???This report should lay to rest any doubt about what is a key source for holding back job creation in the United States...It is the lack of financing."
I wish it were that simple.
A lack of financing is what stalled commercial / residential projects early on, from mid-2008. Banks had to retrench their finances as their LTV ratios were incompatible to their federal capital leverage requirements.
What's preventing most of them from restarting, is pro forma calculations showing that these projects are no longer profitable. Land values and final sales price have declined far beyond the 10~12% profit margins on these sorts of investments, that if these projects were to go ahead without substantial reductions in their principal, they would only lose money.
If the projects themselves were not speculative market plays (initiated on the expectation of a base profit level), then you would have seen few of them stalled. And that is why few of the stalled projects were manufacturing-related. Manufacturing projects are mostly non-speculative works, with exception in flex office/manufacturing buildings that are held by investment groups (like REITs).
Meanwhile, education projects stalled because property tax values and payments have dropped, forcing cuts in spending in two significant ways. First, voters are reluctant to approve new bond measures that would increase property taxes even as more of them find their mortgages underwater. Second, with less revenue in hand, cities and states are unable to fund operations after projects are completed.
So while fascinating, the theory that angel investors are on the sidelines waiting for construction projects to present themselves, doesn't really work.
Townhouses in Little Egg Harbor, New Jersey, unoccupied since their completion in 2007. Additonal buildings were planned for the site, but construction was abandoned due to the economic crisis.
A new report from the American Institute of Architects outlines how delaying building projects is affecting the economy, as well as progress in eco-friendly construction.
The report, “Stalled Construction Projects and Financing Problems: An Agenda to Keep Contruction of America’s Buildings and Infrastructure Going,” points out that in the last three years, construction spending in the U.S. has declined by nearly $300 billion. This loss, the report states, accounts for a 2% decline in the overall size of the American economy.
Based on data from McGraw-Hill Construction and Reed Construction Data, the report (released on November 7 and available online as a PDF) illustrates what types of architecture projects are currently stalled–and why:
- 26.5% are expected to receive LEED, Green Globes, or other green certification
- Since 2008, 40% of reported stalled projects have moved ahead toward planning, design, or construction, but 60% were abandoned
- 21% of stalled projects were delayed because of financing problems in 2011 (data was available through August), compared to 18% last year, and only 11% in 2008
- The education and multi-family housing sectors are seeing the most stalled architecture projects, making up 33% and 21% of those reported, respectively
- Manufacturing-related projects are seeing the least delays, only making up 3% of the total of reported stalled projects
“This report should lay to rest any doubt about what is a key source for holding back job creation in the United States,” said Kermit Baker, chief economist of the AIA, in a statement. “It is the lack of financing especially to the design and construction sector, which accounts for $1 in $9 of U.S. Gross Domestic Product.”
Clearly, from Baker’s comment, the AIA’s title of the report, and the organization’s November 7 launch of a database for stalled projects looking for funding, the AIA hopes to provoke not only discussion but also action to stimulate the architecture and construction industries. And, of course, the U.S. economy as a whole.
Image: LancerE/Flickr
