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Millennials bring uncertainty to recovering real estate market

Focus-MainArizona’s youngest adults are punctuating the state’s real estate recovery with question marks.

As industry experts tout gradual increases in home values and sales since the end of the Great Recession, habits and preferences of Millennials born after 1980 are a growing concern.

Also called Generation Y, members of this group are not marrying and buying homes like previous generations. They tend to prefer urban hubs to suburbia and have little interest in physical labor like construction jobs. The combination could have a far-reaching influence on the state’s future markets as census figures show 15-34-year-olds comprise more than one-fourth of the nation’s population.

In its latest Emerging Trends in Real Estate Report, the Washington, D.C.-based Urban Land Institute predicts the number of millennial-generation residents ages 20 to 34 will increase in the Phoenix area by 11 percent over the next five years.

“Living in the suburbs is identified with their parents, and it’s no longer cool,” said Michael Orr, W.P Carey School of Business real estate analyst. “They (Millennials) don’t seem to mind having more people living in one unit, and they don’t have much available to them aside from rentals because there are few affordable downtown condos, which were geared to Baby Boomers who are downsizing.”

Adding to the uncertainties are Millennials’ career choices. Those who don’t seek college degrees are shunning building trades for technology, health or retail jobs, said Mark Minter, executive director of the Arizona Builders Alliance representing the commercial and industrial construction industry. That’s contributing to a critical shortage of construction workers as the economy improves. During the recession many jobless construction workers left the field, retired or moved to other states to find work.

“Building trades have become a hard sell for young people. It’s outside, entry-level work that doesn’t pay well. There are more glamorous, sexy jobs out there,” he said. Now older workers are filling these entry-level jobs.

Now contractors desperate for skilled employees have stepped up recruiting efforts, Minter said. “We are identifying younger workers in our industry — not someone who looks like a parent — to recruit on high school campuses,” he said, adding the program recently expanded to include summer internships and appearances at school career days.

There’s evidence of the shift at the Maricopa Skill Center in Phoenix, where out of the 44 students enrolled in the construction trades classes during fiscal 2012-13, only 12 were 25 or younger. Fifteen were 50 or older. The Skill Center offers 4- to 6-month training in plumbing, carpentry, electric and solar installation. Of those 44 enrollees, just 23 completed the programs that include a job placement service and access to hundreds of open Arizona construction jobs.

One of them is 59-year-old James Clark of Phoenix, an unemployed veteran and single father of three who completed the solar and electrical programs and is taking the plumbing course. “Jobs are scarce, especially if you are older,” he said.

“The majority of the students in our construction trades program are veterans,” center spokeswoman Phoebe Volk said.

Another is Phoenix resident Joseph Allison, 48, a children’s book author whose works include “Petal Peel and the Ghost Dragon.”

“My first passion is writing,” he said. “But until I don’t have to work anymore, I’m going to pursue solar installation and then once I have the experience I believe I want to get into solar sales.”

Building slowdown surprises experts

Overall, the real estate picture is brighter than it was several years ago with rising values, fewer foreclosures, more traditional sales and resumption of residential and commercial construction. Then a slowdown in home sales and residential building permits at the end of 2013 took experts by surprise.

Orr noted in his January real estate report that building permits reported by the Census for single family homes in Maricopa and Pinal Counties dropped sharply from 1,030 in October 2013 to 667 in November. This is down 21 percent compared with 840 in November 2012, and remains small by historic standards. For example, the total for November 1996 was 1,722 and November 2004 was 3,779. Sales figures dropped in all categories except luxury homes over $500,000.

“The primary change is a steep fall in demand,” he said in the report. “Some will point to the lower demand from investors as the main cause. It is true that investor buying has fallen hard, but that is primarily because there are relatively few bargain properties available these days. A less anticipated fall in demand is from ordinary owner-occupiers. Since they spend far more money than investors, any fall in their demand is more significant to the overall market….Demand is particularly weak in the move-up market from $150,000 to $500,000.”

Spencer Kamps, vice president and spokesman for the Homebuilders Association of Central Arizona, did not return several phone and email requests for an interview.

Orr anticipates a much slower rate of appreciation in 2014 but doesn’t rule out declines. “Time has shown us that the housing market in Greater Phoenix is very volatile. It may still show us a surprise or two in the next few months.”

Strong demand for rentals continues

Changing demographics and a fluctuating market aren’t the only challenges for the state’s real estate industry.  Rising home prices have brought more traditional sales and reduced the number of owners who owe more on their mortgages than their property is worth. They’re also spurring an exodus of bargain-seeking investors from the state’s single family housing market. Yet there is still a strong demand for rental homes as many can no longer qualify for mortgages in this tighter lending market.

According to records provided by the Maricopa County assessor, there are 171,519 registered rental homes in the Valley, excluding apartments. That’s nearly double the 94,848 reported in 2005.

Officials agree those numbers likely aren’t accurate since a property’s rental status is self-reported by the buyer at close of escrow. Although falsely claiming a rental home as owner-occupied on a real estate affidavit is considered perjury, until recently there has been little effort to enforce the rule or verify properties’ status.

