Charlie Colgan Discusses the State of Real Estate and Economic Trends
Wednesday, December 31, 2014 7:32 AM
"We've been through the worst recession since the Great Depression and in some ways even worse," said University of Southern Maine economist Charles Colgan at a meeting of real estate professionals in Camden on December 18. "We took a plunge and instead of coming back up to the surface, we've been very slowly swimming back up to the surface."
According to Colgan, the housing and commercial real estate market in Maine has grown by six percent over the past year, which is the biggest advance in the index he's seen since he began measuring it in 2006. Overall, Colgan said that the real estate market has shown a slow, steady recovery of about 16 percent since a low point in 2010. The recovery is closely linked to overall improvement in the national economy, but he noted that the real estate market is still 20 percent below pre-recession levels, which, he says, were unsustainable given Maine's levels of income and population growth.
Colgan said that the economy remains weak and there are still 10,000 fewer jobs than at pre-recession peaks, which has decreased the need to build more commercial space. And with Maine's demographic and economic trends, he said it is uncertain whether the state will return to pre-recession levels of commercial activity anytime soon.
Demographic & Economic Predictions
Colgan said that what makes the midcoast stand out from other parts of the state is the stability of its population. Between 2000 and 2010, Knox and Lincoln counties saw virtually zero population growth, while Waldo County had a slight increase of a few thousand people during the same period. As Colgan has repeatedly warned, if Maine fails to attract at least 3,000 new residents per year in the next 20 years the state will lose about 20,000 jobs.
Colgan predicts that the region will begin losing 400 residents per year by 2020 due to weaknesses in the recovery and natural population decreases, but that will be offset by 500 new arrivals per year moving into the region to take jobs left by retiring workers. He said Maine businesses have enjoyed what he calls the "Maine quality of life discount," which has allowed them to pay much lower wages than the rest of the country because historically there have been more people than jobs in Maine and people are willing to earn less for the opportunity to live here.
"But if you look at industries from logging to hospitals, they are desperate for workers," said Colgan. "In both cases they are actively recruiting from outside of Maine and they will not be able to find the labor force at the price that they've been willing to pay."
Colgan said that if demographic trends continue, businesses are either going to have to pay workers more competitive wages, pack up and move, or automate.
"I've said before that we might lead the robotic revolution here simply because of our labor force," said Colgan.
Long term, Colgan predicts that Maine's population will only grow by about 16,000 people by 2030. He said one of the biggest challenges for those in the real estate sector is to adapt to changing preferences among the millennial generation and retirees.
"The period of the baby boom generation forming families and buying houses is long over," said Colgan. "The millennials are now the driving force for new family housing."
He cited recent data which suggests that millennials are far less likely to buy houses or cars than their parents' generation. While their parents may have built a 4,000-square-foot house with a three-car garage in the country and a big yard for the kids, the younger generation prefers to live in more densely populated areas with walkable streets. Colgan noted that this preference for cities is also a trend with aging retirees, but for different reasons."They don't want to be out in the suburbs and they definitely don't want to be out in the exurbs where they have to drive everywhere to do everything every day, particularly in the winter," said Colgan.
He pointed out that in the 2010 Census both Portland and Bangor saw significant population increases for the first time since World War II, which is likely due to retirees and millennials moving in. He said that more densely populated midcoast towns like Belfast, Camden and Rockland are best positioned to take advantage of these trends.
Wall Street Booms, Seasonal Housing Booms
Colgan predicts that Maine's residential construction sector will grow in 2015 and beyond, gradually returning to the long-term average of 3,500 to 4,000 new housing units built in Maine each year. Currently Maine is averaging about 3,000 permits per year, compared to 9,000 at the height of the housing bubble in 2006 and 2,100 at the bottom of the recession in 2010.
"My own sense is that most of the new construction is for seasonal or high-amenity properties, not to accommodate new population," said Colgan.
Colgan forecasts a 4.2- to 4.5-percent annual growth rate in seasonal units across Waldo, Knox and Lincoln counties out until 2040, but he added that this growth has very little to do with how well Maine's local economy is doing.
"Historically, when Wall Street booms, coastal Maine goes, 'OK!'" said Colgan.
He said that the fastest growth of seasonal homes in each county will likely be in Camden, Stockton Springs and Waldoboro. He said those numbers are based on the demand for seasonal homes and doesn't necessarily mean there is enough real estate available to provide them.
Colgan was quick to point out that due to weak employment growth and an overall decline in retail employment nationwide there will likely not be very fast growth in the commercial real estate market. Colgan said that national retail employment is estimated to decrease by 8 to 10 percent primarily due to online sales, but also demographic shifts.
"I don't want to say Amazon is swallowing the planet, but you can draw your own conclusions," said Colgan. "The big-box expansion is over and it's not coming back."
He added that it will be a major challenge for developers to figure out how to reuse and repurpose the increasing number of vacant big-box stores and strip malls that were built over the past 30 years.
Addressing anecdotal reports from local realtors about a recent spate of foreclosures, Colgan said the number of foreclosures has passed the peak they reached in the recession. But he added that bankruptcies and foreclosures are still high. He said many people still have underwater mortgages or are reaching the end of their stay-afloat strategy due to stagnant incomes or long-term unemployment.
While the midcoast has a number of economic challenges including demographic trends and the recent mill closure in Bucksport, it is still not divorced from the national economy. Colgan noted that consumer confidence in 2014 has improved, but investment has been hindered by political dysfunction such as last year's federal government shutdown and threats by Republican members of Congress to default on the debt.
"In the next couple of years if we can just retreat to the normal level of partisan bitterness that people have gotten accustomed to without actually threatening the destruction of the economy, that may work itself out," he said.