Directional Signals

Phoenix. Houston. just about anywhere in the Carolinas. And, with a roll of the dice, Las Vegas.

Ask builders where they'd like to expand, or start over (which is more likely the case these days), and eventually they'll mention these and a few other markets, all for the same reason: strong job growth that promises steady home sales for years to come. “We follow growth; we don't create it,” says Lennar spokesman Marshall Ames. Crosswinds Communities CEO Bernie Glieberman adds that his company would “never consider a market without good job statistics.” In 2008, Crosswinds plans to start selling homes and lots in Phoenix, which a recent bizjournals survey identified as the country's hottest job market, expanding at nearly quadruple the national growth rate.

A not-uncommon example of the housing industry following jobs can be found in La Grange, Ga., where an affiliate of Chicago-based developer Marquette Cos. is creating a 400-acre master planned community called Magnolia. With 2,800 homes, the project is designed to capitalize on the local employment boom that's expected to result from Kia Motors' new plant, which will hire more than 2,900 people when it opens in 2009. The Georgia Department of Economic Development projects that the Kia plant could bring a total of 18,000 jobs to the state.

As they've followed jobs, though, builders and developers have been known to take a few detours, especially during the last boom, when exuberance rather than market analysis dictated where they built next. How else can one explain a 51 percent increase in housing starts between 1990 and 2006 when employment during that period increased only 22 percent? Permits in Indianapolis sometimes exceeded jobs created by a ratio of 2-to-1, says Tom Eggleston, CEO of Indy-based C.P. Morgan Communities, which uses a layered analytic model for evaluating a market's potential that gives ample weight to job statistics (see “Do the Math,” www.builderonline.com).

LAYING THE GROUNDWORK: Mesa del Sol is receiving tax credits for creating jobs within its master plan. One of the employers it has lured is Advent Solar, which operates an 87,000-square-foot photovoltaic plant that will ultimately employ 1,000 workers.

As market conditions have worsened, employment data have gained cachet as a reliable barometer and predictor of a market's economic health. The first sentence in the Joint Center for Housing Studies' latest “State of the Housing Market” report says it all: “The length and depth of the current correction will depend on the course of employment growth and interest rates, as well as the speed with which builders pare down excess supply.” Mark Lautman, director of economic development for Cleveland-based developer Forest City Enterprises, believes that job growth might be even more important now because the market is tighter and riskier, “and people can't afford to make mistakes.”

But the snapshot of a market that job growth exposes can fade from year to year. In 2001, the Santa Monica, Calif.–based Milken Institute ranked San Diego first on its annual Best Performing Cities list, which looks at job creation, wages, and high-tech growth. Five years later, San Diego ranked 72nd, a victim of excessive overbuilding and home price inflation. A recent Wall Street Journal article suggested that Florida could be “over” as a growth market, even after the Sunshine State created 846,000 jobs from 2001 through 2006, or about the same number that California and Arizona combined generated.

Consequently, most builders wouldn't think about expanding without measuring job growth against other factors, such as unsold inventory, household formation, and land-use restrictions. “If you look at jobs without looking at permits,” warns Gopal Ahluwalia, the NAHB's staff vice president of research, “you will be greatly disappointed.” And Brad Hunter, director of market research firm Metrostudy's South Florida region in West Palm Beach, Fla., observes that builders are being more cautious in how they analyze any statistic because “there are opportunities over the next five years that can either make or destroy a company.”

Builders know that job creation leads to more development and competition, sometimes beyond a market's capacity to absorb. Housing analyst John Burns points to Jacksonville, Fla., which wasn't on builders' radars a decade ago. “Then, the city did a very good job attracting employers, and seven to 10 builders moved into the market.”

Despite having one of its strongest growth years in 2007, San Antonio saw its inventory of unsold existing homes jump 72 percent, to 12,190, through the first half of that year, according to Metrostudy's estimates. Another market with steady job growth and lots of space, Raleigh, N.C., has eight of the top 10 builders active there and has seen more developers move in over the past few years. As a result, margins are low, “there are a lot more approved lots in this market,” and local politicians are pushing for slower development, says Tom Anhut, Toll Brothers' Raleigh division president.

