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Nonresidential: Commercial Environment Turns Positive

08/03/2011 by Jim Haughey, RCD Chief Economist

Commercial (built to lease) market drivers turned almost universally positive during the spring. The only negative drivers are office and retail rents measured on a year over year basis. Both of these rental indexes have shown quarter to quarter rises recently so they are imposing little restraint on commercial project starts. However, very weak economic growth gains early in 2011 may stall or even briefly reverse the improvement in the starts environment for commercial properties unless economic growth is clearly stronger in the second half of the year.

The build vs. buy indicator still points at buy for real estate investors in many but not all 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 largely spent of committed. Congress had refocused on spending cuts which will inevitably include federal buildings and grants to lower levels of government and nonprofit institutions. Rising tax revenues will eventually offset this constraint at the state level in 2013 but funding constraints will remain at the federal and local level and with nonprofit institutions longer. Largely self funded institutions, such as hospitals and private education, will fell relatively constraints from government spending cuts.

Key Indicators of the U.S. Market Environment — July 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)
163 186 W/E Jul 25 2011 195 Average Rising
10-Year T-bill rate, % level (FRB) 2.97 2.96 W/E Jul 22 2011 2.97 Low Steady
Office rent, 54 metro areas,
% change y/y (PPR)
-6.9 -1.3 Q1 -0.3 Low Falling
Office vacancy rate, 54 metro areas,
% level (PPR)
18.6 18.9 Q1 18.6 High Falling
Office employment, % change y/y (P&PR) 3.5 0.6 Q1 1.2 Low Rising
Office construction starts (% change),
3-mon. ave. y/y % change (RCD)
-4 98 Jun 109 Low Rising

Hotel room rate, 54 metro areas, ann.
% change (PPR)
-6.7 2.3 Q1 3.2 Low Rising
Hotel occupancy rate, 54 metro areas,
% level (PPR)
58.6 61.7 Q1 62.5 Low Rising
Airline revenue passenger miles,
% change y/y (RCD)
17.7 0.9 Jun 1.6 High Rising
Real price of gasoline , $s/gal.
(U.S. Energy Dept.) May'10 = 100
2.83 3.92 Jun 3.68 High Falling
Hotel construction starts (% change),
3-mon. ave. y/y (RCD)
-18 -6 Jun 39 Low Rising

Retail rent, 54 metro areas,
% change y/y (PPR)
-7.3 -3.9 Q4 -3.2 Low Falling
Retail vacancy rate, 54 metro areas,
% level (PPR)
19.4 18.4 Q1 17.9 High Falling
Retail sales, % change y/y
(U.S. Census Bureau)
5.3 7.8 Jun 8.0 High Rising
Consumer confidence index
(The Conference Board)
51.0 58.5 Jul 59.5 Low Rising
Consumer real income, % change y/y
(U.S. Commerce Dept.)
3.8 0.2 May -0.1 Average Falling
Retail construction starts % change,
3-mon. ave. y/y (RCD)
41 5 Jun -3 Low Rising
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)
-1.3 10.8 May 11.6 Average Rising
Business sales, % change y/y
(U.S. Census Bureau)
11.1 10.8 May 11.6 Average Rising
Warehouse construction starts (% change),
3-mon. ave. y/y (RCD)
-4 -9 Jun -21 Low Falling
Capacity utilization rate, % level (FRB) 71.9 74.9 Jun 74.9 Average Rising
Manufacturing production index (FRB) 90.0 92.9 Jun 93.1 Average Rising
Goods Exports $ billions
(U.S. Commerce Dept.)
105 118 Mar 125 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 — April 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.)
330 341 Q1 326 Low Falling
State & local government tax receipts,
$ billions (U.S. Commerce Dept.)
1,319 1,355 Q1 1,377 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


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