There’s a spark of life in housing construction this year. A tiny, weak spark, but a real one nonetheless. Builders are putting up more apartments in the Sacramento region.
For the first six months of 2011, builders received permits for 398 units in the four-county area of Sacramento, El Dorado, Placer and Yolo counties. If the pace continues through the end of the year, the total would be nearly half again as much as in 2010 and 80 percent more than in 2009.
“As far as we can tell, the demand for multi-family rentals is going to be high for a while,” says John Orr, president and CEO of the North State Building Industry Association.
Now the cold water: “High” is highly relative. The projected permit total for this year would be less than one-fourth of the recent peak of 2006. The multifamily picture is bleak across the entire state and not expected to improve significantly for several more years.
“In a good year, we could once produce more than 300,000 new units. We are now doing everything in our power to get to 40,000 units this year,” says Mike Winn, chairman of the California Building Industry Association and president of Michael Winn Associates, a Sacramento-based land development and planning company. “I’ve never seen anything like it, and none of the old-timers or economists can point to anything like it either.”
Robert Rivinius knows the history. Now head of his own Sacramento consulting firm, RHR Group, he was president and CEO of the California Building Industry Association for more than 30 years.
“In the ’90s the worst we ever got was down around 82,000 units. It was like the worst you could imagine. Well, we’re half of that now,” he says. The early ’90s market started to improve after only a couple of years. This bad market is likely to last significantly longer because of short sales and foreclosures, he says. “We aren’t heading in the right direction yet.”
But like the dancing bear in the Russian proverb, what’s notable is not how well the multifamily market is performing, but the fact that it’s performing at all.
Aside from the weak economy generally, the Sacramento Housing and Redevelopment Agency has essentially stopped taking on new projects. Laws signed by Gov. Jerry Brown in June will force redevelopment agencies throughout the state to hand over money to schools and local government, or go out of business altogether. At best that would blunt the agencies’ ability to get more apartments on the market.
The redevelopment agencies have sued to block the new laws, “but our lending program right now is closed for the most part,” says Christine Weichert, assistant director of housing and community development at SHRA. “We are still working on the projects that we have financed before. Some of those are under construction, and we are still closing on some of our loans on those projects.”
As of late September, SHRA projects included 1,194 units under construction and 204 more approved within the city of Sacramento and unincorporated Sacramento County. Nothing else will be approved until the agency’s battle with the state is resolved, which would be January at the earliest.
Before the program stalled, it was getting easier for developers to get tax credits for affordable housing, Weichert says, though it remains challenging to convince banks to issue mortgage revenue bonds.
Developer Dan Benvenuti Jr. says his Tower Development Corp. got one of the last SHRA approvals for senior housing at 5400 Auburn Blvd. “We have another multifamily project for 4600 Auburn. That’s all that we have on the boards for now,” Benvenuti says.
Financing is the big hurdle for any new construction, says Michael McCleery, president of USA Construction Management in Roseville. The company has several projects under way throughout the state, but the only one in the Sacramento region is Forestwood, a 55-unit apartment project in Orangevale acquired from another developer who couldn’t get it started.
With housing construction at a fraction of its peak volume, many people who made a living at it have had to seek work in another locale or change careers. It’s only logical to ask who is going to do all the framing and wiring and piping as demand comes back.
“That won’t be an immediate problem,” Winn says. Plenty of unemployed and underemployed contractors remain locally, and the recession hasn’t provided enough jobs other places to make it worth relocating. Demand for talent in the recovery won’t exceed the supply.
The long run could be another story.
“We have lost a lot of good companies that have decided to close their doors. I’m in particular speaking of some established subcontracting relationships we have. They have just gone away. They don’t have the money to keep the doors open,” McCleery says.
Good companies will survive, but there won’t be as many of them, Rivinius says.
“I’m probably as concerned about the labor force as I am about the builders and trade contractors,” he says. “I would have to say that many people who have been able to find gainful employment would not come back unless they are making significantly less money” in their current locations.
For that reason and others, the North State Building Industry Association is involved in work force development, encouraging training in construction-related fields from middle school through community college.
That’s a good age group to target, as no one expects the construction sector — even multi-family — to get back to normal for a few more years.
“Again, there is a need for people to have somewhere to live. Not everyone wants to have a roommate for the rest of their life,” Rivinius says.
But until the general economy comes back to life, people are likely to keep doubling up.
Brian Collins is a 26-year-old director of accounts at Sacramento-based mobile applications marketing firm Appency. He makes what he calls “decent money,” is putting lots of it into a 401(k) and has an eye on his financial future. And, like most people his age, he’s decided that buying a house is not part of the plan.
Tightening belts may be the overall theme in commercial real estate these days, but a little planning can turn into big savings. Business owners looking for a home and landlords seeking tenant upgrades can trim expenses without shredding the wish list.