Any number of factors can neutralize job growth's positive impact. Dallas has been creating jobs at double the national rate, and CNN/Money recently called it a “smoking hot” real estate market, but builders there complain about mediocre margins kept low by an abundance of developable land. On the flip side, growth barriers in such markets as Portland, Ore.; San Jose, Calif.; and Boise, Idaho, hold development in abeyance.

“Job creation only speaks to demand,” says David Drees, CEO of The Drees Co. in Fort Mitchell, Ky., about markets in general. “It does not address supply.” Supply, though, could become a bigger issue if, as statistics indicate, America can't produce enough jobs to match its population growth. That trend has already led Forest City, at its Mesa del Sol community in Albuquerque, N.M., to create jobs first, before it starts building houses (see “Cart Before the Horse,” page 126).

It seems like every media outlet and research firm has an annual list of best places to live. Some of these lists are trivial, others are blatant marketing. A handful seriously examine where people live and work, and why, and often conclude that their allure is a fertile job market. These lists sometimes become self-fulfilling prophecies as job creation “plays into consumer confidence, which can be dialed up or down,” says Charlie Hewlett, managing director with real estate consultant Robert Charles Lesser & Co. Builders and developers ignore job trends at their own peril, says Hewlett, because communities take years to complete and can span one or more business cycles.

It's obvious that builders have avoided markets with marginal job growth, such as the Gulf States pre-Katrina and Rita. Only NVR and a few other large builders operate in Pittsburgh, says Tom Krobot, CEO of Roswell, Ga.–based Ashton Woods Homes, because “its job growth has been anemic, and there are only 6,000 to 7,000 permits issued each year.” More than half a dozen national builders talked about expanding into Boise in mid-2006, but only one—D.R. Horton—ever bought land there as that market's job growth softened appreciably, says Don Hubble, president of Meridian, Idaho–based Hubble Homes. Boise's residential permits fell to around 3,500 in 2007, from 11,000 two years earlier.

But builders are also less inclined to jump into some markets simply because job formation looks strong, as appearances can be deceiving, or at least transitory. Take Ocala, Fla., 70 miles from Orlando, which sat atop the Milken Institute's Best Performing Cities list for 2006. Florida's Labor Market Statistics Center reports that between August 2006 and August 2007, the Ocala metro area added 0.2 percent more jobs and had the second-lowest year-over-year growth in the state during the month of August. “There are a lot of trades out of work here because [builders] are pulling in their wings,” says Lois Morton, office manager for Ocala-based Robert E. Waller Builders, a custom builder of homes and barns.

Metrostudy's Hunter agrees that job growth should not be the only factor considered. “It's dangerous to distill what's going on in a market to a single number,” he says. Milken research economist Armen Bedroussian is quick to point out that the Institute's list focuses on identifying markets with “sustainable” job growth. But he recommends that builders pay closer attention to migration patterns and “the kinds of jobs being created” in a given market to determine what home prices people can afford.

One problem with relying on job growth data is that they don't always correlate with buyers' impressionable temperaments. Last year, Ideal Homes was pulling teeth for every sale in Oklahoma City, which created 19,400 jobs between July 2006 and July 2007, “one of the best [jobs] numbers we've had in five years,” says Ideal's co-owner and president of sales, Vernon McKown. He blames the media's relentless focus on the subprime mortgage meltdown for undermining consumer confidence. “I don't care how good the job growth is; there's no defense against the press saying week after week that the markets have tanked,” McKown laments.

It must be said, though, that while lack of job growth might give builders pause about expanding into a new market, those numbers take a back seat when land opportunities arise. Pageantry Homes entered Seattle seven years ago to pursue a “project opportunity” that didn't work out, recalls Bill Hoover, Pageantry's Southwest regional president. But it gave Pageantry a foot in the door that has opened up to where the company is now the fourth-largest builder in Washington state. David Weekley Homes' expansion into Panama City and Tallahassee, Fla., in 2005 was driven as much by its long-term relationship with developer St. Joe as by job formation in those markets, says company chairman David Weekley.

In October, Hillwood Residential, a division of Dallas-based developer Hillwood, purchased the 3,827-acre Sienna Plantation near Houston, where the company plans to build 7,000 single-family homes over the next decade. Fred Balda, president of Hillwood Residential, says that while Houston's diverse and sturdy job market “was certainly a component” in his company's decision, Hillwood had been trying to move into Houston for several years, but that “only recently did the right property become available,” when its seller, The Godi Group, based in Scottsdale, Ariz., needed to liquidate that real estate to focus on its distressed home market.

