Here’s how builders and developers fared in 2020 and what’s ahead for this year
The good-news story of 2020 was residential real estate.
With interest rates low and millennials looking to buy, home sales have skyrocketed.
Despite a pandemic that shook the economy to its core, the home building industry had its best year ever, outperforming sunny forecasts presented just weeks before nationwide shutdowns to prevent the spread of coronavirus began.
But the outlook for 2021 is flat, said housing industry analyst Jack Inselmann, who presented his annual forecast Thursday at a meeting of the Greater San Antonio Builders Association.
“A year ago, we had a lot of hope heading into 2020,” Inselmann said. “We had a lot of momentum – what I would call immense momentum – of what occurred in 2019. And we finished a great year of growth.”
January reports from China about a highly contagious virus and whether it would have any effect on the United States were looked upon as an “outside chance,” he said.
By April, Inselmann began to alter his 2020 forecast to a best-case and worst-case scenario. The industry was facing a potential slowdown in home sales and new housing starts and there was much uncertainty.
Then as summer rolled around, the industry bounced back to well above projections. “Boom, it picked back up in June, July, August – our three biggest months ever in sales – and then every month of this year since then, it’s been above what it was last year,” Inselmann said.
“And I think we exceeded it because of the new demand that was generated due to the pandemic and the new reasons that people look to buy the houses,” Inselmann said. “As there are such big problems in so many ways out there, our industry was very lucky.”
The comeback had more to do with the strong economy preceding the pandemic than luck, he said. “We finished off the year in fine form.”
If the shock of the pandemic has passed, repercussions remain for 2021 in the form of continued virus surges, historic job losses, and a tight lot supply for new home construction, factors Inselmann predicts will be felt by the industry in the second half of the year.
But there are other variables that can’t be controlled or predicted that cut into builder’s profits and add to the average cost of a new home, which increased from $183,000 in 2011 to almost $300,000 in 2020.
“What I always worry more about from a builder’s perspective is the cost of materials,” said Ed Berlanga, president of the Greater San Antonio Builders Association and CEO and general partner for Texas Homes. “Lumber is skyrocketing on us in the last month. We are cost-driven, so whatever the costs are, that’s how we evaluate what our sales price increases are.”
The Agave Trace neighborhood on the northwest side of San Antonio is representative of the housing boom discussed by Urban Land Institute. Photos taken on January 12, 2021.
Homes are constructed in the Agave Trace neighborhood. Credit: Bonnie Arbittier / San Antonio Report
After sales fell off for about 45 days last spring, Berlanga didn’t panic. He made the decision to be more aggressive and he said he guessed right. “Otherwise, I’d have a bunch of houses sitting on the ground,” he said. “But we upped our specs, and we sold them.”
Last year was a good year and 2021 looks to bring more of the same. “I’m just going to make the assumption that everything goes well [and] we’ve got strong demand and that we would grow our number,” he said. “But by the end of the year, I would say we’re looking at a flat year.”
There is less certainty around what the future holds for the commercial real estate sector, which was hit harder by the pandemic’s effect on the economy. But definite trends emerging in how and where consumers shop, work, and live will reshape the sector.
“People are still waiting to see how this develops because, let’s be honest, it’s not something we’ve done before, so we have to kind of be a little bit cautious about it,” said Andy Warren, director of real estate research for PWC, who spoke on emerging trends in real estate at a meeting of the Urban Land Institute in San Antonio on Tuesday.
“Retail, hospitality – no question – tremendous smackdown from the pandemic,” Warren said. Though retail has been evolving for years due to the rise in e-commerce, now trade wars and interruptions to the supply chain mean manufacturing will move closer to the consumer, with San Antonio well-positioned as a distribution point due to its proximity to Mexico.
But retail’s not dead. “We will all get back together, we will all go to restaurants, we will go to theaters,” Warren said. “We’ll all get tired of staring at the wall and looking at that mirror thing to work out, [so] we’ll go to gyms. It’s all going to kind of come back and it’ll take time.”
However, the 10-year boom in multifamily development to meet the “renter-by-choice” demand has come to an end, according to a ULI trends report Warren co-authored. Affordability, rather than amenities, is the future of that market.
Home sales may have been strong in 2020, but widespread unemployment led to existing homeowners getting behind on their mortgage payments. Warren said nationwide, 3 million mortgages are in forbearance, meaning the lender allows the borrower to temporarily pause payments. In the rental home market, both tenants and owners are being squeezed as renters struggle to pay. Over 8 million households are potentially facing eviction, he said.
One of the largest trends to get a boost in 2020 was “reverse densification,” Warren said, or more people working remotely rather than from a high-rise office, raising the question of whether office space is needed.
Warren said that attitude is leading to a hybrid model for the office space sector, with companies giving employees the option to work from anywhere. “Employers can have people in the office but they’re also confident that when they’re not in the office they’re actually working and getting things done,” he said.
And remote working will contribute to the ongoing migration of people from New York and California to Texas and Florida, with major employers and increased home sales to follow. Forty-two percent of the people looking at homes in San Antonio on the home search site Redfin don’t live in San Antonio, Warren said.
Warren said 2021, with a COVID-19 vaccine in distribution, is going to bring some measure of clarity and certainty in the market. “But it’s still very much up in the air as to what’s going to happen,” he said.