But as home values — and corresponding property tax revenues — declined during the downturn, and as municipal sales tax coffers dwindled, city and county governments increased their scrutiny to capture the additional taxes. Rental properties do not qualify for owner-occupied tax rebates, and many cities levy sales tax on rental income.

The assessor’s website now urges residents to report suspected unregistered rentals to their city, providing direct phone numbers to the responsible agent. Robert Pizorno, spokesman for the office, said in 2012 the assessor began sending out “verification letters” requiring owners to sign affidavits saying the property was their primary residence. If they didn’t respond, the parcel was automatically reclassified.

The booming residential rental market pushed corresponding growth in the property management industry. That’s getting attention from the Arizona Department of Real Estate, where more instances of fraud and ethical violations are coming to officials’ attention.

Real Estate Commissioner Judy Lowe said property managers must have state real estate licenses, but should have more oversight and education about money management. Regulators are concerned about the potential for misappropriation of trust accounts in which tenants’ rents are deposited and funds allocated for expenses, she said.

According to the department’s 2013-2017 Strategic Plan, property management schemes and misappropriation of trust accounts in which tenants’ rents are deposited and funds allocated for expenses are some of the harmful effects of the real estate market collapse that continue today. The plan calls for more investigations, regular audits, increased penalties and swift action.

In 2010, the agency performed 34 broker audits.  The recommended number of annual audits by 2015 is 875. There are 89,590 real estate licensees in the state.

“When the industry started going through the recession cycle, the department started experiencing budget cuts,” Lowe said. “We went from 72 employees to 32.5, and that meant a slowdown in the number of audits and investigations that the department could stay on top of.”

One of those cases her agency tackled during lean times culminated in January in Pinal County Superior Court. Former Coolidge City Councilman Lester Curry pleaded guilty to real estate fraud and will be sentenced Feb. 24. The broker and property manager will have to spend six months in jail and pay $150,000 restitution for taking money out of his agency’s trust accounts and spending it on hotel rooms, restaurants and casino purchases.

Lowe said the agency has become more efficient with improved technology “but we are still short-handed.” She’s anticipating more complaints as agents become more active in the improving market.

Commercial recovery uneven

Commercial real estate and construction recoveries also are uneven. The Urban Land Institute’s 2014 “Emerging Trends in Real Estate” report moved Phoenix from 33 to 25 on a list of the best places in the nation for investors to put their money, citing employment growth, population growth and the region’s relatively low cost of doing business.

Local experts are more cautious. In September, the W.P. Carey School of Business brought together of group of successful commercial real estate brokers to discuss the market. Among their conclusions: The commercial recovery is slow and investor returns will likely be stagnant in coming months.  But the Phoenix market is moving up and office vacancy rates are expected to decline.

Those same brokers said the region’s glut of retail vacancies will be slow to fill as the popularity of online shopping continues to increase. Residents who have stopped looking for work could have a negative impact on the real estate market, most agreed, and uncertainty in the federal government is hindering growth.

Commercial real estate broker Gary Owen of Chandler has a different perspective. He sees small contractors like construction materials companies and military suppliers getting back into business and leasing unoccupied industrial space while rents are still bargains.

The fitness craze is helping to fill former industrial spots, he said. Crossfit training, indoor baseball and power lifting gyms find air conditioned warehouse space ideal settings for workouts. And he is seeing more startups graduate from garage-run operations to larger industrial buildings. City zoning officials — once leery of non-traditional uses in industrial parks because of perceived parking problems — have become more accommodating.  The growing fitness operations are busiest during early morning, late evening and weekend hours when other businesses are closed, Owen said.

Whatever the sector — commercial, residential, new construction or resale — experts agree they must adapt to changes that Millennials will bring.

Phoenix metro area single family home building permits

2005: 62,617
2009: 9,272
2010: 8,300
2013: 17,411

— Source: U.S. Census

Home sales – November 2013

Units sold
Under $150,000: 1,712 (52 percent fewer than in November 2012)
$150,000 – $500,000: 3,746 (10 percent fewer than in November 2012)
Over $500,000: 388 (14 percent more than in November 2012)
Median price for a single family home in November 2013: $200,000, up from $162,000 in November 2012 but unchanged from October 2013.

— Source: Michael Orr, W.P. Carey School of Business

Construction labor

Electrical
Average hourly pay: $15.73
Jobs: In 2013 there were 6,350 electrical jobs in Maricopa County, up from 6,112 in 2012.

Carpentry
Average hourly pay: $14.57
Jobs: In 2013, there were 15,844 carpentry jobs in Maricopa County, up from 14,765 in 2012.

Plumbing
Average hourly pay: $15.78
Jobs: In 2013, there were 3,780 plumbing jobs in Maricopa County, up from 3,357 in 2012.

Solar Photovoltaic
Average hourly pay: $8.28
Jobs: In 2013, there were 185 solar photovoltaic jobs in Maricopa County, up from 173 in 2012.
— Source: Maricopa Skill Center

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