In recent years, Danville, Calif.–based Pacific Union Homes has exploited “good land opportunities” along Highway 99 in the Central Valley and has been building homes in exurbs such as Oakdale and Atwater. “I was constantly being asked, ‘Who buys your homes? Where do they work?' ” says Matt Tunney, one of Pacific Union's partners. Buyers have been mostly local business owners and people employed by service companies. But new businesses haven't moved into the area in droves yet. So Pacific Union is looking for land again, nearer the San Francisco Bay Area, and is considering getting into higher-density attached products. “We started as an infill developer in the early 1990s, and now we're back to square one,” says Tunney. “We're following job growth again.”

Most sources contacted for this article expect builders to follow jobs to many of the same markets to which they've been headed for more than the past decade. Krobot of Ashton Woods—which over the past few years entered Orlando, Phoenix, Tampa, and Denver—sees construction opportunities arising in the Carolinas, parts of Texas, and Chicago. Consultant Burns expects both coasts and the South to continue to lure businesses, job seekers, and builders.

Builders still view Las Vegas and Phoenix as sure bets too, despite significant inventory overhangs. 37,000 hotel rooms will be built in Vegas over the next several years, with each room projected to create one to 1.25 new jobs, says Pageantry Homes' Hoover. Phoenix added an average of 68,000 private-sector jobs each year from 2002 through 2006, according to bizjournals. That number receded to an estimated 53,000 in 2007, “but that's still good,” says Glieberman.

Job growth isn't uniform across the country, however. When the U.S. Labor Department reported that 110,000 jobs were created nationwide in September, the government also admitted that it might have overestimated job growth by 297,000 jobs in 2006 and early 2007. (In fact, Labor later recalculated its September estimate to 96,000.) The New York Times reported that job growth in the first six months of 2007 was the lowest of any similar period since 2004.

Forest City's Lautman fears that 2008 could usher in a prolonged period when America's labor force shrinks. “By 2010 or 2012, if there's an available skilled worker, there will be 10 companies competing” for him or her. Employees will have more power over where they work and live. “So builders better start figuring out what's attracting or repelling people [in] certain job markets,” says Lautman.

Sometime in the first quarter of 2008, the initial residential phase of 550 homes should get started at Mesa del Sol, a 12,900-acre mixed-use community in Albuquerque, N.M., that, when completed, is projected to house 100,000 residents in 37,500 homes. But before the first foundation for the first home gets poured, Forest City Covington, Mesa del Sol's developer, expects to have 4,000 to 5,000 jobs established within the community, which has earmarked 1,400 acres for industrial, commercial, and office space use.

“I believe we're the only community in the country producing jobs before it brings in homeowners or renters,” says Mark Lautman, Forest City's director of economic development. Forest City Covington negotiated $500 million in tax-increment financing to develop the first 3,000 acres of this project by guaranteeing that the community would create 30,000 “economy-based” jobs and another 35,000 service-related jobs. (Lautman defines “economy-based” as jobs that create products that can be shipped outside of the state.) Businesses will be asked to provide employment and wage data so Forest City Covington can show the state that it's building homes to meet demand.

Through October, Mesa del Sol had attracted two tenants: Advent Solar, a photovoltaic cell maker that operates an 87,000-square-foot plant that will eventually employ 1,000 people; and Albuquerque Studios, a film production company with 300,000 square feet of studio space. Lautman is confident that, despite New Mexico's 3.5 percent unemployment rate, Mesa del Sol can lure businesses by touting the state's pro-business governor, its annual surplus of between $500 million and $1 billion, and its proximity to Albuquerque's airport and downtown. He adds that New Mexico is an “in-migration corridor” that should produce steady population growth.

Forest City acquired this land in 2005 through a partnership with the state, the University of New Mexico, and Covington Capital, another developer, and set up a deal where the state and university own 16 percent of the community and share a portion of its profits. Mesa del Sol is three times larger than Forest City's Stapleton community in Denver and is expected to take 30 to 35 years to complete. Forest City Covington has completed “the first spine” of infrastructure and is interviewing builders for a broad spectrum of housing, including rental. If all goes as planned, “we'll be in really good shape for at least the next five or six years,” Lautman says.