Does the residential slowdown in San Jose sign a recession?

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by Sonya Herrera December 1, 2020

San Jose has issued far fewer housing permits this year – and that could signal a severe economic downturn.

“It looks like a slowdown is imminent,” said Will Smith, IBEW 332 sales representative. “We may be in a recession.”

Smith’s observation is supported by the latest figures released by the Housing Catalyst team in San Jose, part of the city’s economic development department. According to the city, San Jose has issued 994 building permits for new housing units so far this year, less than half of last year.

“If the fourth quarter were to be similar to the previous quarters … a total of around 1,300 new building permits would be issued for 2020”, according to the latest update of the city’s labor crisis work plan. “This is a significant decrease compared to previous years.”

According to information from previous years, the number of residential building permits has been falling since 2017, when 3,097 permits were issued. The city issued building permits for 2,973 units in 2018 and 2,382 permits in 2019.

The average number of residential building permits issued since 1980 is currently 3,005. So far, 2009 and 2011 were the only years in which the number of permits fell below 1,500. Between those years, the average number of residential building permits a year was 1,272.

Building permits for residential buildings will be issued in later stages of development. Buildings go through a review process before being granted permissions or planning approvals. A developer then submits construction plans. A building contractor must obtain planning permission before construction begins.

Matthew Reed, policy manager at SV @ Home, a nonprofit residential real estate attorney, said the permit numbers may not reflect the full picture of the residential development for San Jose.

“We’re in an unprecedented moment,” said Reed. “It’s really hard to know what the next month looks like, let alone 12 or 18 months.”

Reed said he and his colleagues are optimistic that the demand for housing in San Jose will remain high.

“Going forward, San Jose is a place that moves and people will be looking for places to live,” Reed said. “I haven’t heard anyone say, ‘This is a crisis, we’re not going to get out.'”

David Bini, executive director of the Building & Construction Trades Council for Santa Clara and San Benito counties, said demand for construction workers is cyclical and usually reflects the overall economy. Bini said the over 20 unions represented on the council had not reported any major project cancellations.

“There is a lot of work planned to continue, especially work on many different capital improvement programs in cities,” said Bini. Construction workers in the Bay Area are fortunate enough to live in an area with such high demand for housing.

“We are under pressure for more housing, so I think people will find a way to build more housing,” said Bini.

Rich Truempler, senior vice president at CORE Companies, said the main obstacle to housing construction this year has been the fact that rents have come down while construction costs remain high. For example, his company’s only upcoming project in San Jose will be a 569-unit, mixed-affordability building. Construction on the project is scheduled to start in 2022.

“We have not achieved any cost savings,” said Truempler. “That makes it very difficult to finance projects at the moment.”

In the meantime, the number of permits issued in 2020 for affordable housing has almost tripled since last year. 369 permits were issued between January and September.

“In the last recession, there was a hiatus in housing and then jobs came back and put acute pressure on Silicon Valley and housing,” said Truempler, adding that flexible land-use policies and lowering construction costs will help the city might be able to recover from the current building collapse.

According to Smith, IBEW 332, which represents approximately 3,700 local electricians, regularly monitors upcoming projects to assess the likely workload and determine how many new apprentices to hire for the following year.

He said that all major projects of the union end next year and there are no major projects that start after those projects are completed.

“We’re seeing some projects in the pipeline, but they’re smaller projects,” said Smith, adding that while the pace of jobs available for electricians has been speculative, it has declined sharply and is a clear trend.

“If nothing changes,” said Smith, “it looks like 2021 will be the start of the downturn.”

Contact Sonya Herrera at [email protected] or follow @SMHsoftware on Twitter.

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