The driving factors for intensity of urban development are numerous.
They include the cost and availability of land, its attractiveness to
tenants/purchasers, planning/zoning regulations, and availability of
infrastructure. Planning/zoning regulations can be enormously
important, particularly when land is markedly cheaper outside of
existing urban developments. If land is cheap outside existing urban
areas, and developers do not have to pay for infrastructure extension
and new services like police and fire stations, parks, sewers, roads,
and schools, then they have an incentive to build lower density
developments. In contrast, when planning/zoning regulations either
severely limit expansion of urban areas or make their costs comparable
to existing urban areas by charging developers for infrastructure
extension and new services, then developers are incentivized to build
more densely on "...vacant and underused parcels within existing urban
areas."
"LOCATION AND INTENSITY OF URBAN DEVELOPMENT" Association of Bay Area
Governments (July 21, 1999)
http://www.abag.ca.gov/planning/rgp/menu/menua.html
"There is considerable interest in the phenomenon of "urban sprawl" in
US cities. Researchers have examined the effects of government
infrastructure spending, uncompensated impact costs, local public
finance and the tax treatment of owner-occupied housing. To counteract
these effects and to secure public goods such as open space, water
quality and to limit congestion, a select number of communities have
engaged comprehensive regional planning, sometimes referred to as
"Smart Growth." These zoning law changes place stringent density and
use restrictions on rural land and remove restrictions such as
building height and mixed-use prohibitions, in urban areas. The new
laws remove considerable uncertainty about future allowable building
in some areas, but may create it in others. However, uncertainty about
the future optimum building type creates an incentive for landowners
to keep land vacant in the present and is thus a deterrent to
development. Thus, "Smart Growth" policies may initially induce the
opposite of the intended effect."
"Urban Growth Boundaries and Uncertainty on the Timing and Intensity
of Land Development" by Chris Cunningham, Maxwell School, Syracuse
University (April 1, 2005)
http://www-cpr.maxwell.syr.edu/research/urbangrowth.htm
Considerable demand among middle and upper class families for suburban
living has contributed to the popularity of lower-density development.
"Reasons cited include a preference towards lower-density development
(since it often features lower ambient noise and increased privacy),
better schools, and lower crime rates (even though car-related
fatalities often make it more dangerous to live in the suburbs than in
the city)." Traffic also tends to move better with less intensity,
decreasing air pollution emissions. However, high car usage,
difficulties with providing public transportation, and the need to
maintain an extensive network of highways and parking facilities can
create problems for local and regional governments.
"Urban sprawl" Wikipedia (April 3, 2005) http://en.wikipedia.org/wiki/Urban_sprawl
Because demand for construction is highly dependent upon the
prevailing level of economic activity and expectations of future
economic activity, the industry is highly cyclical. Frequently, it
follows a boom-bust pattern.
"Cyclicality of Construction Industry Activity. Demand for ready-mixed
concrete and other concrete products depends on the level of activity
in the construction industry. That industry is cyclical in nature, and
the general condition of the economy and a variety of other factors
beyond our control affect its level of activity. These factors
include, among others:
? commercial vacancy and residential new home inventory levels;
? employment levels;
? consumer spending habits;
? the availability of funds for public or infrastructure construction;
? changes in interest rates;
? sustained adverse weather conditions;
? the availability of short- and long-term financing; and
? levels of inflation."
"Regional Variability. The economic and seasonal factors described
above can affect various local and regional economies in different
ways. Accordingly, the levels of construction activity at any given
time can vary greatly across the country. Markets for our products
generally are local and, therefore, our results of operations are
susceptible to fluctuations in the levels of construction activity
that may occur in our local markets."
"Form 10-Q for US CONCRETE INC" Yahoo Finance (November 9, 2004)
http://biz.yahoo.com/e/041109/rmix10-q.html
As you can see from the chart in the reference below, very small
changes in the economy can produce large swings in construction
activity.
"Economist Expects Full Recovery for Non-Commercial Construction in
2004" USGlass (June 2003)
http://www.usglassmag.com/backissues/0306/contract.html
Sincerely,
Wonko |
Clarification of Answer by
wonko-ga
on
05 Apr 2005 17:54 PDT
Sure. Given that the broader economy is cyclical with up-and-down
periods, one need only consider the factors that create demand for
construction to understand why construction also is cyclical.
Companies only need new buildings when they are growing (adding
employees, equipment, distribution space, etc.). This situation only
occurs when the economy is good. When demand slows, companies do not
need new facilities because they are keeping the same amount of
employees and equipment or even decreasing the number of employees and
equipment. Furthermore, because most construction is financed,
companies want to be confident that they can payback loan and/or bond
used to finance the construction. Companies that go out of business
or abandon unneeded space create additional building inventory, which
further decreases the need for new construction.
Non-commercial real estate is driven by the demand for housing. Given
that nearly all home purchases are financed, consumers tend to
purchase homes when they feel confident about their employment
situation and income. In most cases, consumers feel most confident
about taking on debt when economic conditions are good.
Interest rates also play a role in both commercial and noncommercial
construction. Low interest rates make financing cheap, which enhances
demand. This has occurred during the past few years for noncommercial
construction even though the economy was not particularly good.
However, the poor economy severely depressed commercial construction.
High interest rates are particularly harmful for noncommercial
construction. Demand for rental units drives apartment building
construction, which tends to be less sensitive to broader economic
conditions, although people tend to prefer older and cheaper
apartments when times are bad. In the past two years, the high demand
for single-family homes has depressed demand for apartments.
Government spending on construction is also dependent upon state of
the economy in the form of tax revenues. When the economy is doing
well, governments collect more taxes and can spend more on
infrastructure. When the economy's doing poorly, not only are fewer
taxes collected, but governments may even need to cut taxes further to
stimulate the economy. The shortage of funds limits the amount of
construction projects governments can fund.
I hope this further enhances your understanding of why construction
tends to be cyclical.
Sincerely,
Wonko
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