Home prices rebound somewhat, but multi-family rules

By: Bruce Edwards | Vermont Business Magazine,  freelance writer from southern Vermont
   Vermont’s housing market has rebounded from the depths of the Great Recession of 2008-09, with home prices up 5.7 percent from their prior peak and 13.1 percent above the lowest point during the Great Recession, according to Thomas Kavet, economist to the Vermont Legislature.
   Kavet points out that the Burlington metro area has done even better with home prices in the first quarter of this year 13.9 percent above the prior peak.
   Carve out the Burlington metro market, however, and home prices in the rest of the state remain 1.2 percent below their prior peak in the first quarter of 2008, Kavet said.
   He called Vermont’s gains “pretty modest compared to most states.”
Housing shift
   In its most recent report, Apartment List, an online apartment locating service, found that housing construction across the country has failed to keep pace with demand and is 38 percent below pre-recession levels.
   Much of that decline is attributed to select markets on both coasts and to stagnant single-family home construction.
   But smaller markets, along with a spike in multifamily home building, are helping to soften the overall housing crunch, according to the Apartment List report.
   In Vermont, the report found that since 2006 multifamily units in the Burlington market have accounted for 50 percent of housing permits compared to 23 percent in the pre-recession period from 1990-2005.
    “For multifamily to be 50 percent of the market is really unusual,” Kavet noted.
   Construction of multifamily housing in the Burlington metro area has outpaced the country. Nationally, multifamily construction permits increased from 23.4 percent in the pre-recession period to 33.9 percent in recent years, according to Apartment List.
   “What we found nationally was that in the years since the recession there’s been a shift towards an increasing share of new construction coming from multifamily,” said Chris Salviati, a housing economist with Apartment List.
   He said the findings were based on data from the Census Bureau and the Department of Labor.
   While construction of multifamily housing regained its pre-recession peak four years ago, Salviati said single-family construction has continued to lag “and remains well below the pre-recession peak.”
   There are several factors holding back single-family construction. One obvious culprit is the last recession which was largely driven by a collapse of the real estate market causing developers to remain cautious about diving back into the market, Salviati said.
   He said other factors are a shortage of skilled labor, cost of materials, and increasing land costs.
   But Salviati also said there are changing demographics at work with people seeking jobs and clustering in downtown areas where there’s more of a demand for “dense, walkable-type development.”
   Don Wells of DEW Construction in Williston agrees.
   “In my opinion I think it’s the millennials who really don’t want to own a home and have that responsibility,” he said. “They want to be more mobile.”
   He said that’s different from previous generations where owning a home was the American Dream.
   “So you’re seeing a lot more apartments because of that and condos,” Wells said.
   Given the fixed costs, Salviati said developers have found it more cost-effective and profitable to build multifamily housing.
Metrics
   In determining the state of a particular housing market, Apartment List uses a metric that weighs every new housing unit permitted with how many jobs have been added to the local economy.
   Salviati said a balanced housing market will add between 1 and two jobs for every housing unit created. Over two jobs and that’s considered an undersupplied housing market, he said.
   Between 2008 and 2018, the Burlington market added 1.2 jobs for every new housing unit which “falls right in that healthy range,” he said.
   It’s often been said there are two Vermonts – Chittenden County with Burlington as its hub and the rest of the state.
   That economic fact is reflected in the housing numbers.
   “A lot of the other counties in the state actually have had negative job growth over the last 10 years,” Salviati said.
Permits
   Chittenden County remains the hub of construction activity in the state with O’Brien Bros Farm, Snyder Homes and Cambrian Rise leading the way with either both single-family homes, apartments or condos.
   Statewide, according to the National Association of Homebuilders, there were 1,131 single-family home building permits issued last year, an increase over the 983 permits issued in 2017. But that that number has dropped dramatically since 2004 when 2,686 permits were issued.
   Permits for multifamily homes, however, have increased fairly steadily since 2000 reaching a peak of 1,062 permits in 2015.
   Last year, 949 multifamily building permits were issued in Vermont, an increase from the 766 issued in 2017.
