The Anemic Recovery and Government Revenues

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By Alan Nevin

Director, Economic and Market Research

This is a San Diego story. It’s a story of the remarkable difference between the 2001-2006 economic period compared with the current anemic recovery that, more or less, began in 2011.

The engine that inevitably drives modern recoveries is homebuilding – both single- and multi-family. In the 2001-2006 timeframe, San Diego homebuilders permitted an average annual of 8,289 single-family and 6,803 multi-family units.

In the 2011-2013 timeframe, the single-family units permitted averaged 2,166 and the multi-family 3,890 units annually. Therefore, in the early 2000s, 45% of the units constructed were multi-family compared to 65% multi-family in the 2011-2013.

The dollar implications of the differential between the two periods is stunning, particularly from the standpoint of property tax, retail sales tax and other government exactions that support government operations.

The economic multiplier effect of single-family homes far outweighs that of multi-family, for two reasons. First, the average single-family home is three times the size of the average multi-family unit. Second, persons who buy new single-family homes tend to spend outrageous sums dolling up their homes, both inside and outside. It has been estimated that the average buyer of a single-family home spends more than $25,000 in upgrades within the first two years of ownership (and far more in coastal California, of course).

On the multi-family side, in the last go-around, a substantial share of the multi-family units built were condominiums, many of them vertical. Due to the cost of development per square foot, vertical condominiums produce a far greater dollar impact on the economy than garden units or townhomes. In this recovery, most of the multi-family development involves apartments, rather than condominiums.

When I look at cities like San Diego, San Francisco and Miami, the difference between this recovery and the last one is substantial. In the last recovery, there was an amazing boom of high-rise condominium construction. Though not always financially successful, they did contribute mightily to the tax rolls because of the cost per square foot of construction.

This time around, we are seeing a substantial shift in vertical construction from high-rise to wood-frame projects of five or six stories, most over podium parking or standalone garages. The total construction impact is jaw-dropping. The construction of a typical 30-story high-rise costs four to five times that of a wood-frame five-story building.

Thus, from a governmental revenue standpoint, the sales tax differential is significant. Further, the property tax for a high rise condominium unit is significantly higher than that of a low-rise rental unit.

The combination of 75% fewer new single-family units from the boom average to now, the transition from high-rise condominiums to low-rise rentals, and the deep dip in prices during the recession are major parts of the lackluster recovery we are experiencing.

A few years from now, we may have an increase in our moderate priced lot and land bank, and even some high-rise condominium construction, but the long hiatus between the halcyon days of 2001-2006 and the 2011-2013 recovery period has left a major revenue void in our government piggy bank.

Topics: Economics, Real Estate Development, *, Alan Nevin, RE, San Diego, Apartments, Market Research, Housing Permits


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