28 posts categorized "Construction"

Housing recovery? Let’s say “improvement”

In the rush to put the bad days of recession and slow recovery behind us, there are many news accounts of recovering housing markets. But recovery is a matter of economic context. Recovered compared to what? Housing sales, prices and construction have all been rising of late, but it helps to see the path recently taken.

Through August of this year, for example, Ninth District states have seen single-family housing permits rise by 22 percent over the same period a year ago, just a tick off the national average of 24 percent. Performance of individual states ranged from North Dakota (9 percent growth) to Montana (37 percent). North Dakota’s modest growth belies surging growth in housing; the state didn’t have near the drop in permits experienced by other states during the recession and is currently at record levels, having seen strong annual growth since 2009.

But North Dakota aside, permits fell so far during the recession that it’s hard to deem the most recent period a recovery. In 2004, for example, almost 21,000 single-family housing units were authorized in Minnesota through August of that year—the most ever at the time or since. By 2009, it was barely 4,000. This year, it’s back up to more than 7,000 so far through August. That’s certainly an improvement, but not likely back to full health.

Part of the problem is not knowing what a healthy housing market looks like. Post-recession, it would appear that the pre-recession housing boom was not normal or healthy. And if that’s the case, then a full recovery might not be as far off as pre-recession permit levels might suggest.

Building permits thru August -- 9-26-13

Bakken banks growing faster than peers in shale plays elsewhere

The Bakken energy boom in western North Dakota and eastern Montana has had a catapult effect on banks in the region, helping to fuel rising deposits, fast loan growth and growing profits. But the Bakken is only one of a handful of major, active shale plays across the country. How does the performance of Bakken banks compare with banks in other shale plays?

New research by the Federal Reserve Bank of Minneapolis measured bank performance among banks located inside and outside shale plays in the Bakken, Arkansas, Louisiana, Oklahoma, Pennsylvania and Texas. It found that Bakken banks saw significantly higher growth in deposits, construction and land development loans, and commercial and industrial loans, as well as an increase in profits compared with banks in other shale plays.

“While there are some points of similarity between the relative activity of Bakken banks and banks in other shale areas, the exceptional performance of Bakken banks has generally not been replicated in other shale areas,” noted bank authors Ron Feldman, executive vice president, and Stacy Jolly, financial analyst.

Among the more notable results (see also the accompanying charts at bottom):

• Deposits in Bakken banks increased 49 percent from 2010 to 2012. The next closest shale region was Louisiana, where bank deposits (in shale counties) rose 39 percent, but over a longer period (2008 to 2012).

• Construction and land development loans originating from Bakken banks almost doubled over the previous year ending in March 2013; over the previous three years, these loans grew by 165 percent to $209 million. Commercial and industrial loans within the Bakken saw a more modest rise (29 percent since the end of fourth quarter 2011), but that rate was still much higher than elsewhere. Owing in part to the Bakken’s rural nature and lack of population, residential loans were also higher as workers flocked to the region.

• Profitability of Bakken banks, as calculated by return on average assets, has been slightly higher and more consistent than banks in other shale regions, though banks in Pennsylvania’s Marcellus shale also have seen a persistent rise in profitability since 2009.

 Bakken banking 3 charts -- 8-20-13

For an extensive set of tabbed charts outlining bank performance in shale states, go the original research published online in the fedgazette.

A leaky drinking water system

The heat of summer is probably the best time to let you know your drinking water infrastructure is badly in need of some upgrades.

In 2011, the Environmental Protection Agency began a nationwide assessment of drinking water systems, randomly surveying more than 2,700 medium and large community water systems. The survey collected data on capital improvement projects that system respondents deemed necessary over the coming 20 years. Improvements included replacement or rehabilitation of existing infrastructure due to age or deterioration, as well as new or expanded infrastructure necessary for current population needs or to comply with regulatory requirements.

Last month, the EPA released its final report, which estimated nationwide needs of $376 billion, a slight increase in the amount identified in a similar 2007 survey ($369 billion). Among Ninth District states, the report pegged capital investment needs for Minnesota and Wisconsin at $7 billion and $6.7 billion, respectively. (These were the only district states with enough surveys to allow for a state-based breakdown.) Needs in Minnesota rose more than 8 percent from the 2007 survey, while Wisconsin drinking water needs rose by almost 2 percent.

The report broke down needs by system size as well as capital investment categories (distribution, treatment, etc.). The needs of the two states were very similar in terms of categories—for example, the majority of investment needs in both states lie in transportation and distribution systems (see Chart 1). But Minnesota has a larger need among medium-sized drinking water systems (see Chart 2).

