Where is economic turmoil most likely to strike non-residential building markets? The three major non-residential building categories are commercial, industrial and institutional work. The front-line target is most likely to be commercial construction.

Industrial construction, other than in resources, has been flat for many years. Outsourcing of production work to emerging nations will continue and currency fluctuations complicate investment decisions. As for the institutional category, enterprises in this sector get most of their money from the federal and provincial governments. User fees for necessary services are also a factor. These sources of revenue will stay adequate to strong.

However, the money that comes from charitable donations and foundation earnings (e.g., through stock market investments) is more problematic. But this is generally only a small portion of total institutional revenue in Canada, unlike in the United States, where there are huge endowment funds.

When you consider the strength of an economy, the first things you look at are jobs and consumer spending. At this time, retail spending is particularly vulnerable as a result of reduced employment prospects and the upcoming weakness in housing markets.

As for the amount of money that consumers have to spend, incomes are in jeopardy as a result of job uncertainty. But credit plays a major role as well. Credit is much less freely available now, partly due to house price declines, which impact on home equity loans, but also due to de-leveraging by financial institutions, thanks to the credit crisis.

U.S. Reed Construction Data Chief Economist, Jim Haughey, writing in the latest edition of Executive Insights, lists the following four major changes with respect to credit markets, for firms and individuals: (1) cancelled, not-renewed and reduced credit lines; (2) requests for loan repayments when collateral has depreciated; (3) no credit for poor risk; and (4) high “real” (i.e., inflation-adjusted) interest rates for borrowers generally.

In commercial markets, visible signs of recession will quickly become apparent. First will be boarded up and papered over storefronts in malls. Some big box retailers may also go out of business. That sector of retail (home outfitters, home reno stores, etc.) is closely tied to residential markets. New home construction in Canada is beginning to falter.

In office buildings, there will be more vacant space. Office-based employment is already on the decline. Much of this is a spillover from the financial sector meltdown. The number of tenants will be reduced as a result of upcoming bankruptcies and mergers. That is what always happens in an economic downturn.

These factors at both the retail and office tenancy levels have implications for developers. Some developers that borrowed money in order to purchase malls or office buildings are already having to scramble to make loan payments and/or keep their financing in place.

Let me conclude on a more positive note. It has become clear that where there will be strong growth in construction is in the area of infrastructure work. This is the kind of spending that is being ramped up by governments around the world. What is needed to succeed in this sector?

Those companies − design firms and contractors − that are likely to achieve rapid success in winning infrastructure work include those that have, in no particular order: (1) a proven performance or track record; (2) engineering and project management skills and expertise; (3) global experience; (4) the right contacts; and, let’s not forget, (5) low debt.

Alex Carrick