   Nationally, last year there were 855,332 single-family building permits issued (not seasonally adjusted), an increase from the previous year but down from a high of 1.68 million in 2005. Permits for multifamily homes last year also posted an increase to 473,495. That’s down slightly from the 2015 peak when 486,584 permits were issued.
   Citing Dodge Data and Analytics, Kavet said housing starts (as opposed to permits) in the state were down 24 percent in the first quarter of this year. He attributed that in part to rising interest rates through last year and changes in the mortgage interest deduction.
   Kavet also said construction by its very nature is probably the largest and most cyclical sector of the economy.
   He said there can be a multi-year lag from planning, permitting and financing to breaking ground. During that time, he said market conditions can change.
   “That creates the oversupply swings and then undersupply swings,” he said.
   But Vermont’s economic cycles “tend to be a little more muted than some of the other New England states and that’s largely as a result of the permitting process,” Kavet said.
Demographics
   Kavet said the residential construction market has been impacted more by demographics than financial considerations
   He said the “migratory flows that Vermont depends on to get population growth largely come from New England states.”
   But when home values decline in those states and are slow to rebound, he said people are naturally reluctant to move, he said.
   “That in turn meant not as many new people demanding new homes and so that is a large part of why there hasn’t been more of a recovery,” Kavet said.
   Kavet said developers are reacting to the market and the decline in home ownership.
   He said affordability is helping to drive the surge in multi-family housing. “Most people would prefer to own but just don’t qualify by virtue of income,” Kavet said.
   He also said lending standards have tightened since the recession and income growth has been “extremely slow.”
   Kavet pointed out that new single-family homes are largely only affordable to higher income families. He said Vermont hasn’t seen more home construction because there hasn’t been the demographic growth  that would drive more single-family home building.
   “There’s been some creative scaling down so that smaller, very fuel-efficient homes are out there that they’ve driven the price down as much as they can but it’s still out of reach of a lot of people,” Kavet said.
   That in turn is a major factor in developers focusing on more rental housing, he said.
   He said rising interest rates in 2017 and 2018 coupled with the elimination of the mortgage interest deduction also played a role in slowing the market. He said that situation will likely improve as long-term interest rates decline.
   But Kavet repeated that the real problem is affordability not interest rates.
Contractors
   It took a bit longer this year to start building but Ennis Construction had more than enough work to fill the void.
   Because of the late spring some roads were closed to heavy equipment, delaying three or four housing starts, Jamey Ennis said. He said that meant he couldn’t start work until after May 15, putting him four or five weeks behind schedule.
   The delays aside, Ennis said business is good.
“There are three houses going in between this spring and summer,” he said.
   In addition, the Ascutney contractor has a number of remodeling jobs and is also putting in additions to existing homes.
   If there is a construction slowdown coming, Ennis hasn’t seen any signs on the horizon.
   “A lot of what we deal with are second and third homes,” he said. “We haven’t seen that yet.”
   Ennis said calls keep coming in with a lot of work from repeat customers.
   “For 2020, we’re probably at 50 percent of capacity of what projects we have booked ahead and then we’re about 25 percent for 2021,” he said.
   Business for Donnie P. Blake Inc., a Morrisville home builder, tells a similar story.
   “On the larger home size, pretty darn good,” said Blake, who is the current president of Associated General Contractors of Vermont.
   He said the price of a new entry level home is in the $400,000 to $500,000 range. While it borders on the “ridiculous,” Blake said that’s the entry price point for a new custom-built home these days.
   And while home construction in Lamoille County and the northwestern part of the state is strong, he also said the same can’t be said for other parts of the state like the Northeast Kingdom.
   Blake said his business benefits from visitors to the Stowe area, home to Stowe Mountain Resort.
   He said his clients include millennials “coming out of Boston that want to have a place to go … to build their second home” and Canadians who have been coming to Stowe for years.
   Blake said given the demand for housing and the cost of construction it makes sense some developers have turned to building more multi-family housing where there’s a greater profit margin.
   Blake said permitting costs can be excessive, driving up the cost of construction. Add to that increasing cost of labor and materials, and the result is fewer homes being built, he said.
   “That’s making it tough for the first-time homeowner to get in and own a home,” Blake said. “That’s why you’re seeing some of these older ranch houses up for sale … anything under $200,000 that they’re snapping those things up as fast as they get them and … doing a little rehab on them.”