Drinking water -- 7-17-13

The other Bakken pipelines: Water for fracking

Much pipeline development in the Bakken region of North Dakota and Montana is focused on transporting crude oil. But pipe is also being laid to carry a humble commodity essential to oil production in the region: water.

Copious amounts of water are required to extract oil from the Bakken’s shale beds. The fracking process—injecting a mixture of water and chemicals into shale rock to release oil—consumes up to 8 million gallons of freshwater per well. And along with oil and natural gas, wells produce even larger amounts of subterranean saltwater over their operating life. “The first thing that’s produced out of a well is water; the last thing ever produced out of a well is water,” said Rodney Wren, president of New Frontier Midstream, a Texas-based developer of oil and gas infrastructure.

Today, most freshwater used for fracking is trucked to wellheads, and tanker trucks also haul away saltwater and used frac (“flow back”) water for disposal in deep wells. Trucking water raises costs for producers—fees in the Bakken range from 2 to 10 cents per gallon, depending on miles traveled—and contributes to wear and tear on rural roads.

It’s cheaper to pipe water to and from the wellhead, especially in areas where wells are close together. Brigham Exploration, an oil company acquired by Statoil of Norway in 2011, was a leader in laying water pipelines in the Bakken, installing them simultaneously with crude oil and gas lines. Incoming pipe delivers freshwater for fracking from municipal or rural water systems; outgoing pipelines carry away wastewater for disposal.

There are no public data on oil-industry water networks in the Bakken, but Statoil, New Frontier and other petroleum and energy transportation firms are laying new water pipe to wellheads. New Frontier has plans to build wastewater gathering systems and disposal wells near Dickinson, N.D., and Sidney, Mont., to serve oil and gas producers in those areas.

The next step in oilfield water management is recycling frac flowback water. Statoil has tested a fracking method that uses a 50:50 mixture of flow back water and freshwater. The company aims to raise the proportion of flow back water used to 80 percent—greatly reducing the volume of freshwater that must be transported to the wellhead.

For much more on pipelines and other energy transportation infrastructure in the Bakken, look for the upcoming April issue of fedgazette.

Dusting off the construction hammers

It’s been a long road, but signs of the housing recovery continue to build.

The U.S. Census recently released annual housing data showing that last year saw significant housing growth across the Ninth District and the country (see Chart 1). While growth is good news, the data context is critical. The preceding year was one of the poorest on record. Still, five Ninth District states saw total permits rise at least 20 percent; all but Wisconsin saw permits increase more than 30 percent. Growth occurred in both single-family and multifamily categories; booming North Dakota was the only state to see a bigger increase in single-family permits.

But the show stopper was multifamily permit growth in Minnesota last year, which rose more than 200 percent over 2011. While the state’s outlier growth comes in part from a poor 2011, the 6,700 multifamily permits were the most since 2005. A dearth of new multifamily units since then has led to steadily tighter rental vacancy rates in the Twin Cities and across the state (see Chart 2), and is likely a major factor in the state’s hyper multifamily growth last year.

For more discussion about rental markets in Minnesota and the rest of the Ninth District, see the July 2012 fedgazette.

Housing permits & vacancy -- 2-27-13

More evidence that businesses expect to grow, increase hiring

Signs are upbeat that the Ninth District economy will continue to grow, according to a recent poll of more than 300 business contacts from across the district (see methodology below).

For starters, 40 percent plan to increase employment at their firms, and nearly three-quarters of these firms cited expected high sales growth as the most important factor. Only 7 percent plan to decrease employment. In the same survey a year ago, 38 percent planned to increase employment and 10 percent planned to cut jobs.

Other important factors cited for new hiring were overworked staff, improved financial condition of firms and the need for additional skills. The majority of respondents plan to use word of mouth and advertising to get new employees. Twenty-eight percent plan to use a recruiting firm, and surprisingly few (9 percent) plan to raise starting pay.

For those respondents not planning to hire additional people this year, most expected low growth sales and a desire to keep operating costs low. Many reported difficulty finding skilled candidates. Though fiscal policy developments were not a factor for most respondents, 35 percent said they had a detrimental effect on hiring and 4 percent said they would increase hiring plans.

The survey also asked about wages and benefits; 36 percent expected wage growth of 2.5 percent or more, and a similar amount expected positive wage growth of less than 2.5 percent (see Chart 1). Respondents generally believed benefit increases would be larger than those for wages (see Chart 2).

