COVID, Shortages, Blue state flight, Inflation is back, land shortages.
In 2021, so far, the challenges in the construction and real estate development business have nearly all been tied to the pandemic of 2020. No one in our industry after COVID hit was expecting anything other than a disaster. Boy were we wrong. How about just the opposite and still going great? Which begs the interesting question-if builders on average sold out all of their inventory a year in advance from what they originally planned, how are they going to provide new inventory given the high lead times of finding land and then entitling it and building new subdivisions?
And, given the fact that most new inventory planned could be sold right away as pre-construction sales, who in their right mind would sell so far out with no way of predicting how high construction costs are going? Imagine that in every healthy housing market builders will have virtually no homes to sell or build for months, or in some states- years- unless they hold back their buildable lots and bring them out more slowly.
Inflation– For years our government has conveniently and patronizingly left volatile consumer items out of their bread basket that they base their inflation numbers on. This is done so that government pensions, social security and other entitled payments based upon COLA indexes (cost of living adjustments) are kept low. With inventory shrinking in both the new and existing home markets coupled with material and labor shortages and rising costs due to these shortages and COVID, it is inevitable that 2021 could achieve true double-digit inflation. No matter what the bogus government reported inflation rate is, true inflation is occurring as we speak and heading higher.
Blue State Flight– Across North and South Florida, NC, SC, Georgia and Texas- and yes Nashville (a recent favored destination for New Yorkers) blue state former residents are leaving in droves. COVID was helpful here too. Once companies in New York, Connecticut, Massachusetts, New Jersey, California and Virginia moved their workers back to their homes to work on line the jig was up. My new neighbor who works for a national firm in New Jersey now operates his business from his home in Jupiter, Florida. When I first met him, he declared he was a tax refugee from Morristown, NJ. At Trevi Isle we hear this all day long as people are buying Florida real estate to escape inept blue states.
Land Shortages– It’s hard to imagine land in short supply in Florida, but it is true. It is true in many other states as well. One very big contributor aside from a physical shortage is the complicated and time-consuming bureaucratic process call entitlements. This is the process where you and your planners, lawyers, surveyors and engineers submit application after application (duplicity much of the time) spending up to $250,000 in the process. While this is the cost of doing our business and we have done this many times, the land seller must cooperate by selling and closing only after all approvals are issued and be willing to assist in part of the paperwork.
So, as builder’s sell out early and look for new more expensive land opportunities it appears there may be a lull in building as builders entitle new parcels and try to catch up. More than likely existing home sellers will inherit the new home buyer unable to find new home opportunities. Home Depot, Loews and the local remodelers will be very busy for a few years more. In part 2 of Real Estate Challenges & Opportunities in 2021 we will discuss Material shortages, poaching and holding on to land to get through the lean inventory times.
Stephen Gravett has been a real estate developer for over 45 years and was most recently CEO of Kennedy Homes for the past 11 years and is still CEO of Kennedy Development Partners (KDP) and full time Director of Operations for 5 Star Developers. He is also a state licensed broker and since 1980 a State licensed General Contractor Unlimited. He flew B-52’s in the US Air Force during the Vietnam war.