Construction Forecasts

Nonresidential: Commercial Environment Continues Mixed

Commercial (built to lease) market drivers are balanced among positive, negative and neutral. Office, retail and hotel markets each have one or more positive drivers along with negative and neutral drivers largely due to lingering space surpluses. However, the negative drivers are steadily moving toward neutral. The commercial market remains on a path to a sustained recovery early in 2011. Several long lead indicators have been positive since last fall. The AIA index of design work underway is above 50 which indicates expansion at the pre-start project phase. Real Estate Investment Trusts are accumulating investment capital. So far most of this has been used to buy existing buildings at prices well above the recent cyclical low values but more capital has been accumulated to finance new projects.

There have been some spot rises in commercial starts since last spring but they have not been sustained. Commercial construction starts have stabilized well above the cyclical low point in June 2009. The starts trend was clearly upward from the beginning to the end of 2010. Starts have risen marginally early in 2011. Starts are refilling the pipeline and will lead to slow growth in spending at commercial jobsites beginning early in 2011.

The build vs. buy indicator still points at buy for real estate investors in most markets. Asset prices of existing building have risen significantly from the cyclical low level and continue to improve. This metric is progressively moving to the build side as the value of existing buildings rises and improving occupancy and rental rates boost net operating income prospects. However, this is a long process with the indicator tilting to build market by market. The process will take 2-3 years in the weakest markets but has already happened in a few markets.

The market drivers for institutional construction are rapidly deteriorating. Federal stimulus funding is ebbing quickly. Congress has begun to rescind unspent stimulus and earmarked funds. State and local spending is being deeply trimmed to meet balanced budget requirements. The initially planned 2011-12 federal budget will likely be cut substantially, including some expected construction funds. Higher education, hospitals, nursing homes and cultural facilities have access to non-taxpayer money and will fare better then K-12 education and public buildings.

Key Indicators of the U.S. Market Environment — March 2011 Commercial and Industrial Construction (Driven by cyclical factors)
	Year Ago	Previous Month or Qtr.	Latest		Level	Recent Trend	Impact on Const.
Commercial
Dow Jones composite REIT, index (Dow Jones)	159	186	W/E Mar 18 2011	181	Average	Rising
10-Year T-bill rate, % level (FRB)	3.68	3.60	W/E Mar 25 2011	3.35	Low	Steady
Office rent, 54 metro areas, % change y/y (PPR)	-8.5	-3.5	Q4	-1.5	Low	Falling
Office vacancy rate, 54 metro areas, % level (PPR)	18.6	18.9	Q4	18.6	High	Falling
Office employment, % change y/y (P&PR)	-5.1	-0.2	Q4	0.6	Low	Rising
Office construction starts (% change), 3-mon. ave. y/y % change (RCD)	-11	-2	Feb	-18	Low	Steady
Hotel room rate, 54 metro areas, ann. % change (PPR)	-10.7	1.9	Q4	2.2	Low	Rising
Hotel occupancy rate, 54 metro areas, % level (PPR)	57.9	60.8	Q4	61.8	Low	Rising
Airline revenue passenger miles, % change y/y (RCD)	1.0	5.6	Feb	-0.4	High	Rising
Real price of gasoline , $s/gal. (U.S. Energy Dept.) May'10 = 100	2.69	3.1	Feb	3.21	High	Rising
Hotel construction starts (% change), 3-mon. ave. y/y (RCD)	-37	-66	Feb	-11	Low	Falling
Retail rent, 54 metro areas, % change y/y (PPR)	-8.3	-4.4	Q4	-3.8	Low	Falling
Retail vacancy rate, 54 metro areas, % level (PPR)	19.2	18.1	Q4	18.4	High	Rising
Retail sales, % change y/y (U.S. Census Bureau)	4.1	8.1	Feb	8.9	High	Rising
Consumer confidence index (The Conference Board)	53.5	72	Mar	63.4	Low	Falling
Consumer real income, % change y/y (U.S. Commerce Dept.)	1.8	2.5	Feb	2.9	Average	Rising
Retail construction starts % change, 3-mon. ave. y/y (RCD)	-35	-7	Feb	-1	Low	Steady
Industrial
Warehouse rent, 54 metro areas, % change y/y (PPR)	-9.2	-6.3	Q4	-4.5	Low	Falling
Warehouse vacancy rate, 54 metro areas, % level (PPR)	12.2	12.3	Q4	12.2	High	Steady
Business inventory, % change y/y (U.S. Census Bureau)	-8.6	8.3	Jan	9.1	Average	Rising
Business sales, % change y/y (U.S. Census Bureau)	7.7	9.8	Jan	10.8	Average	Rising
Warehouse construction starts (% change), 3-mon. ave. y/y (RCD)	-65	-13	Feb	26	Low	Steady
Capacity utilization rate, % level (FRB)	69.7	74.4	Feb	74.7	Average	Rising
Manufacturing production index (FRB)	88.1	94.1	Feb	94.5	Average	Rising
Goods Exports $ billions (U.S. Commerce Dept.)	101	116	Jan	121	High	Rising
Abbreviations: y/y = year over year; W/E = 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 — March 2011 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.)	342	347	Q4	341	Low	Falling
State & local government tax receipts, $ billions (U.S. Commerce Dept.)	1,293	13,135	Q4	1,357	Low	Rising
State budget reserves, % of Exp. (National Governors assn.)	4.7	n/a	FY 10	6.2	Low	Steady
Abbreviations: y/y = year over year; W/E = week ending; FRB = Federal Reserve Board; RCD = Reed Construction Data Table: Reed Construction Data and Reed Construction Data - CanaData