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2007 Industry Outlook
Residential Real Estate
As the residential market cools, pricing becomes key.
Developers are squeezed
While buyers today are looking for deals, Florida developers are finding it difficult to lower their prices. One reason is that land prices rose dramatically in the past five years -- especially for premium multifamily sites.
A recent national study by Credit Suisse's equity research department found that the value of land accounted for 33% of a home's price in 2005, the highest percentage in more than 25 years. "Our analysis suggests that the euphoria of the new-home market was similarly present on the land side," according to the report. "The most likely scenario is a return to 2003 land values, which would imply a fall of 27% from peak to trough."
Many Florida builders are walking away from their deposits on land or negotiating significant price reductions and better terms. For example, publicly traded WCI Communities of Bonita Springs recently announced it was writing off
$13 million associated with terminated land options. "With the current slowdown in demand, we believe we own sufficient land to support our operations through the foreseeable future," says President and CEO Jerry Starkey.
WCI also disclosed that buyers failed to close on about 80 traditional homes valued around $48 million that had been scheduled for third-quarter delivery. In fact, every major public home builder has acknowledged significant losses due to dropped contracts.
But there is a positive side to this picture: Lower land and construction prices. In 2007, expect to see a substantial drop in multifamily parcel prices because of a large inventory of approved projects that were aborted as a result of market conditions. Construction costs are also likely to decline, perhaps by 10% to 15% before year-end.
With lower land and construction costs -- and slimmer profit margins -- developers may be able to build more affordable projects. Many builders use their land inventories to address the state's pressing needs for rental and workforce housing, as well as offer better values to commercial users.
Lewis M. Goodkin is president of Goodkin Consulting in Miami.
Training
A new, $12-million state program, Florida reBuilds, will offer training to prospective construction workers to help meet the state's annual need for 13,000 new workers in the building trades, including carpenters, plumbers and masons.
The state Agency for Workforce Innovation (employflorida.com) will facilitate the training and help match employers with the workers.
