara added that builders will also need to have their own ‘house’ in order with stronger financials, lower overhead, and more diverse cash flow not reliant on new home sale closings. Builders who diversify with rental income, solar energy and technology savings now will reap the rewards of their foresight when a down cycle hits.
As it stands, the NJ housing market is still impacted by low inventory in both the new home construction and resale markets. What has improved is the average cost of new homes, so while housing stats have remained lower than previous years, we are making up for it in a better average sales price per home—a particularly strong indicator here in the Jersey Shore.
Builders will continue to face shortages of skilled labor due to several factors at play, the clearest being that trade schools and vocational schools have lost attendees as prospective students focus on college and technology. Finding a way to attract those individuals has become crucial. We’re seeing many builders highlight any combination of competitive pay, benefits, training, apprenticeship and mentoring programs. The message to skilled workers is that of a “no college debt” mentality.
Urban Rental Apartments Fade?
The dynamics of the apartment and rental market should be closely monitored. The common belief is that the millennial generation will eventually want to buy homes and have children, which will naturally impact high density areas and perhaps bring traditional single-family homes back into style. When and how hard that wave hits the Shore is anyone’s guess; regardless, builders should expect that urban dwellers’ collective idea of “home” will evolve as they age.
For more tips and takeaways to keep your A/E/C business ahead of the curve, visit www.curchin.com/construction.