Savannah Chamber

11 improve, but credit will remain tight for riskier home loans. Although lending standards for new home construction and new residential developments will get a bit easier, credit lines and money to builders will still be somewhat scarce, restricting the supply of newly built homes. Supply constraints – the scarcity of developed lots and a shortage of skilled construction tradespeople – will slow recovery of the single-family homebuilding industry. Fortunately financing for lot development should be more available in 2019 than in recent years. The new federal tax laws are a negative for homeowners and in turn homebuilders: limits on the tax deductibility of state and local taxes as well as home mortgages will slow construction of high-priced homes, especially in areas with high state and local taxes. Despite recent home price gains, many households in markets where home prices have not recovered still owe more on their mortgages than their homes are worth, which limits the availability of financing, especially for those with lower credit scores. In addition, many homeowners are in near negative equity situations. These households will not be able to absorb the transactions costs involved in selling their homes, make a significant down payment, or qualify for a new mortgage. These homeowners are stuck in their current homes, unable to trade up or trade down. Another development that will restrain housing activity for many years is that many homeowners have locked in extraordinary low mortgage rates that they will be reluctant to give up. Strong foreign economies will sustain the number of foreign investors who are looking to buy residential properties in the U.S. Foreign buyers have played a major role in the recovery of housing markets in the urban core of many large U.S. MSAs, especially for luxury flats and townhomes. On the plus side, several developed foreign economies (e.g. Canada) are implementing substantial new taxes on foreign real estate buyers, which will encourage foreign buyers to focus more intently on U.S. real estate markets. On the negative side, the strong U.S. dollar makes U.S. homes more expensive for foreign buyers. A potentially powerful demand side support for homebuilding is the rebound in the rate of household formation, which was quite depressed in 2007-2013. Job growth will unlock pent-up demand for housing that built up as young adults opted to stay a home a bit longer. In addition, improving job prospects will partially reverse the recent surge in college enrollment and might slow the rate at which student loan debt is piling up. Indeed, record breaking levels of student loan debt is one reason why young adults have delayed moving out on their own, getting married, having children, and buying a starter house. Non-Residential Construction Spending for new nonresidential construction will increase more slowly in 2019 than in recent years. Nonetheless, the upcycle that began in the second quarter of 2013 will continue. New business formation and expansion, employment gains, and population growth will generate gains in net occupancy. In many markets, tenants no longer have the upper hand in lease negotiations. Preferential tax treatment under the new tax law will boost nonresidential (and residential) investment in federal opportunity zones in 18 states, including 260 zones in Georgia. There will be some negative trends: higher interest rates will be a headwind. Credit conditions will not ease further for those looking to build nonresidential structures and will be tight in markets with high vacancy rates. Dollar strength will continue to dampen foreign investors' interest in U.S. real estate. These counter trends imply that the current up cycle in the nonresidential real estate will proceed, but it will lack vigor. Office and retail vacancy rates will continue to improve but are still elevated in too many markets. Demand for new office space will increase the most in markets that benefit from growth of high technology and health care industries. Abundant supplies of existing space will limit retail construction, but pockets of new development will appear in the most desirable locations. Competition from online retailers limits the need to build more stores but increases the need to build more distribution centers. Industrial development will benefit from growth in industrial production, with new development focused on locations with logistical advantages. Spending for publicly funded structures will increase, reversing the downtrend of recent years. The primary headwind for public construction by local governments has been the property bust, which led to downward – or at least slowed upward – adjustments in assessed property values. Typically, such adjustments lag movements in market prices by several years. Property tax bases have responding to the upturn in real estate prices. Therefore, local governments' property tax baes will be supportive of revenue collections and in turn public construction, but mandatory spending on debt service, pension and healthcare obligations will limit the funds available for new infrastructure projects.

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