Most nonresidential building market drivers are now negative and will worsen further later this year. 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.

Although overall credit markets continue to unthaw gradually, serious credit access problems have developed in the commercial real estate market. A huge amount of mortgage debt needs to be refinanced in the next year when the usual investors are finding better risk-adjusted returns outside of commercial real estate. Building asset prices will plunge as much as 35% through mid-2010. As a result, lots of building will change owners. Already this has caused a cutback in building renovation and more than a 30% drop in the value of construction starts. In most markets, it is now cheaper to buy existing spaced than build new space. This will persist well into next year nationally and into 2011 in the weakest markets.

Institutional construction activity began to decline only a few months ago with most of the decline still ahead. The key short term drivers in this market are cash on hand and cash flow to cover construction costs. The stimulus is just beginning to provide a few bright spots in cash on hand for the federal government, universities and non-profits but this is overwhelmed by the other negatives. Invested capital funds generally have balance one-third below last year. Balances are improving with the equity markets but the recent losses will not be restored for at least several years.

Budget balances from tax sources are plunging from a very comfortable level a year ago. 2009-10 will turn out to be worse for public budget balances than 2001-03. This is the most serious constraint on public capital spending in fifty years. Institutional construction that relies heavily on cash flow, such as higher education and hospitals, is faring much better but will suffer 5-10% cutbacks in spending over the year from last spring to next spring.

The boom in industrial construction is over. It was largely energy driven. Now both energy demand and energy prices are below expected levels projects scheduled to start in the next year were planned. Also, manufacturing capacity use has dropped to a record low level in the mid 60’s. While the evolution of the inventory cycle will boost manufacturing output beginning this summer, capacity use will remain below the 75-80% threshold that typically sets off capacity expansion investment.

Key Indicators of the U.S. Market Environment — July 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)	196	99	Jul 17 09	111	Low	Rising
10-Year T-bill rate, % level (FRB)	5.03	3.42	Jul 17 09	3.55	Low	Rising
Office rent, 54 metro areas, % change y/y (PPR)	3.1	-4.4	Q2	-7.1	Low	Falling
Office vacancy rate, 54 metro areas, % level (PPR)	15.7	17.5	Q2	18.4	High	Rising
Office employment, % change y/y (P&PR)	0.6	-3.3	Q2	-4.9	Low	Falling
Office construction starts ($s), 3-mon. ave. y/y % change (RCD)	23.0	-54.0	Jun	-66.0	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)	-11.6	-8.8	Jun	-0.8	Low	Falling
Real price of gasoline , $s/gal. (U.S. Energy Dept.)	375.0	206.2	May	227.6	High	Rising
Hotel construction starts ($s), 3-mon ave. y/y (RCD)	-52.0	-60.0	Jun	-53.0	Low	Falling
Retail rent, 54 metro areas, % change y/y (PPR)	2.1	-4.9	Q1	-13.0	Low	Falling
Retail vacancy rate, 54 metro areas, % level (PPR)	12.4	16.2	Q2	17.6	Low	Rising
Retail sales, % change y/y (U.S. Census Bureau)	2.9	-12.0	June	-9.2	Low	Falling
Consumer confidence index (The Conference Board)	51.0	54.8	June	49.3	Low	Fallinjg
Consumer real income growth, % change y/y (U.S. Commerce Dept.)	7.0	3.7	May	6.1	High	Rising
Retail construction starts ($s), 3-mon. ave. y/y (RCD)	-31.0	-37.0	Jun	-57.0	Low	Falling
Industrial
Warehouse rent, 54 metro areas, % change y/y (PPR)	-0.5	-4.4	Q1	-6.7	Low	Falling
Warehouse vacancy rate, 54 metro areas, % level (PPR)	9.6	11.3	Q2	12.2	High	Rising
Business inventory, % change y/y (U.S. Census Bureau)	5.7	-7.7	May	-8.0	Low	Falling
Business sales, % change y/y (U.S. Census Bureau)	6.6	-17.2	May	-17.8	Low	Falling
Warehouse construction starts ($s), 3-mon. ave. y/y (RCD)	-15.0	-12.0	Jun	-19.0	Low	Falling
Capacity utilization rate, % level (FRB)	76.3	65	Jun	64.7	Low	Falling
Manufacturing production index (FRB)	112.3	95.5	Jun	95.0	Low	Falling
Goods Exports $ billions (U.S. Commerce Dept.)	109.5	80.0	May	82.1	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 — July 2009
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.)	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)	11,371	8,744	Jul 20 09	9,069	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

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.