CLM Construction Conference Preview: The Economic Factors Impacting Commercial and Residential Real Estate Exposures

It’s certainly been a taxing, grueling two years for the construction and real estate markets. From the onset of COVID-19 to still-lingering supply chain setbacks, both construction and real estate have felt the kickback effects. A session at the CLM Construction Conference this September 21-23 in San Diego will dive into the economic factors that are affecting regional construction and real estate markets.

“It is a fiction that there is a national real estate market,” said Gary H. London, senior principal, London Moeder Advisors. “In the sense that people talk about the real estate market being strong or not. There are a few national factors, such as interest rates and employment that have an influential effect on all real estate markets, but the markets themselves are very regional, even local.”

London will be a keynote speaker at the conference. His presentation is scheduled to be the second premier session on the second day, titled “Post-Pandemic Economic Statistics [and] Real Estate Market Projections for 2023.”

London will address the state of the economy and its effects on legal practitioners, suppliers and advisors to the construction industry.

The Session Itself 

Risk management and mitigation and claims considerations will be important elements in the discussion. But attendees will also count on hearing how different needs on the part of residential and commercial property users are driving change.

The event is one of several annual conferences sponsored by the Claims and Litigation Management Alliance, which is affiliated with The Institutes’ Risk & Insurance Knowledge Group.

Although he is a real estate and land-use economist rather than a macro-economist, London will touch on some of the macro-economic factors by way of overview, before turning to the specifics of the regional and sectoral markets.

“There are several main ‘food groups’ among the real estate sectors,” London explained.

“As many people are aware, there are residential, commercial, office, retail, hotel, and industrial. Residential is divided into single-family and multiple dwellings. Each of the food groups has its different realities. They all move at different paces. Even the same segments in different parts of the country are likely to be at different stages in their respective cycles.”

There are also local issues, such as zoning or land-use policy, that exist everywhere, but are present to greater or lesser degrees. London spoke of Houston, which is famous, or notorious, for being the largest city in the country with no zoning laws.

That is technically true, but in any practical consideration there are other relevant city and county land-use regulations in play there — the city of Houston is primarily Harris County, but not all of Harris County is Houston, and the city sprawls into several adjacent counties.

As noted in a 2021 report by the Kinder Institute of Urban Research at Rice University in Houston, the city’s charter specifically bans zoning. However, Houston also has a historic preservation ordinance that was ruled as not a form of zoning after a seven-year legal dispute.

“The decision seems to clear the way for more local experimentation with urban design and development rules,” the report added.

While bearing in mind a national perspective, London will focus primarily on the two coastal markets, especially the West Coast. “Most of the large markets in the U.S. are on or near the water,” London said.

“That is especially true on the West Coast where the bulk of the population density is within 20 or 30 miles of the water. Markets get very different as you move inland.”

Even so, there are growing exceptions. “Riverside and San Bernadino [Calif.] are among the highest growth areas in the country because they are a little farther from the premium areas that have already been developed, and so have more available land,” London said.

As a further example, London noted that the “Bay Area” is a very broad term that extends across as many as nine counties. “As you go inland, Sacramento is a very different market. And those differences go to the core of the point that there is no national market. There is an aggregate shortage of residential real estate, but in each region that his highly variable based on demographics, interest rates, and now inflation.”

On the topic of interest rates and inflation, London stressed that “while rates have risen sharply in the past year or two, they are still low by historical standards.”

That means he thinks demand for housing will remain strong, again, in some regions more than others.

“Generation Y is driving the need for housing as they seek bigger homes,” he said.

Commercial Real Estate Needs Dipping

Office real estate is on a different trend. “I will take poll of how many attorneys’ firms have not chosen to downsize,” London said.

“There is not likely to be a single hand raised. Most firms have realized that their space needs have decreased dramatically, perhaps 30%. That trend was already underway as an evolutionary trend, when the pandemic accelerated it into a revolutionary need.”

For years, the conventional metric was 250 square feet of office space per employee, London detailed. Now that is 175 square feet or less.

The trends in different sectors, driven by different factors, seem to be converging. “There is a broad trend to residential-dominated mixed-use development,” London said.

“Many of these are in what previously was office or retail space, he added

“We are in a transformative moment,” London said, referring to other trends.

“The best solution to transportation congestion are land-use policies that encourage people to live closer to work. That said, we will still need big infrastructure projects to be the backbone of transportation,” he added.

By big projects, however, London does not mean the scale of ‘urban renewal’ that began in the 1950s. “That was when the automobile culture started. Now the shift is to bring projects down to human scale. The best environment is away from zoning for separate uses to mixed use with people living, working, playing, and shopping all in the same area. None of that is incompatible, the question is how rapidly can land-use policy catch up.”

In California, London noted that most areas have rules against greenfield development, but also mandate low-density housing.

“As things are, we are seeing infilling and getting denser development. There is a big national conversation about how to grow urban and suburban communities. Downtowns are front and center for discovering new uses for existing buildings and infrastructure. We are crafting new policies, and the ability to remediate [older facilities] is greater than ever. This is definitely a national trend.” &