Economic Environment for Nonresidential Markets Worsens
Jim Haughey
 |
Seed Newsvine |
The only positive nonresidential construction market drivers are office starts, construction equipment shipments and, marginally, local tax receipts. Soaring materials costs from the strong economy overseas and slumping space and facility demand from the weak domestic economy have downgraded all other market drivers to neutral or negative. While nominal construction spending is still rising, the volume of activity is still shrinking after adjusting for inflation. The outlook is for at least several more months of decline until cost pressures ebb and the domestic demand outlook improves with a rebounding economy.
The weal environment will eventually catch up to the office market. But now, rents are still rising making new project starts profitable. Tenants who sign leases now are paying substantially more than they die in their expired leases originally signed during the last construction recession. While activity remains very strong, the hotel market has the most serious risk given the nature of the current weakness in the economy. The large flight cutbacks and fare increases announced over the last month by many airlines will reduce travel and hotel occupancy and room rates later this year. And the 2004-08 surge in room rentals to foreign visitors is certain to subside with the slower growth in the world economy which has already begun and the end of the decline in the $US.
In spite of a surge in heavy project starts in May, this market is being restrained by both soaring costs, which may be as much as happened in 2004, and the rapidly slipping availability of public construction funds. Highway funds are shrinking as fuel usage falls. Congress now appears unlikely to provide supplemental funds this year.
Key Indicators of the U.S. Market Environment — May 2008
Commercial and Industrial Construction (Driven mainly by cyclical factors)
| Year Ago | Previous Month or Qtr. |
Latest | Level | Recent Trend | Impact on Const. | ||
| Commercial | |||||||
| Dow Jones composite REIT, index (Dow Jones) | 253 | 215 | W/E Jun 6th | 215 | Average | Steady |  |
| 10-Year T-bill rate, % level (FRB) | 4.84 | 3.83 | W/E May 30h | 4.03 | Low | Rising |  |
| Office rent, 54 metro areas, % change y/y (PPR) | 7.3 | 7.9 | Q1 | 6.7 | High | Falling | |
| Office vacancy rate, 54 metro areas, % level (PPR) | 14.9 | 14.8 | Q1 | 15 | High | Steady |  |
| Office employment, % change y/y (P&PR) | 1.5 | 1.2 | Q1 | 0.6 | High | Falling | |
| Office construction starts ($s), 3-mon. ave. y/y (RCD) | 7.0 | 23.0 | May | 37.0 | High | Rising | |
| Hotel room rate, 54 metro areas, % change y/y (PPR) | 7.1 | 6.2 | Q1 | 5.2 | High | Falling | |
| Hotel occupancy rate, 54 metro areas, % level (PPR) | 67.1 | 67.2 | Q1 | 66.9 | Average | Steady | |
| Airline revenue passenger miles, % change y/y (RCD) | 2.3 | -3.4 | May | 1.4 | High | Falling | |
| Real price of gasoline (May 08 = 100), $s/gal. (U.S. Energy Dept.) | 326 | 3.46 | Apr | 3.67 | High | Rising | |
| Hotel construction starts ($s), 3-mon. ave. y/y (RCD) | 59.0 | -14.0 | May | -16.0 | High | Falling | |
| Retail rent, 54 metro areas, % change y/y (PPR) | 4.3 | 1.7 | Q1 | 0.6 | Average | Falling | |
| Retail vacancy rate, 54 metro areas, % level (PPR) | 9.9 | 10.8 | Q1 | 11.4 | Average | Rising | |
| Retail sales, % change y/y (U.S. Census Bureau) | 2.9 | 1.7 | Apr | 2.3 | Average | Falling | |
| Consumer confidence index (The Conference Board) | 108.5 | 62.8 | May | 57.2 | Low | Falling | |
| Consumer real income growth, % change y/y (U.S. Commerce Dept.) | 4.1 | 1.8 | Apr | 2.2 | Low | Falling | |
| Retail construction starts ($s), 3-mon. ave. y/y (RCD) | 10.0 | -23.0 | May | -13.0 | High | Falling | |
| Industrial | |||||||
| Warehouse rent, 54 metro areas, % change y/y (PPR) | 4 | 2.9 | Q1 | 2.1 | Low | Falling | |
| Warehouse vacancy rate, 54 metro areas, % level (PPR) | 8.6 | 8.8 | Q1 | 9.0 | Average | Falling | |
| Business inventory, % change y/y (U.S. Census Bureau) | 4.7 | 5.0 | Mar | 5.2 | Avg. | Rising | |
| Business sales, % change y/y (U.S. Census Bureau) | 3.2 | 6.9 | Mar | 6.3 | Avg. | Rising | |
| Warehouse construction starts ($s), 3-mon. ave. y/y (RCD) | 18.0 | -54.0 | May | -42.0 | Average | Falling | |
| Capacity utilization rate, % level (FRB) | 79.3 | 78.3 | April | 77.6 | Average | Falling | |
| Manufacturing production index (FRB) | 113.6 | 114.4 | April | 113.5 | Low | Falling | |
| Goods trade (EX + IM), $ billions (U.S. Commerce Dept.) | 252.6 | 286.6 | Mar | 278.1 | High | Falling | |
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 — May 2008
Institutional and Engineering 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.) | 335 | 363 | Q1 | 358 | High | Falling | |
| State & local government tax receipts, $ billions (U.S. Commerce Dept.) | 1271 | 1305 | Q1 | 1327 | High | Rising | |
| State budget reserves, % level (Rockefeller Institute of Govt.) | 7.1 | n/a | FY 06 | 9.8 | High | Falling | |
| Stock market index (Dow Jones Industrial) | 13,424 | 12,746 | W/E Jun 2nd | 12,210 | High | Falling | |
| K-12 enrollment, millions of people (U.S. Education Dept.) | 54.725 | n/a | 2006-07 | 54.993 | Average | Steady | |
| Higher-education enrollment, millions of people (U.S. Education Dept.) | 17.350 | n/a | 2006-07 | 17.664 | High | Rising | |
| Hospital receipts, $ billions (U.S. Health & Human Services Dept.) | 611.566 | 2006 | 651.751 | High | Steady | |
|
| Prison population, % change y/y (Pew Charitable Trust) | 4.5 | N/A | 2006-07 | 2.5 | High | Falling | |
| Heavy/Engineering | |||||||
| Federal highway trust fund, $ billions (U.S. Treasury Dept.) | 14,381 | 13,055 | Apr | 11,578 | Low | Falling | |
| Electric power capacity utilization rate, % level (FRB) | 86.8 | 85.8 | Apr | 85.9 | High | Steady | |
| Airline revenue passenger miles, billions (RCD) | 2.3 | -3.4 | May | 1.4 | High | Falling | |
| State & local govt. capital spending, $ billions (U.S. Commerce Dept.) | 335 | 363 | Q1 | 358 | High | Falling | |
| State and local government tax receipts, $ billions (U.S. Commerce Dept.) | 1271 | 1305 | Q1 | 1327 | High | Rising | |
| Heavy contractor employment, 000s (U.S. Labor Dept.) | 1003.9 | 966.30 | May | 964.3 | High | Falling | |
| Construction equipment shipments, % change y/y (U.S. Census Bureau) | -31.8 | 8.5 | April | 20.9 | Average | 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.
