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April 16, 2018 Focus: Real Estate/Construction/Design

Residential construction is up, but will rising prices put a damper on demand?

Photo / Tim Greenway Dino Spugnardi of Cottage Home Construction near two of the homes he built at the Village Run development in Yarmouth.
Photo / Jason Paige Smith Joe Brasslett, owner of Brasslett Construction.

Dino Spugnardi, owner of Cottage Home Construction, can be found lately at a Yarmouth single-family subdivision called Village Run, building his fourth house there.

It's one of the several homes his company builds per year, with a dozen completed over the past four years, from Kennebunkport to Yarmouth. Demand for new residential construction is hot, he says. And Yarmouth is attracting attention as “a neat little town,” as he says, with buyers seeking a strong community feel, good school district and close proximity to Portland.

Village Run, a project led by Developers Collaborative in Portland, is made up of 26 lots. Spugnardi, one of a handful of contractors at the site, has seen lots “flying off the shelf,” he says.

Building classic-looking New England homes, Spugnardi built Village Run's first house, as a model home, in 2016-17. As the lots began selling, he and other contractors have steadily continued building homes there. Now only a couple of lots are left.

“I've been involved with many developments myself and I can't remember a time when lots sold that quickly and houses get committed to that fast,” he says.

The anecdote speaks to a surge around Maine in residential construction. Inventory of existing homes remains tight.

Realtors statewide had an uncharacteristically strong winter for sales, with 17% fewer listed homes in January versus a year earlier, according to the Maine Association of Realtors. The median sales price in January was $200,000, a 5.26% increase from January 2017.

Higher costs driving up prices

Tight existing-home inventory and growing demand is pushing new construction, from individual single-family homes to subdivisions, condominiums and conversions. That's one theme that emerges in talks with contractors and municipalities around the state.

Another is that demand is expected to continue to grow, largely from millennials, retirees and people moving to Maine. But like existing-inventory prices, construction and conversion pricing is also rising, driven by higher costs for materials and labor.

“From what I hear, inventories continue to be tight,” says Matt Wogan of Waypoint Partners LLC in Freeport, a longtime developer proposing to develop two downtown Yarmouth buildings into townhouse condominiums. “There are a lot more people now engaging in the build process and buying land than there were in the past 10 years. If you look for property and see limited inventory, you'll do one of two things — buy something you don't like and remodel it, or pick a nice piece of land and build what you want. I think there's enough demand right now to support the construction of new homes, although I say that cautiously because that could turn any day.”

Priced out of Portland

Yarmouth's other projects in various stages include a proposal from Greg and Steven Dugas to build a single-family subdivision with 11 lots, plus open space, and 12 lots in Phase 2 of a subdivision called McKearney Village.

Wogan says his townhouse concept stems from Portland demand for in-town living, but in a smaller town. Pending approval, he's already got potential buyers, both locals and out-of-staters.

Demand in Yarmouth, says Economic Development Director Scott LaFlamme, increases in sync with Portland's surging residential costs. Demand is expected to continue with the Yarmouth council's expected approval of character-based zoning rules allowing leniency with things like setbacks.

“When that's approved, I think there will be a tidal wave of infill projects that will be mostly residential. Yarmouth is a huge draw for folks who want to be in a live-work-play environment and have everything walkable,” LaFlamme says.

Elsewhere, Bath is seeing increased demand for housing. Planning and Development Director Andrew Deci attributes that primarily to buyers like young professionals and young families “moving up from Portland who have been priced out of that region and are looking for a small urban community,” he says. “We've got retirees, coming from hotter real estate markets who have cash and want to live in a character-rich, small Maine community.”

Further north, Bangor Economic Development Officer Tyler Collins says there's steady demand, but potential buyers are mainly eyeing old stock for conversion into condos and rentals.

“A lot of vacant foreclosed homes remain from the housing crisis and they're available at prices where developers can scoop them up, renovate them and make better profit margins than building new homes,” Collins says. “I think that will continue.”

In York, permits for stand-alone single-family construction have averaged 70 a year in the past five years, compared with 42 in 2012. Since June 2014, the town has approved 10 housing subdivisions. Amber Harrison, York's code enforcement officer, sees a range of housing, from a modular kit house priced at under $200,000 to million-dollar custom homes. Some developers are converting existing buildings into condos. Potential buyers include vacationers and seasonal residents wanting to be in York year-round. And more existing residents are looking for in-town homes.