   Renting makes sense for many people starting out. But renting isn’t cheap either. Blake said new apartment units can rent for as much as $1,600 a month for a two-bedroom apartment with very little included.
   Even at that price, he said people are “gobbling up” new apartments but there isn’t much out there.
   Swanton homebuilder Denis Bourbeau said his local lumber yard is a good indicator of the strength of the market.
   “I know my lumber salesman said that they’ve been so busy at the lumber yard they hardly can keep up,” said Bourbeau, who builds custom homes that average between $300,000 and $350,000.
   At Birdseye, a Richmond design-build firm, project manager Erich Finley said 2019 has been “an amazingly busy year.”
   “Just the workload and what’s in the pipeline is pretty large on scale as well as volume,” Finley said.
   In talking to other contractors, he said both the residential and commercial sectors are “very busy.”
   Birdseye with its 54 employees builds high-end homes. The company has projects in Charlotte, Woodstock, Ferrisburgh, and Stowe.
   Finley said most of the homes are multi-year projects. As an employee-owned company, hiring hasn’t been a problem.
   “The newest person on our crew has been here for six years,” Finley said. “So we don’t have really a lot of turnover.”
   And because Birdseye is a multifaceted firm, when business slows down in one area like construction, the design or woodworking units often can pick up the slack.
Commercial
   “It’s a good year and there’s still plenty of work out there,” said Don Wells, president of DEW Construction. “It looks like there’s good opportunities that should take us into the next year-and-a-half to two years so I’m optimistic.”
   DEW has a number of projects lined up in Vermont and New Hampshire:
   “We’re going to be starting a $13 million renovation of the Double Tree hotel here in Burlington, the old Sheraton, right off Exit 14,” Wells said.
   The Williston company also plans to break ground in September on a new hotel at the Burlington International Airport.
   The company has an option on the former Rutland Herald property in the heart of the downtown to build a hotel. Wells said that project is on hold until New Market tax credits are secured.
   Other projects include:
   Starbucks in Essex Junction; office building in St. Albans for Community College of Vermont and Northwestern Medical Center; 33-unit apartment complex in St. Albans; 30-units of housing in White River Junction (spring groundbreaking); fire station in Killington; school project at Burr & Burton in Manchester; senior housing in Essex; One Taylor Street transit center/apartment project in Montpelier; office projects in Lebanon and Hanover and a $6 million project for Bio X Cell in Lebanon.
   PC Construction, the state’s largest contractor with a multi-state presence, has a number of projects either underway or under contract including:
   The University of Vermont athletic center, a $65 million project that includes a 3,500-seat multi-purpose arena, renovations to Gutterson Fieldhouse and the Patrick Gymnasium.
   PC is preparing to break ground next year on a renovation and expansion to the Southwestern Vermont Medical Center in Bennington.
   The company is looking at a 2020 start at the University of Vermont Medical Center’s NICU and Emergency Department renovation projects.
   A series of renovations is underway at Central Vermont Medical Center in Berlin.
   PC’s special projects group has a recurring client list that includes Green Mountain Power, IDEXX Laboratories among others.
   The company has been retained for an expansion and renovation of the historic Mount Washington Hotel in New Hampshire. There is also a pre-construction book of business for a number of hotels throughout northern New England.
   In addition, PC has ongoing work at Global Foundries in Essex Junction and at Dartmouth College in Hanover, N.H.
   PC was selected as the general contractor for Burlington’s City Place project. The company remains under contract for the project as lead developer Brookfield Properties continues its planning and updated design process.
   According to Works in Progress, there are a number of other commercial projects in the state that are either under construction or scheduled to start including:
   A 23,000-square-foot apartment building in Vergennes. The $5.1 million project is being built by Vergennes Community Housing;
   Reich Rehearsal Building & Residence in Marlboro, a 15,600-square-foot building with an estimated cost between $1 million and $5 million;
   Upper Valley Honda, a 31,000-square-foot showroom being built in White River Junction at an estimated cost of $5.3 million;
   A multi-tenant commercial building is under construction in Colchester at an estimated cost of $1.16 million;
   TD Bank has two renovations underway in Williston and Burlington at a total estimated cost of $750,000;
   At 85 North Avenue in Burlington, a new apartment building is going up. The 57,000-square-foot building is being built at an estimated cost of $5 million.
