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Predicting Our Economic Future

Predicting Our Economic Future

(January 12, 2011)

Searching for Signs of Recovery in the Rezoning Chambers of N.C. City Halls

When the economy collapsed the real estate sector was hit hardest. Professionals in the world of real estate are constantly asked when the economy will rebound.

I’m not an economist. I do know, however, that the distant early warning signs of economic collapse and the signals of rejuvenation are found in more places than the jobless rate, the prime lending rate and the list of housing starts — all data from the macro economy. Sometimes “micro” data adds clarity to the crystal ball.

The home furnishings industry provides a good example of this point. When I was affiliated with a High Point law firm, I leased our downtown parking lot the weekend of each fall and spring furniture market and then subleased each space to some of the 75,000 market attendees. Demand for centrally-located parking was high and the supply was limited. Consequently, the price of spaces went up. I learned aft er a few markets that I could accurately predict the market’s later-reported success by how early in the morning market attendees arrived, how long they stayed before leaving for another area, how willing they were to park like sardines, and their readiness to pay my usurious rate rather than move to a distant and lower priced lot.

The real estate economy is no different. There are numerous telltale signs visible on the ground, but not at ten thousand feet where economists spend their time.

One of these economic signs is the planning board calendar. From reading these calendars it is possible to create a Planning Board Index, or “PBI.” The PBI uses the list of initiated rezonings to gain insight into business expansions, credit available for expansions, and confidence in the economy that it is a good time to expand rather than entrench.

The PBI right now is low. Very low. And low is bad. Compared to this time last year, the index is possibly inching up slightly in some places, but the real story is that it still indicates a moribund real estate economy that still has not yet risen from the grave.

To create the PBI, I carefully selected seven N.C. cities and six N.C. counties that represent coastal, piedmont, and mountain regions as well as large and small metropolitan areas. I then collected planning board agendas from each city and county from October 2007 (near but slightly past the height of the market) and October 2010 (for current comparison). Counties selected were Brunswick, Wake, Guilford, Cabarrus, Catawba and Buncombe. Cities selected were Wilmington, Wilson, Raleigh, High Point, Charlotte, Hickory and Asheville.

In December of 2009, there were practically no new rezonings across the state. Most activity involved churches, school systems or other government institutions using previously approved bond financing. Privately initiated rezonings (or requests for special use permits) were essentially nonexistent. No shopping centers anywhere. And no large subdivisions.

But a comparison of two diff erent economies is necessary to create the index. Th us, 2010 compared to 2007 provides insight into the absence of growth activity.

The 2010 to 2007 comparisons are clear. The first number in the following combinations represents the number of rezonings and special use permits in that jurisdiction in October of 2007. The second number is the same but for 2010.

For counties: Brunswick 5/0; Buncombe 4/0; Catawba 2/0; Cabarrus 2/0; Guilford 1/3; Wake 1/1.

For cities: Asheville 1/1; Hickory 1/1; Charlotte 2/3; High Point 3/0; Raleigh 5/1; Wilson 4/1; Wilmington 1/3.

The uptick in Wilmington involved one rezoning for .15 acres and another for .17 acres, hardly large projects or expansions. Spot checks show that a vast majority of private rezonings in 2010 are initiated by small, family-owned businesses, not by developers.

The point is simple. There are few signs anywhere that projects are leaving the drawing boards and finding their way into the permitting and rezoning chambers of city hall.

Now that we’ve established that the patient still has no pulse, the question is how we shock its heart back into rhythm.

At some point in early 2009 one of my colleagues at the bank soon-to-be-formerly-known-as-Wachovia put it this way. “We ate lots of bad loans and business deals and it’s just going to take some time for them to be digested and pass through our financial intestines. Th en we can make more loans.” I appreciated the analogy.

Real estate deals occur only when there is confidence in the market and money can fl ow freely through the system from lender to borrower, typically collateralized by the real estate itself. According to the tea leaves I’m reading, the PBI is almost as low now as it was last December.


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Thomas E. Terrell
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