The Future Of Real Estate May Be Etched In Concrete

If you're looking for hints on the future of the real estate pipeline, including new residential and non-residential starts, you can do worse than listening to Ed Sullivan. The senior vice president and chief economist of the Portland Cement Association, Sullivan was among the keynote speakers at the recent mid-year meeting of the Herndon, Va.-based National Concrete Masonry Association, at the Inter-Continental Hotel in Chicago.

Invariably as riveting a speaker as he is an insightful forecaster, Sullivan began by noting the American economy is in something akin to a weather pattern calling for consistently warm and sunny days.

“The economy's good right now,” he said, observing we've been creating on average about 200,000 new jobs a month, and more than two million new jobs a year. “These numbers lead to household formation, which boosts residential development.”

But the skies aren't completely sunny. Federal deficits will reach $1 trillion in three years, and interest rates and home prices are rising.

“Skilled and unskilled labor is getting scarce,” he said. “The administration's immigration policy of forcing unskilled labor out of the country hikes inflation. Give these stressors time to percolate, and there's going to be an impact later on. You'll have to pay. Wage gains will start to accelerate, and driving the jobless numbers from 3.8 percent to 3.5 percent will have a much larger impact on wages then what we've seen so far.”

Cement consumption is projected to rise from 97 million metric tons to more than 100 million metric tons yearly by 2022. “Downturns in cycles don't occur because they're old,” Sullivan said. “We believe the current expansion will likely persist a while longer.”

Construction Sub-sectors

Sullivan next sliced and diced the market for new building by giving the audience a look at several subsectors. In single-family building, still-low mortgage rates and job gains are helping make homes affordable for more Americans.

But headwinds exist. Millennials are burdened by debt, and are realizing the American Dream later. While low inventories and rising prices should spur accelerated building, declines in available skilled workers following the 2008-09 crash will result in at least 100,000 fewer housing starts per year. Sullivan believes the growth rates of single-family home starts will decline year by year from 2017 through 2022.

Meantime, new starts in multifamily should head in the opposite direction, going from today's under-water rates of growth to low single digits by 2022, Sullivan believes.

Today, he notes, one fifth of all American jobs are in offices. Expect the non-residential building subsector to grow, in tandem with the strong gains in employment.

Truly sobering stats rare found in the current and future state of public construction, which accounts for 50 percent of all concrete used in building. There's no doubt the country's aging population negatively impacts public construction.

“States now spend more on Medicaid and Medicare than on schools,” Sullivan said. “The decline in public construction wasn't a 2017 blip. It's structural, as our older population puts pressure on public spending.”

Sullivan is no more upbeat on the prospects for success of President Trump's infrastructure plan.

“Eighty percent of the infrastructure cost falls on states and local governments already burdened by debt,” he noted.“The plan sounds attractive, but when you consider it relies on states, the likelihood it will generate $1.5 million in new infrastructure improvements is remote.”

Summarizing a Cycle

“What we've got is the classic boom-bust cycle,” Sullivan told audience members. “The impact of the Trump infrastructure plan will not be as great as expected, so the boom won't be as great, nor will the bust . Under this scenario, the peak will occur in the first half of 2020, followed by decline.”

But, asked an audience member, “Could anything change this forecast? A natural disaster? Geo-political conflicts?”

“A trade war could do it,” Sullivan answered, “But more likely, the overheating of the economy, the rise in interest rates, and the Federal debt will emerge as bigger factors.”

Originally appeared in Forbes