  Ad hoc survey Ch 1-2 -- 2-5-13

Methodology: On Jan. 15, the Minneapolis Fed invited, via email, about 1,000 Beige Book contacts from across the Ninth District to answer the special question in a web-based survey. By Jan. 31, 303 contacts had filled out the survey. The respondents come from a variety of industries (see table below).

Ad hoc survey METHOD TABLE -- 2-5-13

A long road back for wood products firms

There’s good news for the Ninth District’s wood products industry: After years of retrenchment caused by the housing collapse and subsequent recession, the bleeding appears to have stopped.

Sawmills and manufacturers have reported increased output and revenues this year as the U.S. economy slowly improves, increasing demand for construction lumber and other wood products. After bottoming out in 2010, industry employment in Minnesota, Wisconsin, South Dakota and Montana rose slightly last year, according to government labor figures (see chart).

Wood products Ch 1 10-18-12

The bad news is that the industry has a way to go to recover thousands of jobs lost over the past decade. Montana saw the steepest drop in wood manufacturing jobs; employment fell by more than half between 2001 and 2010. The state’s sawmills were already in decline before the housing crisis, due to rising operating costs and log prices.

Employment in Minnesota and Wisconsin followed a similar downward path after the housing crash as demand sagged for oriented strand board, paperboard and office paper. Wood products workers in South Dakota fared better; during the housing downturn, many firms shifted their focus to the home remodeling market, shoring up sales and preserving jobs. But wood products manufacturers in the state still shed about 250 jobs over the past decade.

It’s questionable whether wood products employment will ever return to the levels seen at the height of the housing boom. In recent years, rising productivity has reduced the number of workers needed to run sawmills, paper mills, particle board plants and other forest products operations. Neiman Enterprises, a large sawmill operation in the Black Hills of South Dakota, has ramped up its lumber production since 2010. But over the same period, investments in automation have allowed the firm to reduce its headcount, said resource manager Dan Buehler.

And in western Montana and the Black Hills, a persistent infestation of mountain pine bark beetles has killed millions of pine trees, threatening to restrict future log supplies. (For much more on the impact of the pine beetle outbreak on the wood products industry, watch the fedgazette website for the upcoming article, “The beetle and the damage done.”)

Research Assistant Dulguun Batbold contributed to this Roundup post.

Beige Book, Minneapolis: Ninth District economy slowly improving

The Ninth District economy expanded modestly during late summer and early fall, according the most recent Beige Book released this week by the Federal Reserve Bank of Minneapolis.

Each of the 12 Federal Reserve district banks drafts a similar report, which in sum are a summary of regional economic conditions across the country, in preparation for the Oct. 23-24 Federal Open Market Committee meeting, where interest rates and other monetary policy issues are decided.

In the Ninth District, improved activity was seen in construction and real estate, consumer spending, tourism and professional services. Energy and mining continued to perform at high levels, while agriculture varied widely, with crop farmers generally in better condition than animal producers. On the softer side, manufacturing activity slowed in late summer, and wage increases remained subdued, although stronger increases were reported in some areas. But labor markets tightened somewhat, and price increases were generally modest.

For those interested in other regional, national or historical Beige Book reports on economic conditions, the Minneapolis Fed offers everything in one spot.

Makin’ power while the wind (subsidy) is still blowin’

Like a nice, steady breeze, the nation’s wind power capacity has been expanding, with Ninth District states making a major contribution. But whether that arc of increase continues could well depend on what Congress decides regarding an expiring tax credit.

After five years of strong growth, the United States now trails only China in installed capacity (47 to 62 gigawatts, respectively) and has 1.5 times the wind-generating capacity of Germany and seven times that of France, according to a comprehensive August report by the U.S. Department of Energy. Wind still makes up a small portion of domestic power generation, at 3.3 percent, but that’s a fourfold increase just since 2006.

Texas is the leader in wind development, and by a wide margin (see Chart 1). But Minnesota and North Dakota are in the top 10 in wind capacity. Minnesota installed as much new wind capacity last year—542 megawatts (MW)—as many states have in sum. South Dakota also made its mark. It has almost 800 MW of wind capacity, virtually all of it installed since 2007, and representing almost all of the state’s increase in power generation over this period. Wind’s share of electricity capacity in the state leapt from less than 2 percent in 2007 to 22 percent, the highest rate in the country (see Table 1).

Wind power Ch1& Table1

But the industry is nervously awaiting congressional action on a federal wind energy production tax credit of 2.2 cents per kilowatt hour—currently equal to more than $1 billion annually and set to expire at the end of the year. The credit was created two decades ago and has been extended numerous times or reborn after being allowed to expire. Its renewal is questionable this time around given sentiment in Congress about budget deficits.

