THE AVENUE MARCH 2, 2011
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The revision downward in fourth quarter GDP from 3.2 percent to 2.8 percent last week and continuing high unemployment just reinforces the underlying reason for this lackluster recovery: the 35 percent of the economy’s assets comprised of the built environment (real estate and the infrastructure that supports real estate) is M.I.A.
Exports are rising at a swift pace in line with the president’s call to double exports in five years, corporate profits and cash are near record levels, and American strength as a high tech leader is actually expanding with the launch of new hardware (e.g., Apple’s iPad and iPhone) and software (e.g., social networks dominated by American companies). We need much more export growth, of course, especially in manufacturing.
The missing presence of real estate and infrastructure, together the largest asset class in the entire economy, is the major reason we are bumping along between 2.5 to 3.0 percent growth. This is not enough to create sufficient employment, allow government coffers to recover, or for the United States to maintain its standing in the world. Infrastructure investment, which anyone paying attention knows, is woefully inadequate.
We have major deficits in the most important transportation infrastructure required to succeed in the 21st century knowledge economy, rail transit. It is hoped the delayed federal transportation bill will be passed this year and let metropolitan areas build the types of transportation system they want and need, rather than state government dithering with business as usual approaches. Rail transit is as important to the 21st century economy as roads were to the last half of the 20th century economy. Since transportation drives development, until we encourage rail transit, we will continue to stay in this depressed level of economic growth. Denver, Salt Lake, Phoenix, Washington, Los Angeles, St. Louis, Seattle and many other metro areas are massively expanding their rail transit systems on their own nickel, giving up on federal leadership and funding.
The real estate industry is actually just beginning to show signs of a thaw, lead by a significant increase in rental apartment building permits, reflected in the latest monthly numbers. However, the best news is that many mixed-use, walkable urban developments, many in the suburbs, are being dusted off and financed. These will be the focus of most development over the next real estate cycle and will give transit planners places to connect-the-dots. There is huge pent-up demand for these new and expanded walkable urban places and my numbers show it will take a generation to catch up, which will put a solid foundation under the economy for years. This will be especially good for the employment of the worst hit groups of workers; high school or less educated, manual, construction workers, many of whom are minorities.
The recovery did not have to be this slow. The prejudice against real estate, the fundamental cause of the Great Recession, has lead policy makers to shun it like the plague. It was the overbuilding of the wrong product in the wrong location that caused the Great Recession. The building of the right product in the right location will finally add some zip to this recovery.
1 comments
As a design professional that relocated to New Orleans in 2009 from the D.C. Metro area after the private development implosion that occurred there in 2008, I saw a lot of overbuilding of "right product built in the right place." The D.C. metro area saw a significant push in private development projects that represented the trifecta of good urban design to urban planners & designers. Mixed-use projects redeveloping brownfields near mass transit. The problem was finding young professionals willing or able to pay $300+ / SF costs on one-bedroom condo apartments. The D.C. area also saw a bubble in office buildings as well that were built on spec and sat empty for lack of leasees and this was in 2006-2007. Even public/private partnerships suffered from this as well. I would see projects literally stop in their tracks (foundations in the ground, plans ready for bidding, etc) and shelved indefinitely. I worked on a project in the Naval Yards redevelopment that went from a two-building tower mixed-use proposal of condos, offices, grocery store and retail to a two-story above ground parking garage during the design phase because of the over-building in that area and rapidly changing market at that time. The project was shelved early in 2008 because of the market uncertainty that was beginning to show. Projects literally stopped in the fall of 2008. I saw similar situations occur in Denver with similar results of overbuilding mixed-use residential infill of Denver's LoDo, Union Station, Highlands & Baker neighborhoods. Those were developments that took close to ten years of planning, design and construction to complete. Regrettably there will be a glut of over-built "perfect product" to work through in some of these cities before a rebound can and does eventually occur. Here in New Orleans, we have a different situation in which Federal, State, City and private recovery monies have helped maintain a steady pace of redevelopment and rebuilding of infrastructure, limited mass transit, public amenities (parks, libraries, schools, community centers) and small scale private projects. There is still another 5-10 years worth of rebuilding that will need to occur in New Orleans and that is just rebuilding what needs to be replaced/upgraded. The issue won't be when or if the real estate & construction industry recovers, the question will be to what level does it recover to? The construction industry reacts to these contractions with underbidding, cutting of professional design fees and other cost cutting measures to stay functioning but it takes years with good economic growth for recovery. It isn't just construction workers who suffered as a result. The architectural & engineering industry suffered mightily as well. Cities like Chicago saw unemployment levels for architects close to 50%! Until the A/E industry begins to see a significant uptick of projects & proposed projects coming in the door there won't be a full recovery in the construction & real estate industries. It took the A/E industry almost 15 years to recover from the last major recession in the mid-90s that hit the A/E and construction industries. I've seen a lot of young professionals leaving the A/E world for other employment because of the downturn and may never return. That big hole in the economy from the cratering of the built environment will take several years to recover for sure, but the people who have managed to stay in the industries associated with the built environment will have gone through monumental shifts in how they operate in that time. Where it is going is hard to say, but it won't look like it did before the Great Recession that is already apparent.
- singlspeed
March 4, 2011 at 12:09pm