Savannah Chamber

13 7 Prevailing mortgage rates are a tremendous bargain, and rates probably will move lower in 2020. Low mortgage rates will be a driver of the housing recovery. Home mortgages should be relatively easy to obtain. Credit conditions for those seeking mortgages will remain good as home values improve, but credit will remain tight for riskier home loans. Although lending standards for new home construction and new residential developments will be good, credit lines and money to builders may become somewhat scarcer due to heightened concerns about recession. Supply constraints – the scarcity of developed lots and a shortage of skilled construction tradespeople – will continue to be a factor slowing recovery of the homebuilding industry. Financing for lot development probably will be less available in 2020 than in recent years, reflecting heightened fears of recession. 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, some 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, some 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. Trade tensions, visa restrictions, the strong dollar, and weaker foreign economies will reduce 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. 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 unlocks pent-up demand for housing that built up as young adults opted to stay in a home a bit longer. Non-Residential Construction Spending for new nonresidential construction will increase more slowly in 2020 than in recent years, but the upcycle that began in the second quarter of 2013 will continue. Lower interest rates are a powerful tailwind. Low yields and financial market volatility will make investors more interested in income-producing property as an asset class. New business formation and expansion, employment gains, and population growth will generate gains in net occupancy. In many markets, tenants will 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: credit conditions will not ease further for those looking to build nonresidential structures and will be tight in markets with high vacancy rates. Trade tensions, dollar strength, and visa restrictions 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 be very limited due to lower industrial production, but new development will focus 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 bases 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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