Construction of single-family homes, booming since the recent drop in interest rates, is expected to be the only bright spot in the otherwise gloomy economic forecast for the real estate industry during the next two years, housing economists say.
With continued high vacancy rates for office and hotel space in most metropolitan areas and proposed tax reform measures that could severely limit apartment construction and real estate syndications, some builders are turning to single-family home construction and the home-renovation business in hopes of avoiding the expected tough times in the immediate future.
Trammell Crow, founder of the huge Dallas development company that bears his name, joked to developers gathered at the Urban Land Institute's annual convention in Orlando last week that a chain of 16 hotels recently built by his company is for sale. He also said, in a more serious vein, that his company plans to get into residential building "in a big way" during the next three years.
"We have plans to expand our home building nationally in the near future," Crow said. "We are in two cities now, and plan to start building in two more cities next year and three more cities in 1988," although he declined to identify them.
Still, some economists caution that the boom in housing construction other than apartments could grind to a halt if interest rates start moving back up, as they are expected to do by the end of this year.
"With the exception of a few markets, construction of single-family homes is just incredible right now," said Barbara Alexander, senior vice president of Salomon Bros., a financial brokerage firm. "But consumers have become bargain hunters, and if interest rates do not keep coming down through next year, consumers won't continue buying houses at the rate they are buying this year."
Housing economists speaking at the National Association of Home Builders economic forecast seminar this week said they expect starts of new housing units for 1986 to range between 1.8 million and 2 million. For 1987, however, the economists say new housing starts will range between 1.6 million and 1.8 million.
"While housing is strong now, there is still relatively slow income growth, high unemployment, and by 1987 there may be very little pent-up demand left in the market," said Lawrence Chimerine, chairman and chief economist for Chase Econometrics, an economic consulting firm. He said, "1987 will be a very uncertain year for real estate, with a possible reduction in single-family construction of between 5 and 10 percent."
Most of the economists at the seminar said they believe mortgage interest rates will remain stable through the end of the third quarter of 1986, then begin to drift back up in the last quarter.
The current boom in residential construction is in contrast with the commercial building industry, which is beginning to feel the impact of very high vacancy rates in almost every U.S. city.
"The country has lots of every type of building product today," said John Eulich, chairman of Vantage Cos., a Dallas development firm, in an address to the developers gathered in Orlando. " . . . It just doesn't make a lot of sense to be starting new office buildings right now."
Vacancy rates in commercial office buildings average 20 percent in most metropolitan centers, and will probably be higher by the end of the year, as projects started several years ago open for business this year, Alexander said. At the same time, vacancy rates in hotels are averaging 35 percent, she said.
Reflecting the problems of commercial construction, housing economists said they are beginning to see banks and other lenders ease off on loan commitments to commercial builders.
"We are starting to see sharp declines in construction outside of housing, particularly reductions in the amount of loans going toward offices and hotels," Chimerine said. "And if anything close to the Senate Finance Committee's tax bill passes, it will have a significantly depressing effect on real estate construction."
In an NAHB telephone survey this week of home builders across the United States, 80 percent of those builders interviewed said they believe the tax reform measure approved by the Senate committee last week would be positive for construction of single-family homes, but a majority said the measure would have a "very negative impact" on construction of apartment units and commercial building.
"The Senate tax reform bill will clearly slow investments for multi-family housing and commercial construction," said Lyle Gramley, chief economist for the Mortgage Bankers Association of America. Economists predicted the provision calling for the elimination of real estate as a shelter for nonreal estate income, plus proposed ceilings on tax-exempt bond financing, could cut apartment construction by half.
"About 75 percent of the multi-family projects involve syndications or other" forms of financing that would be eliminated by the Senate bill, said Kenneth T. Rosen, consultant manager of real estate research for Salomon Bros.
Many of the developers in Orlando said they were hoping to weather the anticipated tough times by finding niches in the market where there still is demand for certain types of products. Several developers said they have started using their expertise to help other companies with distressed properties.
"We are covering ourselves by selling our expertise, taking fees for helping with work-outs of difficult properties," said Lee C. Sammis, president of Sammis Co., a California office-building developer.
One sector of real estate construction that is expected to boom this year and continue to do well in 1987, Alexander said, was the home remodeling business.
"By the end of this year, as people begin to live in the houses they have just bought or have begun to feel flush with the cash they have gotten from refinancing their mortgage, repair and remodeling acitivity could get very hot," Alexander said.