Expect homebuilding in Florida to continue its rapid pace so long as regulators, Mother Nature, lawyers, and worker shortages don’t make building conditions—and affordability challenges—worse than they already are, an expert panel in the Sunshine State believes.
The five experts that came together in Orlando Sept. 19 at the Florida Building Material Association’s annual expo alternated their comments between bright forecasts and daunting challenges. (The entire 90-minute session is viewable here.)
“If there’s one state I’d like to be in, it’s Florida,” said Jim Adamczyk, Chief Strategy Officer at FAIRWINDS Credit Union, a $5 billion institution. “Affordability is probably the biggest challenge we face today across all of our segments, whether it’s residential or commercial. I’m still optimistic about where we’re going to be, but there’s a lot of work ahead.”
Panel moderator Don Magruder, CEO of RoMac Building Supply, noted that none of the panelists cited building materials as a worry. Panelists said supplies are much easier to get since the COVID scare ended, and any price increases today are just routine.
Instead, when asked about affordability challenges, they were quick to blame local governments’ rising impact fees.
Regulatory Costs
“If you look at some of the counties here in the state of Florida. I would guarantee that a third of the price of your new home is government-regulated fees,” said Wes Robbins, President of the Greater Orlando Builders Association. “That is just absurd.” He particularly targeted Osceola County, just south of Orlando, for having increased its mobility impact fee for single-family homes by 117%, to $21,710 per home from $9.999. This one-time fee is used to recover the costs of infrastructure and public services related to growth.
That decision by county officials shows clearly the officials believe “we do not want you to build more houses,” inferred Chris Coghlan, CEO of Fastening Specialists, a supply house.
“We still have over 1,000 people moving into this state every day,” Robbins said. “The NIMBYism that is occurring, I can understand to an extent—we do have traffic here. But just telling us that we’ve got to charge more for housing to keep people out is not the answer.”
Robbins also warned of coming problems finding lots in Florida that can clear Section 404 of the federal Clean Water Act. To get a permit under Section 404, the developer must submit a proposal detailing the project’s scope, potential environmental impact, and proposed measures to protect the area’s wetlands.
“A lot of the home builders that are in a good land position will probably continue to build, but a lot of home builders are going to start having issues with getting their plats developed so that we can put in the infrastructure to start building houses,” he said. “I think you're going to see a huge delay, which is only going to constrain the supply and demand.”
Insurance Premiums
As for insurance, Mike Diament, Senior Vice President at Marsh & McLennan, said premiums are rising because insurers expect they’ll have to pay out more in claims—so much more that some underwriters are pulling out of the state, reducing competition and pushing rates even higher.
“Just over the last five years, we've seen a massive shrink in capacity in certain lines of coverage,” he said. “And that's resulted in a lot of challenges for business owners, because the ones that are still writing it, they're increasing pricing because they really don’t want that risk anyway.”
Insurers protect themselves from losses in part by buying policies from reinsurance firms, Diament said. Marsh & McLellan has its own reinsurance brokers, Diament said, “and over the past six months, they've told u we're set up for storms. And so, if we don't have activity, I think the pricing on on real estate is going to come down a little bit.”
One week after Diament spoke, Hurricane Helene hit Florida.
Labor Challenges
Chris Lee, President and Owner of Orlando’s 1st Choice Door & Millwork, was among several panelists who described their woes finding workers.
“Five years ago, people were willing to get up in the morning and go do an honest hard day's work and be compensated for that, and felt really good about it,” he said. “And I feel like in this country there's a stigma that's been created. People don't want to get sweaty, they don't want to work hard, and they don't want to get dirty.
“I would say the salesperson that's motivated by commission or perhaps someone working in the office, those people are more available than they've been in quite a long time,” Lee continued. “But the people that need to case those doors and load those doors and deliver those doors is a constant battle. ... We go to a staffing company because it's just it's so cumbersome to interview people. … We had a person start last week that at lunch, on their first day, clocked out and said, ‘This just isn't for us.’”
Affordability Problems
Adamczyk said his credit union gets applications for mortgage loans every day in which people with good credit and a good job are denied because they can’t afford the mortgage.
“In 2019, you needed to make about $65,000 to $70,000 median income to afford the median home price,” he said. “Well, today you need to make about $120,000 in household income to afford that. If you just think about how fast that's moved in that short period of time, it's had a significant impact.”
For the first time, FAIRWINDS also has seen the run-up in insurance costs becoming an impediment to home buying. “Now it's part of our conversation. In the beginning of the loan application, whether it's for a commercial project or it's for a residential project, [we ask] ‘what's your insurance budget?’” Adamczyk said., “And we've seen deals that have been turned from cashflow positive to cashflow negative, simply because the estimate for insurance was about six times less than what it actually was.”
Construction Defects Litigation
For builders, that insurance issue includes higher premiums to fight legal claims of construction defects. Robbins’ day job is being VP and partner at W Robbins & Co., which provides installation and painting services in central Florida, so he is familiar with the problem.
“I literally got served yesterday with a four-inch stack of construction defect claims from something that we painted 10 years ago,” Robbins said. “It has become absurd. ... Lawyers used to chase ambulances because there was money in injuries and all that. And now they've found their new path through construction defects.”
“A lot of carriers don't want to write it,” Diament said. “ They know that that these construction defect claims are coming again. They have a duty to defend. They have to spend money and attorney fees, which again, jacks up the rates. It's been priced in. It's very, very challenging."
Nevertheless, Optimism
Despite those issues, the panelists predicted people will continue to pour into Florida, so the homebuilding industry will continue to grow.
“As these interest rates come, come down, there's a ton of pent-up demand,” Lee said. “Everyone I talked to wants to to move.”
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Here is a link to the entire presentation:
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