From a small northwestern observatory…

Finance and economics generally focused on real estate

2/2/09 — More on the Domino Theory

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California is in deep hock.  Not only are essential state services (police, for example) going wanting, but they’re now apparantly going to furlough every state employee two days per month.  Student aid checks for colleges won’t get mailed out.  I can’t imagine this not getting worse before it gets better.

From a real estate development perspective, this has some very long range implications.  Except for in-fill and redevelopment, most development requires some public infrastructure — even in cases where the developer is required to pay infrastructure fees or mitigation.  A little personal example — about 10 years ago, I was working with a small town in the southeast to get a low-income tax credit housing development put together.  EVERYONE was in favor of this.  It was a total no-brainer — demand was far in excess of our intended project, the numbers all worked out, etc., etc., etc.  

Then we hit the ONE stumbling block.  The proposed project, to qualify for various Federal subsidies (necessary to make everything pencil out) would have to tie into the public municipal water system, and proof of this availability would have to go into the application packet.  No sweat, I figured, we’ll simply go to the right authorities and get a letter.  As it happens, the local municipal water supply system suffered from years of neglect, with leaks and pressure problems.  We were sympathetically informed (by a public official who really wanted this project to succeed) that hooking 200 more apartments — or even 100 — to the existing system would cause a catastrophic collapse of the entire system.  What would be needed to fix this, we asked?  Money, which they didn’t have.  (Epilogue — we explored getting some Community Development Block Grant money for the town to get this fixed, and it became quickly clear that we were looking at a very long range problem, well beyond the scope of our abilities to fix.)

That’s what we may have in the very near future in California.  Sadly, public infrastructure projects are always the first to go and always the last to return. Admittedly, the White House stimulus bill is infrastructure-oriented, but it’s looking for “shovel-ready” projects.  Infrastructure in support of future real estate development rarely meets this criteria.

California’s not alone — it’s just the biggest state, and yes… the only state with a governor who is also a movie star (and married to a Kennedy, to boot).  We’re going to see widespread infrastructure issues in coming months.


And while we’re at it — Builder magazine reports a growing list of major homebuilders who are biting the dust.  They estimate that about half of the top firms from the 2005 boom will not make it thru this recession.

Written by johnkilpatrick

February 2, 2009 at 11:33 am

Posted in Economy, Real Estate

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