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Early Read: Central Valley Building Activity Cools

March 8,2017
Screen Shot 2015-05-04 at 12.10.29 PMThe stock market and renewed business optimism may be signaling expected growth in the US economy but so far this new year – building activity in the Central Valley is in stark contrast – markedly slower than the same time in 2016.

“Since November 8th, Election Day, the Stock Market has posted $3.2 trillion in GAINS and consumer confidence is at a 15 year high. Jobs!” President Trump tweeted in recent days. But what’s happening in the trenches?

For the first two months of 2017 both residential and commercial permit valuation in Kings, Tulare and Fresno counties is substantially lower than the first two months of 2016 according to the trade website Construction Monitor.

In Kings County the value for all building permits is down to $11.6 million for January and February 2017 compared to $26.6 million for the same period in 2016. On the residential side, some 31 single-family home permits have been issued compared to 49 in early 2016 although a code change in the state may have skewed these home permit numbers.More that later. Commercial permits in Kings County have plummeted to $1.8 million from $4 million.

Down By Half

In Tulare County, total building activity is around half what it was in early 2016. Valuation for the two month period in 2016 was $123.6 million vs $68.7 million for the same months this year. A big drop is not seen in single-family home construction in the county which continues this year at a strong pace similar to 2016. Instead the big decline is in the commercial sector with valuation falling from $74 million for Jan/Feb 2016 to $25 million for Jan/Feb this year.

Within the commercial numbers there has been a big drop seen in permits for solar panel in the county in 2017 vs 2016. In the residential sector permits for 643 solar units were issued in early 2016 vs just 247 so far this year.

On the commercial side, solar permit valuation in early 2016 was $62 million vs just $11 million so far this year with an ebb in larger projects. Solar units on dairies are the exception this year with strong numbers.

Likewise in the commercial remodel category in Tulare County we see only 19 permits so far this new year vs 47 projects in early 2016.

Fresno County has seen a drop in all building categories as well from $142 million in Jan/Feb 2016 vs $98 million in 2017. Here too the number and value of commercial remodel projects has dropped big time from 99 permits valued at $17.1 million in Jan/Feb 2016 to 52 permits valued at $10 million the year so far.

Residential permits in Fresno County are down this year to 138 units from 281 in 2016 but here a change in the fees demanded by the state may be a factor.

Code Change A Factor

Kings/Tulare BIA head Mike Lane reminds us that a state code change implemented in January 2017 may have caused come residential builders to push their building permits back to December to avoid the higher fees in the new year. That appears to be born out in Fresno County where builders permitted 603 new homes in December 2016 compared to what they did in December 2015, only 150 homes. The same seems to be true inTulare County where December 2016 saw157 units permitted compared to 74 in December 2015 when code change was not an issue.

In addition higher interest rates may have put a damper on the home loan market to some degree Lane says Analysts say rising prices, a tight supply of homes and higher mortgage rates combined to slow sales of U.S. existing homes in December, when they fell 2.8 percent.

Nationwide the US government announced March 1 that construction spending fell for the second month in a row – down 1.0% in January to a seasonally adjusted annual rate of $1.180 trillion, below the revised rate of $1.192 trillion in December.

Associated Builders and Contractors (ABC) forecasts a slowdown of growth in U.S. commercial construction in 2017, according to ABC chief economist Anirban Basu.

“The U.S. economy continues to expand amid a weak global economy and, despite risks to the construction industry, nonresidential spending should expand 3.5 percent in 2017,” says Basu. “For more than two years, the Federal Reserve has been able to focus heavily on stimulating economic growth and moving the nation toward full employment. However, as commodity prices, including energy prices, firm up and labor costs march higher, the Federal Reserve will need to be more concerned about rising inflation expectations going forward. Associated increases in interest rates could have significantly negative impacts on certain asset prices, including stocks, bonds, commercial real estate and apartment buildings.”

Some may point to the wet weather this winter in the Valley and that much is true. But this should not affect the permit process that is typically launched well before construction mobilization happens on the ground.

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