The credit's expiration could affect not only future wind power generation in district states, but also district employment at a fair number of manufacturing facilities that supply the various components and services for wind farm development (see map).

Already there have been rumblings, according to local news reports. Otter Tail Corp., of Fergus Falls, Minn., has announced plans to sell DMI Industries, a maker of wind towers in West Fargo, N.D., with the eventual fate of 216 employees unknown. St. Paul-based WindLogics, a wind forecasting company, recently cut 10 employees because development work has stopped.

Officials with Mortenson Construction, one of the largest wind farm builders in the country and located in Golden Valley, Minn., said several hundred jobs could be eliminated if the tax credit expires. In Aberdeen, S.D., officials at the Molded Fiber Glass plant have reportedly put on hold a plan to add 100 to 200 jobs in light of the tax credit limbo.

 Wind map -- 8-15-12jpgSource: U.S. Department of Energy

Plenty of vacancy when it comes to rental data

While there seems to be more local news today about tight rental markets and new apartment developments, you’ll read or hear very little about rental markets on a national, statewide or even regional scale, and you’ll see even less hard data connected to those reports.

That’s because macro data on rental markets are sparse and decentralized. Most data are very local, and there is little aggregation of market activity like demand, rent levels and other matters the public takes for granted in the single-family housing market. In terms of centralized sources for data across states and cities, they start and end with multifamily permits from the U.S. Census Bureau. These data show that multifamily housing construction dried up after the recession and has only recently started to rebound (see cover article in the July fedgazette).

Other surveys by the Census offer some broad-based data on local markets, but come with considerable caveats. For example, the American Community Survey (ACS) and Current Population Survey (both conducted by the Census) measure vacancy rates in the Twin Cities. Unfortunately, annual data for each run only through 2010—a turning point in many rental markets. CPS offers quarterly vacancy rates for the Twin Cities, but these figures can have seasonal volatility. In any case, results from these two public surveys do not conform particularly well with vacancy surveys conducted by private firms in the Twin Cities (Marquette Advisors, CBRE; see chart).

Rental housing -- poor data 7-29-12

Other “large” cities in the Ninth District are not large enough to attract much attention from private market research firms. The ACS offers data for smaller metropolitan statistical areas, including those in the district, but they tend to suffer the same caveats about timeliness and congruence with local sources.

As a result, understanding local markets is a hunt-and-peck effort. Local data sources are notoriously spotty, in both their volume and reliability, even for fundamental measures like rent levels and vacancies. Industry sources widely acknowledged the lack of good information on rental markets.

“We struggle with a lack of data,” particularly in outstate markets, said Mary Rippe, head of the Minnesota Multi Housing Association. She said rentals were harder to track because historically there’s been no Multiple Listing Service (MLS) that is standard with home sales (more on this in a bit). Turnover is also much higher for rentals and thus harder to track. Even the definition of vacancy introduces some complexity, as a corporate office might have a different definition of vacancy than a building manager for the same unit (if it’s empty but being repaired or updated, for example).

Some rental associations gather data; some do not. In their defense, local associations need to be wary of market surveys so as not to encourage collusion or rent setting, industry sources pointed out. For those associations that gather local data, some make that information available, but many do not. In more than a half-dozen cities with a rental association, information requests to rental associations via both phone and email were either refused or ignored.

The information gap is partially filled in some cities that publish annual reports on city housing, which typically include a section on rental housing. But most local governments “do not track rents charged by owners, and many communities do not even have a rental registration or license program. So they don’t even know who is operating rental housing in the community,” said Sue Speakman-Gomez, president of HousingLink, a Twin Cities clearinghouse of affordable rental housing information. The organization is trying to fill that void, she said, but acknowledged that “we still have a lot of work to do.”

Private data firms are starting to get their rental toes wet. Companies like Zillow have increased their abilities to identify and market local rental properties; the downside is that aggregate data are thin—there are no historical benchmarks for comparison—and privately held. MLS also has started to include rental housing, but Realtor.com—home of the National Association of Realtors—currently lists fewer than 350,000 units nationwide; this for a nation with about 40 million renter-occupied households, according to the Census.

Even among subjects with a strong policy bent, like affordable housing, surprisingly little centralized data are available that might allow for the analysis of broader patterns. For example, the U.S. Department of Housing and Urban Development confirmed that it does not aggregate waiting lists for various housing assistance programs, nor does any state, despite the fact that local housing authorities are required to gather this information. A check of local housing agencies shows that wait lists for public housing and Section 8 assistance vouchers have skyrocketed. (For more, see the July fedgazette article on low-income rental markets.)