Norton on Real Estate: Just how bad is it out there?

Having just returned from a Counselors of Real Estate meeting in San Francisco and a new markets tax credits workshop in Washington, D.C., I have had the opportunity to ponder the status and prospects of New Hampshire from afar.

While in San Francisco talking about the subprime mortgage credit meltdown, two facts come to light. First, nationally we have been building about 2 million housing units annually over the past two to three years (funny-money mortgages were some of the momentum for this volume of construction). However, our stabilized housing demand has been about 1.3 million units annually, so there are 1.5 million to 2 million excess units that need to be “absorbed” before the markets will stabilize.

On the one hand, that is a lot of units, but the United States is a very big market, so the local and regional impacts differ. Also, housing units can be single-family homes, condos, apartments, mobile homes, etc. So areas like Miami, Houston and Phoenix will recover more slowly than others.

The state of California has been experiencing 400,000 net new immigrants each year (presumably legal ones). Compare that to New England, which is losing 300,000 to 400,000 people every year! Whether you like growth or not, losing population is a drag on the local and regional economy. For New England, this condition is exacerbated by the aging of our population as well. The graying has two effects — higher health-care costs and higher housing prices blocking young families.

Despite a plethora of economic statistics that show low inflation, think about your energy costs. Yes, we have become used to gasoline between $2.6 and $2.90 a gallon. (I saw $4.12 in San Francisco!) But my monthly gas charges now total $250 to $275, up from $150. My electric bill is double ($34.96 before I consume one kwh!). My water/sewer bill has doubled in the past three years, as has my natural gas bill (essentially the same usage, but the rates!).

Much of the postmortem on the subprime lending “bubble” concludes that we have seen the lowest interest rates for quite a while. Rising rates with stronger credit standards (more equity, less leverage) will add to the costs to develop or own real estate, but this is manageable, as the return to usual and customary standards is reasonable and prudent. Also while rates have bumped back up 50 to 100 basis points, they are still historically quite low.

One confusing area is the hype of bad press coverage from the media. It is challenging to cut through this fog and discern fact from fiction. Looking back three years, things are not as good as they were, but neither are they as bad as the talking heads want us to believe. To quote economic futurist Jeff Thredgold, “Even as much of the national media bemoans U.S. housing market weakness and the economy’s inevitable move toward recession, the overall economy just keeps pulsing along.”

But like the broken clock that is right twice a day, rising energy costs will soon push inflation and the weakening dollar will affect us adversely once the initial push of increased exports becomes old news. So a softening is coming. Hopefully it will be a short bump of 12 or so months and not a real recession.

For companies throughout the region, we have to continue to produce more with less, constantly watching and controlling costs, because the flat global economy does not let us raise prices. Yes, there are some exceptions, but not many. In the commercial real estate sectors, opportunities will be more prevalent in the “value-added deals” than the “core deals.” This is where an experienced real estate adviser with intimate knowledge of each segment of the market can add real value.

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at