Whither Construction? : Building Appears to Be Going On Unabated, but Data Points to a Decline

For Ira Norris, president of Inco Homes, Antelope Valley is the land of opportunity. The developer is constructing a new single-family housing project in the valley near Palmdale, an area Norris sees as a “permanent market” because of good freeway access, “good climate” and escalating housing prices in the San Fernando Valley.

Antelope Valley is “the most sensible move” for Los Angeles workers who want to own a home reasonably close to work but who are “unable or unwilling to live in the San Fernando Valley,” Norris said recently.

Roger C. Werbel, president of Werbel Homes, is building Tallywood in Diamond Bar near the intersection of the Pomona and Orange freeways. The area is “about the last opportunity left” for development, he said, but it is perfect for his second project in the community--a 109-unit townhouse development. Werbel sees a “natural flow” to the community of Los Angeles and Orange County workers who need affordable housing.

From the vantage point of residents of such fast-growing communities--who live daily with the sounds of cement mixers, saws and hammers-- California’s construction boom proceeds apace. Housing projects and commercial buildings seemingly spring up overnight, which has fueled a slow-growth movement by residents pining for uncrowded highways and more breathing room.

But there are strong indications from the Construction Industry Research Board, which studies building permits and contract awards, that for the state as a whole the construction boom may be abating. In Southern California, the trend is less clear when the research board’s report is viewed with construction loan data from another source.

According to the construction industry analysis, the value of new construction in California fell to $40.2 billion in 1987, down 5.8% from 1986. Though figures show total California construction for the first seven months of 1988 to be 7.2% (not adjusted for inflation) ahead of the year-ago period, the research board forecasts a 4.8% drop for all 1988 to $38.3 billion and further declines for the next two years. The rise in the first half of this year was attributed to a few very large projects.

The construction industry report forecast an 8.9% residential decline in 1988 for the state as a whole and a 3.7% drop in nonresidential building construction. “Heavy construction (including roads, sewer and water projects) is shown increasing by 14% in 1988. That increase is largely the result of a $500-million offshore oil project in Santa Barbara County,” said Ben Bartolotto research director for the board.

The research board’s results show that during the first seven months of this year, construction activity in Southern California rose in every sector but housing in comparison to the first seven months of 1987. Housing permits declined about 9.4%. The TRW Real Estate Market Information survey, which is an analysis of construction loan data that builders must file with county officials, also shows an increase in activity in Southern California through July of this year, compared to the first seven months of last year.

But Southern California’s August loan figures show a substantial increase from August last year, which makes the predicted downturn for all of 1988 less certain, said John Karevold, who compiled the TRW report. Before the August data was available, TRW was also predicting a slowdown for all of 1988 in California, Karevold said. The August loan figures for Southern California aren’t enough information to change his forecast for the full year, Bartolotto said, because the last months of 1987 showed very low levels of activity.

According to the TRW survey, construction loans in Los Angeles County rose 46% in August in comparison to August last year. Loans rose 81% in Riverside County, and the data also showed substantial increases in Orange, Riverside, San Diego and San Bernadino counties. The industry report doesn’t include August figures, and the TRW survey doesn’t include August data for regions outside Southern California.

The construction industry report showed sharp declines in building activity this past July as compared to June in all sectors in most areas of the state. Ken Willis, executive director of the Building Industry Assn. of Southern California, said he thinks some of that decline reflects a traditional slowdown in the start of new projects in midsummer. Also, he said, builders appear to be reacting to a slight jump in interest rates or may be holding off because of speculation about the effect of the presidential election. “Everybody lives on rumors and psychology,” he said.

Bartolotto said the current statewide trend is part of a normal construction cycle. Activity is leveling off after the boom of the first part of the decade fueled by “tremendous pent-up demand” from strong population and employment growth in the 1970s, he said. That boom was also exaggerated by 1981 tax incentives for nonresidential construction, he said. Construction activity peaked in 1986 and is leveling off because construction has caught up with demand, he said.

While the 1981 tax incentive helped push construction to historic levels, the elimination of a key tax benefit in the 1986 federal tax revision had a big effect on curbing construction in one area, Bartolotto said. The overall decline in housing permits is due solely to the double-digit decline in permits for multi-family housing because of the 1986 tax changes that limited the attractiveness of real estate investments.

Although the boom appears to be leveling off in the state as a whole, the trend isn’t uniform, according to the industry survey.

The research board’s finding showed sizable gains in building permits for offices, stores and parking garages. The volume of office building permits rose to $1.46 billion for the first seven months of this year, up 17.3% from the same period last year, according to the report. Store construction volume rose to $1.32 billion, up 16.4% from $1.1 billion for the same period last year. Parking garage volume rose to $371.4 million, a 72.6% rise.

Werbel said he was surprised at the 20% decline in housing permits for the Los Angeles-Long Beach metropolitan area because of the growth in Diamond Bar and other areas of the county. He speculated that the issuance of permits has fallen behind demand. “It’s taking longer to get building permits. The layer of approvals is more complicated,” he said.

Despite the decline in the metropolitan area, Los Angeles city building permits rose 12.9% through August of this year compared to the first eight months of last year. In August, city permits jumped 23.5% from the July level, according to city records.

Building permits are also up substantially in Riverside County, in large part because developers are rushing to get permits before a vote on a countywide slow-growth initiative. The initiative, which would limit population increases in unincorporated parts of the county to the statewide growth rate of the previous year, has qualified for the November ballot.

Slow-growth initiatives have had significant impacts on the statistics in other areas. Almost all of the July statewide decline in housing permits was because of a near record number of permits issued in Orange County in the prior month. Developers swamped officials with permit applications before a June vote on an Orange County slow-growth initiative. The initiative was defeated.

The Riverside initiative aside, county planning director Roger Streeter said the county would still experience heavy demand for permits because “there are an awful lot of opportunities out here. We get many, many request for commercial and industrial projects.” he said. The commercial and industrial development has followed the big increase in housing construction in the county, he said.