Economic Forecasts Are Like the Weather: Unpredictable
Chris d Craiker AIA/NCARB
As interest rates started to rise in Fall 2022, predictions of an economic downturn grew like dark clouds on the horizon. But like the looming rough weather, who would have thought that the climate across the country would be so destructive, and could anyone in California believe that by April our reservoirs and rivers would be full and overflowing? Predicting the economy and construction industry future is like predicting the weather: erratic, volatile and scary.
Economics, like the weather, are complex without a foundation based on predictable laws of physics but built on historic, arguably predictable, human behavior.
While the North Bay and Napa have seen some economic platforms slow and construction seem to decline, this is mostly because of the huge jump in construction activity across the board during the three-year pandemic. All levels, from new home construction to major renovations to new home construction, have continued to perform reasonably well. Napa’s economy remains strong with its high dependence on wine, hospitality and tourism.
Overall, 2021-2023 remodeling had jumped up over 30% so a decline is more about getting back to normal as mortgage rates rise, then settle and inflation eases. The uncertainty of the financial markets and the threat of a recession affects both builders and homeowners more than the actual event. Homeowners may pare back or even delay renovation projects because of the uncertainty, not because of the reality.
The U.S. Remodeler’s Index, USRI, a 40-year reliable industry survey, reports high optimism among all trades and general contractors entering the Summer months. The average expectation is 3% to 5% growth for the year. Only commercial construction is in the doldrums and according to the American Institute of Architects, AIA, billing and commercial inquiries are down 27% from the 2022 high. Supply chains are less of a drag on construction schedules, and most remodelers and new construction are booked for months ahead. Napa is unique, and there is a constant demand for construction.
Nationwide, existing home sales continue to drop as interest rates and the economy slows down. New construction, including single-family homes, townhomes, condominiums and even co-ops sell are down 22% nationwide, and yet in Napa the second home and vacation residence markets thrives and has grown from 17% to about 26% of all home sales. These non-permanent residential segments represent between 13% and 17% of our total housing, depending on how you count them.
The big take-away is the current economy appears to be doing better than expected in the Spring as the Federal Reserve Bank continued to raise interest rates. The U.S. economy has grown at an annual rate of 2.5% in the first quarter, up from low 0.7% in late January. Remember,” Red skies at night, Sailors delight!”
For both private homeowners investors, the best places to put your bucks and for contractors to score new work, will be public buildings like schools, public works projects and healthcare facilities according to the Dodge Data & Analytics. Homeowners, stay tuned.
Contractors and investors should consider targeting surrounding areas of electric vehicle plants for much needed residential construction and the universal need for car- chargers will boom, especially with the passage of the Federal $52 billion CHIPS Act and the Inflation Reduction Act. We’ve been renovating apartment complexes in Union City and Fremont and the rents are astronomical with super low vacancies. Why Napa hasn’t encouraged electric vehicle component development is another story. The takeaway is: look for local high demands and missed local opportunities.
For example, California is set to receive $9.2 billion from the Infrastructure Investment and Jobs Act, with 250 specific projects identified for funding. That includes $8 billion for investment in roads, bridges, public transit, ports and airports. Check out the targeted projects and see what is missing in the community.
While spending on office and hotel projects has gone down significantly, as the economic climate has changed, the opportunity to convert archaic building uses to more valuable uses are the best bet. Finding an abandoned or under preforming warehouse and converting it to residential housing is the big future. Interestingly, that is an old idea that ebbs and flows like the weather.
If you are an investor, rich or just starting, look at unmet demands, such as an affordable housing site or a unique product shortage, and then fill it. This is both politically correct and economically dynamite. The Napa hospitality industry’s insatiable need for special unique places to stay is huge. Converting qualified historic structures to B&Bs may be costly but highly rewarding.
However, there is one storm on the horizon that will affect our economy. Climate Change is no longer an abstract concept and it’s here to stay. It will affect our economy far greater than most people are willing to admit. The US Commodity Future Trading Commission stated, “ Climate Change…is a major risk to the stability of the US financial system and its ability to sustain the American economy “. Even Jerome Powell has called for an internationally coordinated response as it could catastrophically affect the world economy.
The challenge is how much this rogue hurricane on the horizon will shape our future.
Chris d Craiker AIA/NCARB has worked on over eight Napa B&Bs in 29 years