Challenges
   Matthew Musgrave of the Associated General Contractors of Vermont said labor remains the biggest challenge the industry faces. That situation is becoming more acute as trades people retire with not a lot of new workers taking their place, Musgrave said.
   He said AGC is working with the Legislature, Vermont Technical College and the Vermont Talent Pipeline.
   AGC has also launched its own workforce development website constructvermont.com.
   “When we look at the numbers of statistics out there half the kids coming out of school are going off to a four-year or two-year (school) and then half of them aren’t,” Musgrave said. “We’re trying to look at ways to attract some of those folks to the trades where right out of high school, with a 10-hour OSHA certification and someone who can do basic math, can walk into a job that pays above the median income.”
   Wells of DEW said he “would love to hire another 15 people if we could.”
Act 250
   AGC Vermont is keeping watch on draft legislation under consideration in the House Natural Resources Committee that would revise Act 250, the state’s 50-year-old land use law.
   Musgrave said AGC believes the permitting process needs to be streamlined to avoid unnecessary and costly delays.
   At the same time he said the industry does “understand and value the tradition that Vermont has in terms of protecting our environment.”
   Musgrave said AGC would like to see the definition of party status tightened.
   “Currently under Act 250 an effected party is a very broad scope of language in the document,” he said.
   Over the years, developers have complained about the appeal process.
   Musgrave cited the Costco gas station project in Colchester which has been delayed several years by a number of appeals filed by a competing gas station owner.
   He said only a Costco with very deep pockets can survive the appeals process.
   Musgrave said someone is currently able to use Act 250 to staunch development, not because the project is harmful to a community or the environment, but simply because they don’t like it.
   He said the draft legislation would get rid of 11th-hour appeals. “In the draft proposal in order to appeal on a topic, the topic has to be brought up in the original permitting,” he said.
   Blake, the AGC president, cited one commercial project in Jeffersonville that took 18 months to go through the permitting process. The same developer got a permit in New Hampshire within three months, he said.
   “You lose a lot of opportunity here,” Blake said. “People go somewhere else.”
   Wells of DEW said something needs to change when a party files a frivolous appeal.
   “If people are going to be able to appeal a permit that meets all of the requirements for either from the town or from the state,” Wells said, “and they’re (developer) not looking for any deviation from the ordinances, that it meets all the criteria, then if someone appeals it, if they lose the appeal, they ought to be subject to damages.”
   Wells cited the Montpelier hotel and parking garage project which has been delayed by appeals.
   “We should have been well under construction,” he said.
   The Vermont Natural Resources Council supports revising the appeal process. Brian Shupe, VNRC executive director, said the environmental group would like to see the Environmental Court replaced with a citizen board similar to the former Environmental Board, which was “a more user friendly process.”
   He said a new citizen board, comprised of professionals, would make the process less like a court room and thus less litigious.
   But Shupe also said appeals like the Costco case are outliers.
   “Very few Act 250 permits are appealed,” he said. “Actually, the majority of them don’t even have a hearing. They’re treated as minor applications.”
   While the AGC would like to tighten the criteria for who qualifies for party status, VNRC believes residents who may be impacted by a project, whether an abutting property owner or not, should be able to make their case for party status.
   Shupe said he hasn’t heard anyone suggest that someone who files a frivolous appeal and loses should pay damages.
   “I haven’t heard anybody take that seriously and it hasn’t been part of the discussion in the House so far,” he said.
   Shupe said “one person’s frivolous appeal is another person’s impact on their quality of life.”
   Kavet said Act 250 slows down the process thus making it harder to build large projects. “It’s harder in Vermont than it is say in Rhode Island or New Hampshire or places like that,” he said.
   He said the result is that the state hasn’t been left with an excess supply of unsold real estate. As an example, he said Vermont was one of the first states to climb out of the negative real estate price hole after the recession.
   But Kavet also said the downside to the process is that it does slow development when new construction is needed in a timely fashion.