By: John Kazanovicz, II, Esq. – Managing Partner, KF Oakland Office & Partner, Jason Daniel Feld, Esq.
There is an interesting phenomenon happening in the California construction market since the Summer of 2022. There is a steady but slow rise in the construction building permits being issued throughout California. According to the U.S. Census and the U.S. Department of Housing and Urban Development’s joint announcement (https://www.census.gov/construction/nrc/pdf/newresconst.pdf) of new residential construction statistics for September 2022, privately‐owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 1,564,000. This is 1.4 percent above the revised August rate of 1,542,000. While this is slightly lower than a year ago (3.2 percent below the September 2021 rate of 1,615,000), the trend for obtaining new home permits was reportedly ahead of the projected rates given the market conditions and inflation throughout the country. Interestingly, single‐family authorizations in September were at a rate of 872,000 which was also 3.1 percent below the revised August 2022 figure of 900,000. Authorizations of units in buildings with five units or more were at a rate of 644,000 in September. Overall, while slowly recovering from the record lows during the height of the pandemic, the economic forecast for new home construction in California is positive, but cautious.
The flip side of this coin is the construction starts in California, which continue to remain stagnant despite additional building permits being issued. Privately‐owned housing starts in September were at a seasonally adjusted annual rate of 1,439,000. This is 8.1 percent (±14.9 percent) below the revised August estimate of 1,566,000 and is 7.7 percent (±11.5 percent) below the September 2021 rate of 1,559,000. Single‐family housing starts in September were at a rate of 892,000; this is 4.7 percent (±10.7 percent) below the revised August figure of 936,000. The September rate for units in buildings with five units or more was 530,000.
Even more alarming are housing completions and obtaining Certificates of Completion and Occupancy. According to U.S. Department of Housing and Urban Development, Privately‐owned housing completions in September were at a seasonally adjusted annual rate of 1,427,000. This is 6.1 percent (±11.0 percent) above the revised August estimate of 1,345,000 and is 15.7 percent (±13.1 percent) above the September 2021 rate of 1,233,000. Single‐family housing completions in September were at a rate of 1,049,000; this is 3.2 percent (±8.8 percent) above the revised August rate of 1,016,000. The September rate for units in buildings with five units or more was 376,000.
The main cause economists believe are contributing to this phenomenon are inflation, labor and material shortages and the consistent threat from the Federal Reserve of continuing to raise interest rates. The alternatives to single family homes continues to be the rise in multi-family housing, apartment complexes, and high rise residential construction. Renting is a more cost effective way to allow people to afford housing while waiting for the market conditions to shift and home prices to reduce to be able to obtain access to reasonable single family homes or condominiums – especially for first time homeowners.
In discussions with our builder clients, they indicate that they are busier than ever and are even turning down new jobs. The constant issue remains labor and material shortages, scheduling issues, and delays outside of their control that elongate the timeframe for completing their current building projects. As counsel for several prominent homebuilders, developers, and general contractors, we work diligently with our clients to take all the necessary precautions to ensure quality construction, minimize potential litigation, and provide all contractual protections possible to allow their residential construction projects to prosper.