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Nonresidential building recession will persist through most of 2010

0 258 Market Intelligence

Most market drivers for nonresidential building construction are negative, especially for developer financed commercial projects. Many developer projects are being delayed, or cancelled and some previously started projects are being suspended, notes Reed Construction Data chief economist Jim Haughey.

Most market drivers for nonresidential building construction are negative, especially for developer financed commercial projects. Many developer projects are being delayed, or cancelled and some previously started projects are being suspended. Some of the cutbacks are initiated by developers who now expect well below normal building operating income and asset values in 2010-11 than when they began planning for the project. Other cutbacks are being forced by the inability to obtain financing. Lenders are being pressured by bank examiners to reduce their exposure to commercial real estate. Most of the decline in rental and occupancy rates has now occurred but continued declines are forecast into late 2010.

A modest cutback in institutional construction spending began only a few months ago. This sector is always very late in a business cycle. Most institutional projects are started only when building funds are on hand or expected usage fees (tuition, hospital charges) are sufficient. A weakening economy does not alter the availability of construction funds or the reason to improve or add space. However, those institutional projects planned to be financed by current tax receipts or investment fund earnings did experience a sharp cutback in starts and a small cutback in jobsite spending in late 2008 and early 2009 when both tax receipts and investment fund balances were plunging.

Investment fund balances began recovering last May and state and local government tax receipts are tentatively recovering at the end of 2009. However, the depressed state of both investment and general fund balances throughout 2010 will cause further small declines in this type of project over the next yeaal building stimulus funds will substantially offset weakness in investment and general funds in 2010-11. Almost all of the building stimulus funds appropriated 15 months ago have yet to be spent. The bureaucratic process to allocate funds and ready project to start is very slow. Congress will likely appropriate more building stimulus funds early next year which will be spent in 2011 and beyond.

Institutional construction activity is now declining slowly with most of small expected decline still ahead. The usual cyclical pattern is distorted by the stimulus plan. So far it has propped up state budget balances and maintained some construction activity that otherwise would have been halted. Recall that California had to halt many projects before the federal stimulus money arrived. Ahead the stimulus plan will fund as much as $100 Billion in institutional building beginning soon and stretching beyond 2012.

Key Indicators of the U.S. Market Environment — Dec 2009
Commercial and Industrial Construction (Driven mainly by cyclical factors)

  Year
Ago
Previous
Month
or Qtr.
Latest Level Recent
Trend
Impact
on Const.
Commercial
Dow Jones composite REIT, index (Dow Jones) 111 130 Dec 4 09 144 Low Rising
10-Year T-bill rate, % level (FRB) 2.56 3.53 Dec 4 09 3.34 Low Falling
Office rent, 54 metro areas, % change y/y (PPR) 1.9 -7.1 Q3 -8.8 Low Falling
Office vacancy rate, 54 metro areas, % level (PPR) 16 18.6 Q3 19.4 High Rising
Office employment, % change y/y (P&PR) -0.5 -5.0 Q3 -4.6 Low Falling
Office construction starts ($s), 3-mon. ave
y/y % change (RCD)
-21.0 -37.0 Nov -22.0 Low Falling

Hotel room rate, 54 metro areas,
% change y/y (PPR)
-2.7 -12.7 Q3 -13.1 High Falling
Hotel occupancy rate, 54 metro areas,
% level (PPR)
66 60.0 Q3 59 Average Falling
Airline revenue passenger miles,
% change y/y (RCD)
-10.6 0.6 Nov 2.1 Low Rising
Real price of gasoline , $s/gal.
(U.S. Energy Dept.)
218.8 256.5 Nov 265.8 High Steady
Hotel construction starts ($s),
3-mon. ave. y/y (RCD)
-24.0 -56.0 Sep -26.0 Low Falling

Retail rent, 54 metro areas, % change y/y (PPR) -1.6 -7.6 Q3 -8.2 Low Falling
Retail vacancy rate, 54 metro areas, % level (PPR) 10.4 17.5 Q3 18.6 Low Rising
Retail sales, % change y/y (U.S. Census Bureau) -5.4 -6.3 Oct -1.7 Low Falling
Consumer confidence index (The Conference Board) 44.7 48.7 Nov 49.5 Low Steady
Consumer real income growth, % change y/y
(U.S. Commerce Dept.)
-10.2 -1.5 Oct -1.6 Low Falling
Retail construction starts ($s), 3-mon. ave.
y/y (RCD)
-12.0 -47.0 Nov -38.0 Low Falling
Industrial
Warehouse rent, 54 metro areas,
% change y/y (PPR)
-1.1 -7.8 Q3 -8.9 Low Falling
Warehouse vacancy rate, 54 metro areas,
% level (PPR)
9.8 12.2 Q3 13.0 High Rising
Business inventory, % change y/y
(U.S. Census Bureau)
5.7 -13.5 Oct -12.6 Low Falling
Business sales, % change y/y
(U.S. Census Bureau)
2.7 -12.6 Oct -8.2 Low Falling
Warehouse construction starts ($s),
3-mon. ave. y/y (RCD)
-40.0 -30.0 Nov 1.0 Low Falling
Capacity utilization rate, % level (FRB) 72.4 67 Oct 66.7 Low Steady
Manufacturing production index (FRB) 107.6 99.2 Oct 99.1 Low Rising
Goods Exports $ billions (U.S. Commerce Dept.) 117.2 84.1 July 86.7 Low Rising

Abbreviations: y/y = year over year; WE = week ending; FRB = Federal Reserve Board;
PPR = Property & Portfolio Research; RCD = Reed Construction Data.
Table: Reed Construction Data and Reed Construction Data - CanaData.

Key Indicators of the U.S. Market Environment — Dec 2009
Institutional Construction
(Driven by demographics and government finances, as well as cyclical factors)

  Year
Ago
Previous
Month
or Qtr.
Latest Level Recent
Trend
Impact
on Const.
Institutional
State & local govt. capital spending, $ billions
(U.S. Commerce Dept.)
353 361 Q3 363 Average Steady
State & local government tax receipts, $ billions
(U.S. Commerce Dept.)
1351 1238 Q3 1262 Low Falling
State budget reserves, % of Exp.
(National Governors assn.)
10.5 n/a FY 09 5.4 Low Falling
Stock market index (Dow Jones Industrial) 8,630 10,270 Dec 7 09 10,337 Low Rising

Abbreviations: y/y = year over year; WE = week ending;
FRB = Federal Reserve Board; RCD = Reed Construction Data.
Table: Reed Construction Data and Reed Construction Data - CanaData.

by Jim Haughey

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