One York development is the 33-lot Turner Drive subdivision, developed by Atlantic Construction/DLJ Corp. in York. Part-owner Jeffrey Jellison says buyers range from young local professionals to families and retirees. Homes built on spec tend to sell by the time the sheetrock is up, he says.

Rising costs inescapable

As new-home availability increases, so do prices.

Building primarily for the middle-income market, with homes ranging from 2,000 to 2,500 square feet plus garage and yard, Turner Drive homes in 2017 averaged $445,000, up from $395,000 the previous year.

“Now we're in the low to mid-$500,000 range,” Jellison says. But buyers are willing to pay more. By the time the spec houses are completed, he adds, “they'll all be gone.”

Rising construction costs are driving higher home prices, contractors say.

Spugnardi says it's impossible to quote a job and not have the price of materials change if the job doesn't start in less than 30 days.

“And that never happens,” he says. “After a job is priced, it's at least 90 days before you start ordering material. Sometimes six months if a client is using a construction loan.”

One example might be the cost of red cedar shingles from Canada, used for roofing, which were $225 per square (100 square feet) in the early 2000s, $325 two years ago and $400 today. The added costs mentioned do not take into account rising interest rates or even the cost of a mortgage, which have increased with additional regulation on the financial sector.

So far, increased costs haven't slowed demand, contractors say. But Jonathan Bates, of Stone Park Properties LLC in Ellsworth, predicts it could. Bates focuses on construction and conversion of townhouses for leasing as the best way to maximize profits in a city where many tenants are local young professionals and downsizers.

“When you have a single-level ranch, which five years ago developed for $200,000, homeownership made sense,” says Bates. “Now a single-level will be close to $350,000. Every year we see a steady increase in materials, labor, regulations, new codes, taxes, everything.”

He adds, “I think in two years new construction will come to a halt, unless you're developing leasing products in a non-oversupplied area.”

Either way, with demand remaining hot, another problem is not enough subcontractors, Spugnardi says. Many left the business during the recession.

“I'd love to see the state spend more money on vocational programs,” he says. “The housing industry needs young blood. Right now, I'm using people in their late 30s to 70s. We'll find ourselves in trouble in a few years if all these older gentlemen say, 'I can't do this anymore.'”

Contractors agree that development in a volatile economy is a balancing act.

“You have to be patient and choose the right development,” says Jellison. “If you have a formula for buying a chunk of land, ascertaining your costs and dividing that by a certain number of lots, you're okay as long as you don't go over that number.”

“We're all looking at the market and figuring out how can we make a return given the risk we're taking,” says Developers Collaborative owner Kevin Bunker. While low-income housing is helped by subsidies and the rich have ready cash, “the hard part is developing for the middle-income buyer.”

New-build niches

That thought process is resulting in niche development in some areas. In greater Bangor, Joe Brasslett, owner of Brasslett Construction LLC in Etna, finds the $300,000 single-family market, leveraged by word-of-mouth customers in service sectors like the local police department, is his “sweet spot,” as he says. He recently completed a ranch house in Dexter, with a dozen houses and a 40-unit apartment complex on tap. Still, he says new construction could be limited in the future as high-quality lots are taken, making what's left more expensive.

“$60,000 to $70,000 for a good-quality lot isn't outrageous when you travel the state south, but with a $300,000 budget, with $230,000 left, that throws the house out of [the buyer's] budget,” Brasslett says.

In Lewiston, the new Hartley Block construction will provide 63 rental units. But more generally, officials see conversion of existing buildings for rentals, plus a slight uptick in single-family development. City Planner David Hediger expects those trends to continue, with more people moving into Lewiston due to higher home costs in Portland.

Reflecting tight inventory, Ellsworth has permitted more rental-lease unit construction over the past 20 months than the previous eight years combined, says City Manager David Cole. The market is expected to grow, especially with The Jackson Laboratory's development of a mouse production facility, expected to employ 350.

“I don't think we've even baked the Jackson Lab development into the cake yet,” says Cole. “So we'll have future needs.”

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