The recent rise in value for the shares of Real Estate Investment Trusts is the only improving market driver for nonresidential construction. REIT share prices are tagging on to the general, much larger, rise in equity share prices. And the REIT index is a long lead indicator which is only showing that investors sense that the free fall in the economy is over and an end to the recession is in sight.

The impact of economic stimulus spending, both the $135B for construction and the balance of the $787 B is not yet in the data which is only through March for most measures. Actual stimulus spending is still trivial through April but will be progressively larger over the next year. Stimulus spending will fully offset the negative market drivers for highway construction; provide a major offset in the institutional building market and a minor — but still measurable — offset in the commercial building market. How fast the stimulus funds will be spent is still unclear. But it appears certain to be much slower than the original promises from Washington. The recession will end on its own before most of the money is spent which means the stimulus funds will provide a boost to the economy in the early stage of recovery.

The negative market drivers before the impact of the stimulus plan include falling rental and vacancy rates for commercial buildings, rapidly worsening state and local government budget situations for public buildings and facilities and declining capacity needs for all non-building projects.

The state and local government budget problem has worsened quickly. Many, perhaps most governments are making emergency cuts in FY 09 spending and trimming spending plans in the approved or pending FY 10 budget which begins for most governments on July 1st. State and local fiscal problems will continue to worsen into next year and will require lean budgets for several years. Expect this problem to be relatively worse where there is a high reliance on income taxes, especially progressive rate taxes. New York City will be hit very hard.

Commercial construction will also suffer from the rapidly rising default rate for commercial mortgages, a delayed consequence of the credit bubble bursting last fall. This is causing a rise in distress sales of commercial property as owners are unable to refinance short term loans because of the deterioration in their income and balance sheets. Each distress sales makes buying space even relatively cheaper than building space.

Key Indicators of the U.S. Market Environment — April 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)	217	89	May 6 09	107	Low	Rising
10-Year T-bill rate, % level (FRB)	3.51	2.82	Apr 24 09	2.96	Low	Rising
Office rent, 54 metro areas, % change y/y (PPR)	6.1	-3.8	Q1	-4.4	Low	Falling
Office vacancy rate, 54 metro areas, % level (PPR)	15.2	16.9	Q1	17.5	High	Rising
Office employment, % change y/y (P&PR)	0.3	-1.3	Q4	-2.4	High	Falling
Office construction starts ($s), 3-mon. ave. y/y % change (RCD)	-33.8	-13.5	Feb	6.8	Low	Falling
Hotel room rate, 54 metro areas, % change y/y (PPR)	3.9	2.3	Q4	1.5	High	Falling
Hotel occupancy rate, 54 metro areas, % level (PPR)	66.7	64.0	Q4	62.2	Average	Falling
Airline revenue passenger miles, % change y/y (RCD)	-3.5	-7.1	Apr	-3.4	Low	Falling
Real price of gasoline , $s/gal. (U.S. Energy Dept.)	321.1	191.5	Mar	195.4	High	Falling
Hotel construction starts ($s), 3-mon. ave. y/y (RCD)	-37.4	-17.6	Jan	-1.5	High	Falling
Retail rent, 54 metro areas, % change y/y (PPR)	21.4	-7.4	Q1	-4.9	Average	Falling
Retail vacancy rate, 54 metro areas, % level (PPR)	11.2	14.7	Q1	16.2	Average	Rising
Retail sales, % change y/y (U.S. Census Bureau)	2.2	-8.0	Mar	-9.4	Low	Falling
Consumer confidence index (The Conference Board)	62.8	26.9	April	39.2	Low	Rising
Consumer real income growth, % change y/y (U.S. Commerce Dept.)	-0.5	6.6	Feb	6.6	High	Rising
Retail construction starts ($s), 3-mon. ave. y/y (RCD)	-4.4	-35.2	Feb	-32.2	Low	Falling
Industrial
Warehouse rent, 54 metro areas, % change y/y (PPR)	0.7	-3.4	Q1	-4.4	Low	Falling
Warehouse vacancy rate, 54 metro areas, % level (PPR)	8.9	10.5	Q1	11.1	High	Rising
Business inventory, % change y/y (U.S. Census Bureau)	5.3	-2.4	Feb	-3.5	High	Falling
Business sales, % change y/y (U.S. Census Bureau)	6.0	-14.3	Feb	-13.0	Low	Falling
Warehouse construction starts ($s), 3-mon. ave. y/y (RCD)	-8.2	5.0	Feb	40.1	Low	Falling
Capacity utilization rate, % level (FRB)	77.7	66.9	Mar	65.8	Low	Falling
Manufacturing production index (FRB)	113.9	98.5	Mar	96.9	Low	Falling
Goods Exports $ billions (U.S. Commerce Dept.)	108	82.2	Feb	84.7	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 — April 2009
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.)	345	361	Q1	349	Average	Falling
State & local government tax receipts, $ billions (U.S. Commerce Dept.)	1317	1284	Q1	1260	Low	Falling
State budget reserves, % of Exp. (National Governors assn.)	10.5	n/a	FY 08	8.0	High	Falling
Stock market index (Dow Jones Industrial)	12,974	7,868	May 6th	8,302	Low	Rising
K-12 enrollment, millions of people (U.S. Education Dept.)	55.762	n/a	2007-08	55.966	Average	Steady
Higher-education enrollment, millions of people (U.S. Education Dept.)	17.598	na/	2007-08	18.264	High	Rising
Hospital receipts, $ billions (U.S. Health & Human Services Dept.)	648.2		2007	696.7	High	Rising
Prison population, % change y/y (Pew Charitable Trust)	4.3	N/A	2007-08	2.5	High	Falling
Heavy/Engineering
Federal highway trust fund, $ billions (U.S. Treasury Dept.)	11,578	9,545	Mar	9,738	Low	Falling
Electric power capacity utilization rate, % level (FRB)	84	79	Mar	80	Average	Falling
Airline revenue passenger miles, billions (RCD) (ann. % change)	-3.5	-7.1	Apr	-3.4	Low	Falling
State & local govt. capital spending, $ billions (U.S. Commerce Dept.)	345	361	Q1	349	Average	Falling
State and local government tax receipts, $ billions (U.S. Commerce Dept.)	1317	1284	Q1	1260	Low	Falling
Heavy contractor employment, 000s (U.S. Labor Dept.)	994	921	Mar	910	Average	Falling
Construction equipment shipments, % change y/y (U.S. Census Bureau)	8.5	-23.2	Feb	-28.0	Low	Falling

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.